Minimum wage and social welfare

Last week the Government announced that New Zealand’s minimum wage would increase 50 cents to $15.25 per hour on 1 April (2016).

The starting-out and training hourly minimum wages rates will increase from $11.80 to $12.20 per hour. It is set at 80% of the minimum wage.

“An increase to $15.25 per hour will directly benefit approximately 152,700 workers and will increase wages throughout the economy by $75 million per year.

For a 40 hour week that works out at $610. Annually it is $31,720.

“With annual inflation currently at 0.1 per cent, an increase to the minimum wage by 3.4 per cent gives our lowest paid workers more money in their pocket, without imposing undue pressure on businesses or hindering job growth.

“The Government has increased the minimum wage every year since coming to office, from $12 to $15.25. This is an overall increase of 27% compared to inflation of around 11%.”

New Zealand was the first country to set a minimum wage, in 1894. Relatively we have one of the highest minimum wages in the world. The current Australian minimum wage is higher at A$17.29, but is as low as US$7.25 in the USA (it varies state to state).

Yesterday Radio NZ had a debate on at How high should the minimum wage be set? (link to audio there).

Eric Crampton, who is an economist and the director of the New Zealand Initiative…

…said among developed countries New Zealand already had the highest minimum wage in relation to the average wage.

Mr Crampton said it was unreasonable to set the minimum wage high enough for people to live off it without any subsidy.

“I don’t think that there is any problem that is solved by the minimum wage that is not better solved through things like wage subsidies and Working for Families,” he said.

The minimum wage was poorly targeted and welfare systems were better placed to support lower-income workers, he said.

“We should look at where the burden of supporting lower productivity or lower income workers should fall,” he said.

“Should it fall on the employers and customers of firms that supply goods and services that are produced by lower income workers? Or should it fall on the tax base more broadly?

“We’ve got a tax system that’s progressive – it tries to spread the burden to where it can be afforded. When we instead put that burden onto employers of lower productivity workers, we knock them out of work.”

Former MP Laila Harré, now the co-owner of a living-wage restaurant…

…said full-time workers should not need to rely on government handouts.

“If people go to work, one should expect to learn a living from that job,” Ms Harré said.

“We have many non-viable businesses keeping themselves viable by surviving on these incredibly low rates of pay, [and] often extraordinarily dangerous working conditions.”

University of Auckland economics professor Tim Hazledine…

…said businesses generally had a great degree of ingenuity to adjust to change.

New Zealanders had a social and cultural expectation that adults should go to work and receive a living wage, he said – and the economy could adjust to that.

The Living age Movement Aotearoa New Zealand increased their suggested minimum to $19.80.

The Movement calls on Government, employers and society as a whole to strive for a Living Wage as a necessary step in reducing inequality and poverty in our society.

Striving for a ‘living wage’ is fine. Whether a much higher minimum should be imposed is debatable.

A problem with a set ‘living wage’ is that one size doesn’t fit all workers.

And if it is set too high then some businesses (and jobs) may not be viable, so the risk is that it would result in higher unemployment and make it more difficult for low skilled and especially young people to get jobs.

New Zealand also has an extensive and increasingly complex social welfare system that supports the unemployed and the unemployable, and also substantially subsidises many low paid (and not so low paid) workers through Working for Families.

Working for Families on it’s own is complicated enough with four types of payments:

  • family tax credit
  • in-work tax credit
  • minimum family tax credit
  • parental tax credit.

As well as that Accommodation Supplements are available and their are subsidies available for pre-school and out-of-school care.

Few would argue over having a minimum wage, although the level will always be debatable.

A higher ‘living wage’ is much more questionable except as an aspiration.

Both broad and targeted social welfare to some extent is expected in a modern society but the levels and availability will always be up for debate.

One problem is that social welfare tack-ons make it increasingly complex, at risk of being in inefficient use of taxpayer resources.

Some call for a Universal Basic Income (UBI):

An unconditional basic income (also called basic income, basic income guarantee, universal basic income, universal demogrant, or citizen’s income) is a form of social security system in which all citizens or residents of a country regularly receive an unconditional sum of money, either from a government or some other public institution, in addition to any income received from elsewhere.

A UBI may simplify things but would be difficult to transition to if it meant (as it would probably have to) that some people would get less than they do now, unless it was encumbered with supplemental assistance.

It’s easy to tack on increases, but reducing benefits and subsidies when people have adjusted to and become reliant on current income and welfare levels is tricky and risky.

Some sort of overhaul and simplification of our wage and welfare systems has some merit but would be very difficult to implement unless the country suddenly became rich enough to pay a lot more.