A $19hr “living wage”, wtf

Warning:  I’m not an economist in this post.  I’m telling you what I think, don’t expect me to be nice as I’m not intending to be.  If it insults you I’m sorry, take it as a representation of my depth of feeling around the issue rather than a sledging if you can.

Let me start this by underlying everything with a certain point – living wages are idiotic if our concern is to make sure that the worst off in society have a sufficient income.  By imposing a “price floor”, you are ensuring that there are a group of people who can’t get jobs and will get hurt – unions don’t care because they don’t represent the unemployed, but I find it morally abhorrent.  You want a minimum standard of living for societies worst off – have a minimum income, it’s as easy as that.

Now this article in the Herald says people need $19hr to live.  What, when we think about the ability to live we actually need to look at access to income not hourly wages right?  When they release their full “analysis” I’ll be sure to say why this is nonsensical (eg where are lifecycle earnings, investment in human capital, defining necessities, access to credit etc) – but for now whatever.

Let’s take someone working full time at $19hr.  What does this person earn pre-tax $39,420pa (this excludes benefits which they are targeting to increase it further). What is nominal GDP per capita.  $47,157pa.

So either we have a society where different types of labour, and different peoples requirements for income (eg a 18 year old and a 57 year old), aren’t terribly different and so people shouldn’t get paid very differently – and as a result the potential worker who “offers the least” may well still get hired – or this will lead to higher unemployment and cut backs in hours for these people.  Who won’t get hired in this sort of situation – people that are risky to hire or haven’t developed skills yet.  So the young, the vulnerable, those that have been out of work.

I mean I swear to god unions, and their determination to get what they want without thinking about the consequences for other people, makes me sick.  There are people who struggle, and as a society I think we should try to help them – part of this is ignoring faux research by unions, and making sure that we actually push government to sufficiently redistribute to the poorest among ask (with the acknowledged cost that this redistribution does lead to less income/production overall).

Yes I know, I’m a “capitalist” right wing economist blah blah blah – but when people choose to actually think in terms of costs and benefits we can actually have a sensible discussion about social justice, and how society is willing to trade-off between equity and efficiency.  Introducing a policy like this isn’t just inefficient, it is inequitable and unjust – and will hurt those who are already the most disenfranchised.

Sidenote:  You may say this is unfair as they aren’t saying “make this the minimum wage”.  But think of it this way, they are trying to make the case for $19, so they can turn around and make $17 seem like a reasonable demand – while still ignore the costs stemming from this.  It is a misinforming marketing tool – that hardly makes it better!

Sidenote 2:  No offence but an actor that can’t get a sufficient wage is receiving a signal to look for other work – if you can hardly pay your bills and decide to continue acting you are “consuming” that acting.  If you can’t afford to live because you are busy with that, it’s your own fault.  Be careful asking for a higher minimum wage, it is likely you just won’t be able to find any work at all.  Remember, when computers with economics word generators replace me I’ll have to do the same thing.

Sidenote 3:  I am surprised that a church allowed a union to talk them into making it an issue of wages instead of income adequacy – I don’t remember catching the part of the bible that said that only those who have the opportunity to work given their endowment and the arbitrary policies of government should be allowed a minimum living standard.  Was there a “parable of the deserving poor” where we are taught to decide who deserves society’s support and who doesn’t?

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  • http://offsettingbehaviour.blogspot.com/ Eric Crampton

    Oh, Matt. You don’t know what the unions are thinking? They’re thinking that raising the costs incurred by non-union competition makes them better off.

    • http://tvhe.co.nz/ Matt Nolan

      This is true – and it makes me a sad panda

      • http://www.tvhe.co.nz/ Agnitio

        sad sad panda

  • Luc Hansen

    A cry from the heart, indeed, Matt.

    But what’s lacking in your post is just how we can do something positive for the poor or working poor who are, after all, the targeted beneficiaries of the campaign.

    Something, he cried, plaintively, anything! (As we do, for example, when the ABs are behind and the team in front are running down the clock).

    So what can a right wing economist (the term kind of diminishes claims of the study of economics to genuine scientific status, but never mind) offer us here?

    Some reading for you: http://www.washingtonpost.com/opinions/matt-miller-raise-the-minimum-wage/2013/02/06/34857264-7066-11e2-8b8d-e0b59a1b8e2a_story_1.html

    Cheers.

    • http://tvhe.co.nz/ Matt Nolan

      There is likely to be the series of posts I’ve done in the past suggesting that a minimum income combined with the subsidisation of eduction offer the most compelling way forward – albeit these policies need to be determined based on “what society believes is fair” rather than what I believe is fair.

      I don’t think my “faux platform” has changed much from last election

      http://www.tvhe.co.nz/2011/09/08/an-economists-platform/

      • Luc Hansen

        Thanks Matt. I haven’t been reading your blog long enough to be aware of your previously posted thoughts, so the context is welcome.

        A minimum income is a brave call, though. I hear echoes of Ghandi’s “wealth without work” as a path to destruction!

        On face value, there does seem to be a contradiction in opposing the ‘living wage” but supporting a minimum income. I’ll look at the economics involved to get my head around that!

