Best of intentions, worst of results

BEST OF INTENTIONS, WORST OF RESULTS

A review of the New Zealand experience, and international evidence on living wage policies

Summary Report

Your Money, Your Voice Promoting sensible restraint of government expenditure

1

FOREWORD and entrepreneurs, it is the role of businesses to determine wage rates based on the job in question and productivity levels. Businesses which take on workers pay what the job is worth.

Paying a higher rate without asking for better performance or more output is not sound business practice – they would soon go out of business.

New Zealand, but that applies to everyone – paying a so-called ‘living wage’ adjustment to a select few council staff simply distorts things further.

The report’s findings and evidence should give pause to organisations (councils, especially) wanting to depart from the principle of paying people based on merit.

That’s why the ‘living wage’ is not good business, or good for business.

We all have a role to play in lifting living standards and reducing poverty. At the Auckland Chamber of Commerce, we recognize that low wages can make it difficult for workers and their families to fully participate.

Government welfare policies exist to address this, including the setting of a ‘minimum’ wage to prevent unscrupulous employers paying too little. But the ‘living wage’ concept as this research report clearly shows is a subjective view of the world – its meaning and calculation depends on how economic conditions and political mood are interpreted.

We strongly support a high wage economy and believe the best way to achieve it is through policies that focus on increasing productivity, improving skills and enhancing the business environment. As the risk takers

1

It is most concerning to the Chamber that councils in New Zealand are leading the charge on this flawed concept.

Councils don’t face the same price-cost pressures that other businesses do, and are expedient in exploiting the revenue they receive from ratepayers.

That is why the Auckland Chamber of Commerce is pleased to support this research report. It provides businesses and ratepayers with a refreshing and well researched insight to why a ‘living wage’ approach to lifting living standards is playing populist politics without regard to the evidence of its distorting impacts on the wider economy.

The cost of living in Auckland is notably higher than elsewhere in

Michael Barnett Chief Executive Auckland Chamber of Commerce

ABOUT THE AUTHOR Jim Rose is a Research Fellow at the New Zealand Taxpayers’ Union. He has masters degrees in economics from the Australian National University, Canberra and in public policy from the now National Graduate Institute for Policy Studies in Tokyo.

Jim has worked at the Ministry of Business, Innovation and Employment, the Department of Labour, the Ministry of Social Development, and The Treasury.

In Australia, Jim has worked in the Productivity Commission, the Department of the Prime Minister and Cabinet, and the Department of Finance.

In addition to papers for the Taxpayers’ Union Jim also writes op-eds for the National Business Review and the New Zealand Herald. His blog is at www. utopiayouarestandinginit.com

2

BACKGROUND The living wage policies being considered and implemented across New Zealand are noble in intent but fundamentally flawed.

Proponents wish to reduce poverty and lift living standards under the guise of workers earning a higher wage.

Paying a living wage is not simply a matter of paying people on the lowest pay rate more money.

These people are expected to upskill and some can’t, and lose their jobs to better qualified candidates.

Significant economic evidence shows that a living wage will only make it harder for low wage earners to find work – resulting in lasting damage to their cause: exacerbated poverty and increased unemployment.

This comes at the expense of taxpayers and ratepayers across New Zealand.

This report summarises a paper by the New Zealand Taxpayers’ Union Research Fellow Jim Rose, “Best of Intentions, Worst of Results”. His paper draws on international literature and quantitative evidence to explain the flaws of living wage policies.

3

The concept of a living wage is not a new one, although its meaning is less precise.

Generally, it is a “fair and decent” wage capable of meeting the “basic needs” of an employee. There is no universal methodology on how this is calculated, but according to Living Wage Aotearoa New Zealand, typically it means enough income – on a standard working week – to provide the “necessities of life”, and the ability to “participate as active citizens in society”. More generally, this includes nutrition, health, housing, education, savings and miscellaneous spending.

There is no scientific method of determining what a living wage is – its meaning and calculation are highly subjective to economic conditions and political mood.

Living Wage Aotearoa New Zealand calculates the rate based on “expenditure items for a modest weekly budget”, and currently this sits at $19.80 as of 1 July 2016.

“There is no scientific method of determining what a living wage is – its meaning and calculation are highly subjective to economic conditions and political mood.”

In Wellington, four councils are involved with living wage policies for their employees:

• In April 2014, the Wellington City Council introduced a living wage of $18.40, moving to $18.55 and finally $18.63.

The new mayor, Justin Lester, is prioritising an increase in the living wage to $19.80.

• After public consultation in 2016 an attempt was made

by Porirua City Council to introduce the living wage – the Council compromised at $17.25.

