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Living wages

Jim Rose from the Taxpayers’ Union has a rather nice report up on problems with living wage policies. Here’s their summary:

The report’s key findings are:

  • Seventeen Wellington City Council employees lost their jobs after being under the skill level required for the living wage.
  • Councils hire on merit, so candidates under the skill level commensurate with the living wage will be crowded out by higher-skilled candidates.
  • There is no consensus or scientific basis for the calculation of a living wage. Any calculations are politically subjective.
  • Any living wage in New Zealand will be abated by up to 40% by decreases in government transfers and increased income tax obligations.
  • Living wages shift the burden from means-tested taxpayers to ratepayers and business owners.
  • Below-living-wage employment allows for in-work training, where employees tradeoff lower wages for the opportunity to learn skills that increase their future earning potential.

Living wage policies do less to improve outcomes for the working poor than you might think. New Zealand’s Working for Families system tops up the wages of lower paid workers; those payments abate with income.

Critics argue that this is a subsidy to employers, but that isn’t quite right. If Working for Families did not exist, employment would be lower: there’s been reasonable work showing employment and hours increases with WFF. In short, there are a range of tasks that are worth at least the minimum wage to the employer, but that wouldn’t draw candidates to do the job on the after-tax-and-transfer salary offered. Those jobs wouldn’t get done, and there would be less employment, in the absence of WFF – but do not forget that the subsidies are funded by taxes that have their own deadweight costs.

Recall as well Gail Pacheco’s work with Tim Maloney showing that minimum wages are poorly targeted if they’re intended to improve household incomes at the bottom: a lot of minimum wage earners are kids starting out in higher earning families, or second earners in higher earning families. Programmes like Working for Families can be sensitive to these kinds of conditions; minimum wages and living wage mandates are not.

There’s reasonable debate about how much support government should provide for the working poor. But trying to place that burden on employers through higher minimum wages or through living wage mandates doesn’t work as well as wage subsidies. The burden of minimum wage hikes can often be shifted to the lower income customers of the goods and services produced by minimum wage workers, and can hurt employment prospects for those starting out. By contrast the burden of taxation to support wage subsidies is spread across the system in ways that at least try to balance equity and efficiency considerations.

Previously:

About Eric Crampton (88 Articles)
I'm Head of Research with the New Zealand Initiative.

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