Some links against a Living Wage

By Matt Nolan 07/01/2014


With the Living Wage idea cropping up around the place, I’ve noticed a couple of places where there have been criticisms of the result:

  1. A review by Brian Scott, where he points out that many of the defined “needs” required to get this wage are in fact not things some people in society would put in their defined “minimum” – this raises an interesting question of “what is poverty”, something we will lightly touch on here on Monday ;)
  2. An analysis from Treasury based on their arithmetic microsimulation model (Taxwell).  This essentially says “if the change in the minimum wage caused NO change in behaviour, who are the people who would see their income increase”.  So this DOES NOT rely on any employment effects or the such (although they will occur in New Zealand, given how high this would push the minimum wage relative to the average wage) – and it shows that most of the benefit in this optimistic scenario does not go to the group the Living Wage campaign wants targeted.

Now some may say that this is a suggestion to businesses, not a demand for policy.  That is fine – I remember working at the Warehouse and being paid a bit more for that role as part of their desire to build a “community” among staff.  And it was good.  But if it is just a request for firms to consider, why keep yelling at politicians?

Furthermore, part of the “gain” comes from non-pecuniary elements of the firm (the “community” bit from the Warehouse I worked in) and from the wage being “relatively” higher.  As a result, we have to be a touch careful appealing to “x-inefficiency” as a driver of improved outcomes when many of these structural elements are not being considered ;)

A broader point though, when I first heard of the Living Wage I had a non-economist rant against it.  If we care about a minimum standard in this way, why do we only want people who are employed to get it?  What is the minimum standard?  Why is the minimum standard as a “reservation” level for someone different from the minimum standard we think employers should pay for someone to work?

Now my answers to these questions bring me to a “minimum income” concept.  This isn’t necessarily correct.  They could be answered in a specific way that justifies a Living Wage.  Or we may instead believe there is a lot of scope on efficiency lines.  But the conversation needs to be had with evidence around the existence of trade-offs and a clear conception of the principles of fairness involved – factors that are obfuscated in the rallying cry to make someone else pay someone else more in order to make ourselves feel moral ;)

Note:  I’ll normally throw in a bunch of links to things I’ve thrown up on TVHE in these sorts of posts, but I found the posts on this issue over at Offsetting Behaviour more interesting and informative than anything I’ve written.  I hope Eric doesn’t mind me linking to a bundle of his posts :P

Originally appeared at TVHE 3 January