• The Greater Wellington Regional Council voted in 2016 to adopt the living wage of $19.80 applying initially to its employees and eventually to its contractors.

The purpose of a living wage is to lift the income of low wage workers. At present, the main way of assisting low-income earners is through government transfers such as the Working for Families tax credit, which increases net income. These schemes act as a negative tax rate, giving low wage earners an income in line with social expectations.

This summary report explores the key findings of “Best of Intentions, Worst of Results”, describing the ways in which living wage policies are inherently flawed. Each finding is supported by international literature and quantitative research by its author, Jim Rose.

• The Hutt City Council is considering a living wage policy, with its Chief Executive reporting to the Council in March 2017 on the policy’s feasibility.

In addition, the Auckland Council’s new mayor, Phil Goff, has made a living wage of $19.80 for his employees a top priority.

4

1

KEY FINDINGS:

Councils hire on merit, so candidates under the skill level commensurate with the living wage will be crowded out by higherskilled candidates

When a council lifts its lowest wage to a living wage, higherskilled applicants will apply for vacancies, seeing that the opening is at their wage level.

Naturally, the recruiter will employ the higher-skilled applicant over a lower-skilled applicant at the same wage rate. It is this action that pushes low-skilled workers out of employment and into poorer living standards – the very issue living wage activists fight for. Simply, councils will toughen their hiring standards.

This has been the experience overseas, confirmed by research in California.

5

Half of the Westfield Valley Fair Mall falls in San Jose city, and the other half falls in Santa Clara city. In 2012, San Jose raised its minimum wage from $8 to $10 an hour. Santa Clara’s minimum wage remained at the state level of $8 an hour. Employers on the $8 an hour side of the mall found that the quality of their applicants fell away, with noticeable differences in the personality traits and dress standards presented by the $8 an hour applicants compared with the $10 an hour applicants.

2 The partial implementation of the living wage policies by the Wellington City Council has led to at least 17 parking wardens losing their jobs.

These tougher hiring standards were put to work when the Wellington City Council decided to bring parking wardens back as council employees, increasing their wages to the living wage. As a result, 17 parking wardens were not rehired. According to Living Wage Aotearoa New Zealand, some parking wardens were replaced after being deemed below the skill level required for the new role.

Seventeen Wellington City Council parking wardens lost their jobs for being under the skill level required for the living wage

“The partial implementation of the living wage policies by the Wellington City Council has led to at least 17 parking wardens losing their jobs.�

Quite clearly higher-skilled applicants can crowd low-skill workers out of their own jobs.

6

3

Any living wage will be abated by 40% from taxes and less Working for Families tax credit

“Effectively, what limited gains that can be made from living wage policies for existing employees are largely eroded by significant decreases in government transfers.�

In 2015, the Ministry of Business, Innovation and Employment concluded that a couple working a combined 60 hours a week on the minimum wage will lose over 40 percent of a living wage increase to additional tax and reductions in Working for Families. Working for Families is abated at 22.5 cents on family income that exceeds $36,350.

This threshold applies to families with one worker earning $17.50 or more, or two minimum wage earners working more than 45 hours combined.

Effectively, what limited gains that can be made from living wage policies for existing employees are largely eroded by significant decreases in government transfers. Combine this with ample evidence to suggest that hiring standards toughen, and the living wage becomes far less appealing.

7

4

Living wages shift the burden from taxpayers as a whole, to ratepayers and business owners

“Essentially, fewer people are paying for more benefits to council staff that were previously met by central government.”

Funding under the current model of benefits and tax credits in New Zealand comes from the Government’s consolidated fund, paid through taxation. Living wages in councils simply shift the responsibility of social insurance from central government to councils – where living wages are relied on as a safety net instead of benefits and tax credits. This means ratepayers bear the cost which were once paid for by taxpayers as a whole. Essentially, fewer people are paying for more benefits to council staff that were previously met by central government.

Furthermore, living wages on a national scale (and indeed minimum wage hikes) push the burden of social insurance from central government to the employers of low-wage workers.

Clearly, the more equitable and effective solution is to spread the burden of social insurance across a larger tax base – such as taxpayers as a whole. In addition, local government’s funding model (rates based on property value) is far less equitable than taxation which is proportionate to income and one’s ability to pay.

8

5 Voters make decisions about which candidate they elect based on their policies, among other things. The election of a candidate gives them a mandate to carry out the policies they campaigned on. This mandate breaks down when the elected officials fail to carry out these promises, or carry out other policies not mentioned in their campaign and without consultation. Such is the case for the Greater Wellington Regional Council, who failed to carry out consultation on the living wage before implementing it.