        Back to the books!

        • http://tvhe.co.nz/ Matt Nolan

          I hear echos of Milton Friedman as well as Ghandi when I suggest a minimum income ;)

          Also there is no contradiction. I agree with the Rawlsian concept that as a society we should be judged by how we treat the worst off in society. And I believe that a minimum income is a prerequisite for allowing opportunity.

          A high minimum wage on the other hand will exclude some from work, and set who deserves a “minimum income” quite arbitrarily. By using an “indirect way” of dealing with income adequacy such a policy will miss it’s goals and lead to other negative unintended consequences – something I take as a personal affront as I obviously have trouble separating myself from the society I’m in ;)

          • http://www.facebook.com/raf.manji Raf Manji

            Agreed!! Living wage seems a bit daft to me and I am big supporter of a basic income.

            I think the biggest issue with the living wage is the one they aren’t talking about and that’s what has really driven the cost of living up so far in the last 10 years: housing, energy.

            We have wasted the upfront benefits of globalization by frittering it away on debt fueled consumption and excessive credit going into housing. Now we are stuck with a number of very tricky problems.

            • http://tvhe.co.nz/ Matt Nolan

              Indeed, the issue of a minimum income is one I can remember us agreeing on in the past :)

              I suspect that the real reason society steers away from it is because a lot of people accept a strong moral distinction between “deserving” and “undeserving” poor – a distinction I don’t agree with (and I’d suspect you don’t either) on a personal level.

              • http://www.facebook.com/raf.manji Raf Manji

                Yes but it’s a conversation we need to have. i’ve just written a paper on the human right to a basic income and am looking at developing a paper on what it means to be a citizen and the rights AND responsibilities/duties that come along with that. It’s time for the welfare system to go, as it’s not built for the 21st century of flexible work, robots and fewer actual paid jobs but we need to have any idea of what will replace it.

                It need to be a very “joined up” conversation but those seem to be quite hard to get going (though we did talk about many of these issues up at #kiwifoo on the w/e).

                • http://tvhe.co.nz/ Matt Nolan

                  I agree – it is a conversation we need to have now, and openly. We can’t predict the future, but we can talk about risks and trying to make sure society is prepared to make educated trade-offs.

                  The papers sound interestingly, I’d be keen to read them some time if you wouldn’t mind :)

                • Apirana

                  Whilst we would all like to see people paid more and there are undoubtedly some genuine cases where certain people or occupations might ideally receive higher salaries (e.g. many would claim the nurses should be paid more because of the supposed virtuous nature of their work) the fact remains that businesses do not operate in a void and must therefore respond to the economic conditions in which they seek to compete. Businesses do not achieve profitability by merely paying people more. Profitability is linked closely to the productivity of employees and income generating ability of the institution or business (i.e.it must have a suitably large market for its wares that ensures that it can provide those products or services without bankrupting itself). The proposition of a Living Wage is highly discriminatory; it works in favour of largely unaccountable bodies (such as local authorities) who do not have to face the rigour of the market or big business such as Tesco (who have I think signed up to such in the UK) who can absorb such increases more easily than small businesses which are highly reliant on employing low skilled workers. It can be argued in fact that the minimum wage and its metamorphosis into the living wage actually destroy jobs as it becomes more and more expensive to take on labour. It also pays little attention to the particular circumstances of an individual; clearly an 18 year old does not need the same amount of money as a 35 year old with 4 children (who will acutally only recieve a small amount of the increase anyway as there tax credits etc erode). Employers should be responsive to the needs of their employees but they should also pay them a wage that reflects what they think that employee brings to the business , the cost of employing a replacement (i.e. the cost of labour) and reflects what the business can bear. There is nothing righteous about paying someone a Living wage if it busts the business.

                • Apirana

                  I think you confuse human rights with values. No one has a human right to a living wage (whatever that is as I’m unsure anyway). They have a right to sell their labour and to reject offers to purchase that labour if they think the compensation is insufficient. End

                • http://www.facebook.com/raf.manji Raf Manji

                  You confuse values with human rights :-) How can you say “no one has a human right to a living wage?”. Given that human rights are socially constituted (whether positive or negative), we can decide what they are. In fact, this debate has been going on for thousands of years, culminating in a raft of human rights charters around the world from 1948 to today (or 1919 if you regard the initial articles of the ILO as a rights charter). Values can reflect rights or even lead to them but rights are not values.

                • Apirana

                  The UN has spent its existence conjuring up a whole range of what it perceives as “rights” but are in fact values which merely reflect the political persuasion and aspirations of the institutions inhabitants. The elastic & ever expanding language of rights has inflated the role of the state, lead to the erosion of trad liberty and has provided perverse outcomes. The establishing of these “rights” as law or the pursuit of these “rights” through social policy has often entrenched dependency, undermined social responsibility & disempowering huge sections of the popn. “Social justice” &other concepts which emanate from the bien pensant are not rights; the are merely reflections of the values of that particular class. If you don’t accept this look no further than the absurd rulings that come out of the European Court of Human Rights (Lord help us). A living wage is not a right!

