The Living Wage, in one chart.

By Eric Crampton 01/11/2013

I love this chart from Treasury’s advice on living wage proposals. 

There’s a morbid part of me that wishes the thing would be implemented as a minimum wage – the resulting substantial increase in unemployment would do a good job of settling certain empirical debates about the effects of minimum wages. I don’t really want it implemented: some data points are just too expensive to acquire.
But wait, there’s more!

Other key points in the Treasury information release:

  • The group that produced the $18.40 figure based it on what would be needed to sustain a family of two adults and two children. Treasury notes that families with two adults and two children make up only 6% of families currently earning below the $18.40 living wage. Three-quarters of families earning below the living wage have no kids; sixty-three percent are single adults with no dependents. Twenty-nine percent of low-earners are in families with family income greater than $60,000.
  • After taking into account abatement of income-tested benefits for those with kids, the living wage would do far more to subsidise those without children. The biggest benefit would go to families with two low-earners with no children, conditional on both of them keeping their jobs.
  • The proposed living wage is just shy of the median wage. Employment effects are then likely to be large: MBIE reckoned 25,000 job losses. We would also expect reductions in staff benefits and reduced hours.
  • If the goal is to improve outcomes for low-earning families with young children, it is better to consider some mix of:
    • Shifting WFF towards parents with younger children
    • Targeting ECE subsidies more strongly (I agree entirely; see here)
    • Fix benefit abatement rates to encourage 3-5 days of work;
    • “Making our system of service interventions for children aged 0-5 years more focused and integrated.”
  • The policy would further hinder manufacturing.
  • Minimum wage increases have substantially outpaced CPI but have not helped increase average wages; we shouldn’t expect this hike to do better.
  • We’d reduce the incentive to acquire skills because the policy would attenuate the returns to upskilling.
I love it when Treasury makes it very clear that some proposed policy is a very bad idea.

0 Responses to “The Living Wage, in one chart.”

  • Eric, what case studies have you that show increasing/legislating a minimum wage increases unemployment?

    • Hit the links at the end of the post for some lit review. We don’t really do case study approaches on this stuff – rather, bigger econometric studies. Upshot: effects in the US are minor, but their min wage is tiny relative to median wage. Where minimum wages are substantial, expect effects.

  • Thanks. Had a scan through and some of it was better than I feared it might be. Liked (because of its implied humility, open-mindedness,diligence) in particular, the comment about the difficulty of perceiving a clear cause & effect signal in lots of background noise. But look, the implicit assumption in your post is so strong I’d expect to see a simple graph of minimum wage against employment. Or a plot showing higher employment levels clustered where minimum wage as % of average (or would median wage be better?) is higher. How many countries would you need to study before you were sure you had the argument statistically? Following your ECE link leads me to suppose that there’s more than enough irony for everyone here in that the Quebec case study sets out a system that works and is efficient: but those goods are won by a higher level of state intervention. A “Just pay this wage already” act has the appeals of simplicity and minimal intervention – but could well be less efficient, and at risk from being gamed by the unscrupulous.

  • The last time I looked, the living wage campaign was based on the premise that it would be a voluntary act on the part of the employer, albeit after a chorus of yapping at his/her heels! The minimum wage, on the other hand is compulsory. So it’s surely a little confusing to conflate the two, as Treasury does. I don’t pay much attention to the living wage movement – although I’m always happy to see living standards increased! – purely because of that voluntary exchange aspect.

    I entirely agree with you, Eric, that a sudden shift to a living wage for all low paid workers would be a shock for the economy, but a well signalled, phased in introduction (forward guidance?) would be a different matter. And the married/single , children/no children objection raised by Treasury can always be dealt with in the tax tables. And if people do indeed respond to incentives, maybe our dole queues would shrink!

    And as for the minimum wage, lots and lots of countries have one, and in the OECD the ones that don’t are those with the strongest government-union cooperation, the Scandinavian social democrats, so I’m surprised at the heat that is still generated around it.

    I think the main problem for those who decry the compulsory minimum wage is precisely the lack of empirical evidence for their position. And the empirical data is difficult to come by because while economic theory states that an increase in the minimum wage will result in an increase in unemployment if the wage is then above the equilibrium level, the equilibrium concept is a bit like a Higgs-Boson particle – we know it’s there somewhere, but it’s damned hard to spot!

    Personally, while I’m open to evidence to the contrary, I tend to think right now that wages are kept at the existing legal minimum wage for so many simply because of the exercise of market power, the natural response of a profit maximising firm.

    It’s interesting that in the OECD 2011 dataset, of 31 countries I found that only two countries have a (much higher) min:med wage level ratio than NZ, but fully 20 of those countries were suffering a higher unemployment rate at that time, so it seems there’s not much correlation to be found between the level of the minimum wage and unemployment rate – but I entirely accept that at some stage, there would be, for sure.