If a living wage is to be implemented by territorial authorities in New Zealand, it must come on the back of a mandate or consultation. Anything less may have noble intentions, but is simply undemocratic.

9

If social insurance is to be funded by the ratepayer, then it is democratic for it to be carried out with a mandate through a council’s budgeting process, or by public consultation on that specific issue

6

Employees naturally shop around for higher wages, and employers naturally shop around for more productive employees at the wage they can afford

“It is irresponsible to suggest that councils should intentionally turn down bettersuited applicants in favour of less productive, lower skilled and less experienced employees�

Candidates will apply for jobs at their pay level, and councils will employ the most productive and effective candidates they can find.

Once living wage policies are implemented, candidates who are currently employed at $19.80 an hour or more will see an opening in a council and apply for it.

Regardless of whether or not lowwage workers were previously employed in that role, the council is compelled to employ the higher-skilled candidate.

An employer that receives an application from a highly-skilled candidate is far more likely to make an offer to that applicant, instead of the lower-skilled applicant.

This is especially relevant considering territorial authorities are required to perform efficiently and effectively under section 10 of the Local Government Act 2002.

It is irresponsible to suggest that councils should intentionally turn down better-suited applicants in favour of less productive, lower skilled and less experienced employees. In practice, it is clear that lower-skilled applicants are crowded out by better-qualified applicants, such as was the case with Wellington’s parking warden experiment.

10

7

Councils do not face market competition so cannot experiment with living wage accreditation where a private firm can A living wage policy in the public sector is funded from higher rates or taxes. In the private sector, there will be a combination of higher prices, lower profits, layoffs and some business failures.

Private firms can experiment by trial and error, and those that succeed with a living wage may be able to grow and continue business. Territorial authorities do not compete in the services they provide, so are unable to carry out this same trial and error process – they cannot fail, they can only implement inefficient and ineffective policies with no market test.

Not only does this process contradict the ‘effective and efficient’ provisions in section 10 of the Local Government Act 2002, but it comes at the expense of ratepayers. There is no way to tell if a living wage is competitive for councils, the only result is more ratepayers’ dollars being misspent.

11

8

Joint contracts among Wellington’s councils have caused operational difficulties

Joint ventures by Wellington’s territorial authorities make for high compliance costs, administrative burdens, and operational difficulties. When a contractor works for a number of councils with different living wage policies, the payroll process becomes complicated. This too is the case in San Jose, California, where the mall runs through the border of two cities – one with a living wage and the other without. Some stores straddle the border, occupying space in both cities, and those employers undergo strenuous administrative difficulties in calculating wages.

Entities such as Wellington Water ( jointly owned by Porirua City, Hutt City, Wellington City, and Wellington Regional Council), CentrePort ( jointly owned by Wellington Regional Council and Manawatu-Wanganui Regional Council), and contracts that straddle more than one local body such as security guards, all face these operational difficulties.

While this may appear to be insignificant, it further complicates the already toughened hiring process and places further tax burden on ratepayers.

12

A living wage denies low-skilled workers both a job and a step up in the job ladder. Workers sell their labour and in return get much more than a wage: perks, social benefits and most importantly – training. If the training provided by an employer is useful elsewhere, the employee trades off lower starting wages for these benefits. A living wage in councils, and in general, crowds out this opportunity for low wage workers. This training is fundamental to career development for young and lowskilled workers.

Councils do not hire and train at the living wage. They hire people already trained. Untrained people miss out.

Worse still, these low-skilled individuals miss out on employment, and the cost of that unemployment is put on the taxpayer. Living wage activists fight a noble cause, seeking to improve living standards and alleviate poverty – however their policy achieves the exact opposite. These bad outcomes are unavoidable if a living wage is adopted.

Such is the case in San Francisco, where a minimum wage hike to $12 dollars all but eliminated the hiring of inexperienced workers.

Research on San Francisco shows only 2 percent of workers had no prior experience. North Carolina on the other hand has a minimum wage of $7.25 and 35 percent of workers had no prior experience.

13

9 Belowliving-wage employment allows for inwork training

“Councils do not hire and train at the living wage.

They hire people already trained.

Untrained people miss out.”

CONCLUSION The evidence is clear: living wage policies are inefficient and ineffective. They have the best of intentions but the worst of results. One of the aims of the Taxpayers’ Union is to promote evidence-based public policy.

As Best of Intentions, Worst of Results shows - living wage policies, rather than help the poor, are likely to crowd out low-skilled workers from employment while inequitably placing the tax burden on ratepayers.

The full research paper by Jim Rose is available for download at www.taxpayers.org.nz/living_wage with hard copies available on request.

14

www.taxpayers.org.nz 15