        • Apirana

          A brave call from whom? It is a soft and short sighted proposition offered up by the bien pensant and the attendant soft left. Pressure placed on businesses to pay a “living wage” would be a disaster for the increasingly uncompetitive NZ economy furteh damagign productivity and distorting the labour market. If NZ is serious about dragging itself away from permanent economic decline then such propositions should be dismissed before getting to base one.

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  • http://www.facebook.com/peter.quixote.92 Peter Quixote

    could you give me an idea on your own income Matt, especially rate per hour and about the children and general costs, then I will come back and sort you out

    • http://tvhe.co.nz/ Matt Nolan

      Ignoring the fact that I often work 80 hour weeks – the fact I spent tens of thousands of dollars investing in my human capital, and accepting the risk of working in a service industry where it can be hard to find work in my field, is irrelevant right.

      And due to that we should follow the non-sequitur of arbitrarily excluding some people from work – given that since they can’t find work they are morally worthless …

      Of course, I disagree with both sentiments expressed in those two paras – hence why I wrote this post, and why your point is personal and irrelevant :)

  • Luc Hansen

    Then again, Matt, perhaps the incentive effect of higher wages on offer will result in what Duncan Garner called “bludgers” (he was referring to the current cohort of youth unemployment, but I imagine he would be even harsher towards adults in the same position) and the general dole queue and the DPB population vanishing as beneficiaries fall over each other to follow the price signal and fill all those vacant job positions out there! The carrot approach, if you like, instead of the stick – two sides of the same coin.

    Or, if those jobs aren’t out there because of a general lack of AD, and a government in power generally unwilling to use fiscal policy to generate it, a boost in wages for the percentile of the population who reliably spend all their income may be just the medicine our economy needs.

    One problem I have with your dissing of the living wage concept in favour of the minimum income idea (which I support, as well) is that the former appears at least attainable in the short to medium term, while society is a long way from the massive tax restructuring programme needed to implement the latter. It’s the old bird in the hand principle ;-)

    If the injustice you speak of does arise – and I have my doubts about that – then we can address that separately. Benefit levels actually aren’t set in concrete and the extra taxes paid under the living wage will accrue to the treasury coffers and maybe some bright young thing working there will come up with a stunning plan on how to spend it!

    We seem to forget the past readily, but minimum wages have happily coexisted with unemployment close to or at a bedrock level, even quite recently. The setting of the level of payment seems to to me to rely more on moral precepts than economics.

    (But this year I’m doing Stage I and Stage II microeconomics so maybe I’ll have changed my mind by the end of that!)

    And just a note, I really appreciate the opportunity of running this stuff past you and getting your informed views in return.

    • http://tvhe.co.nz/ Matt Nolan

      Hi Luc,

      Indeed, a minimum wage in of itself may have a justification. As a economist I would note that it at least provides a second best solution when we face:

      1) A monopsony purchaser of labour (or a similar concentration)
      2) Homogeneous labour with a generally weak bargaining position

      Also, at say the level we have the minimum wage now it is not terribly binding – instead of seeing employment or hours decline, it is generally an issue of bargaining power. Now, I would add that at the margin of some groups it may be binding (such as with youth unemployment), but it isn’t necessarily given.

      However, we are talking about an issue of equity (so pulling in value judgments on top of a more objective economic analysis), and this is where looking at this solely through a minimum wage gets me. At $18-20 we will have negative employment effects, and we are doing this solely because we are trying to “solve” an “issue” of income adequacy. This involves morally valuing the people who are able to get work in that situation about those that can’t. I find this inappropriate.

      “One problem I have with your dissing of the living wage concept in
      favour of the minimum income idea (which I support, as well) is that the
      former appears at least attainable in the short to medium term, while
      society is a long way from the massive tax restructuring programme
      needed to implement the latter.”

      I find this an interesting thought. We currently have a benefit system, and we have targeted support for groups based on equity judgements. Surely we already have a minimum income scheme, we just refuse to call it that!

      There are two differences between a true NIT and what we do:

      1) Benefit claw backs see effective marginal tax rates sit at very high levels for lowish levels of income

      2) The tax system is still “progressive” in a strict sense, when in a NIT the tax system itself is flat. Where the burden falls for this is a difficult issue.

      However, we already have a lot of what is in place – by pushing a NIT I’m mainly just asking us to make our value judgments about the support system more transparent, and also suggesting we stop bullying people who aren’t working … as that is a bit morally weird for me (I strongly suspect that I am in a tiny minority here though).

      “We seem to forget the past readily, but minimum wages have happily
      coexisted with unemployment close to or at a bedrock level, even quite
      recently. The setting of the level of payment seems to to me to rely
      more on moral precepts than economics.”

      Yar they did, in a setting with large monopsony employers and homogenous labour – but the world has been changing :) . I just can’t help the fact that, I want our equity efficiency trade-off to be dealt with in a Kaldor-Hicks type manner, rather than choosing what is politically expedient ;)

      “And just a note, I really appreciate the opportunity of running this stuff past you and getting your informed views in return.”

      Cheers. Just remember to remain extremely critical and always ask why – if I’m not explaining things clearly it is my fault not yours, and your argument could well be better than mine!

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