Does NZ want a living wage?

Benefit fraud, house prices, child poverty, immigrant-induced wage deflation — if there’s a single unifying thread to this election’s talking points it’s that that the cost of life in New Zealand has risen faster than our ability to pay for it. Yet unlike the last two elections, the issue of the minimum wage has taken a back seat.

Marama Fox managed to squeeze in a few sentences on the Māori Party’s living wage policy during the first minor party leaders’ debate, but the exchange that followed with moderator Lisa Owen was inconclusive. Owen pressed Fox on how many job losses would result from the policy, Fox parried that a phased-in approach would cushion the blow for employers.

The facts here line up on Owen’s side. The most recent Minimum Wage Review, published in 2016, estimated that as many as 28,000 jobs would be lost were the minimum wage raised to the living wage. Alongside this, workers would have to contend with a 0.7 percent rise in inflation blunting the spending power of their raise.

Policy on incomes, particularly on the minimum wage, should be an essential part of any discussion on how affordable or unaffordable life has become. All of the left-leaning parties have put forward drastic changes to incomes; in Labour’s case, this includes policy that goes far beyond their offerings in previous years.

Thus far, only Mana and the Māori Party support introducing a living wage, calculated by Living Wage Aotearoa as $20.20. Mana is pledging a minimum wage of NZ$20 an hour and indexing it so that it is never less than 66 percent of the average income.

The Green Party’s minimum wage starts significantly lower, at $17.75 — just lower than what they pledged last election, when they wanted to push the minimum wage to $18 by 2017. However, wages will rise more sharply this time around, reaching a Mana/Māori-level 66 percent of the average wage by 2020.

The Labour policy is the most striking. Though it starts out lower than the others at $16.50 ($0.75 more than the current minimum), it too will rise to two-thirds of the average wage ‘as economic conditions allow’ (plenty of wriggle room there). This would bring Labour’s minimum neck and neck with Mana, Māori, and Green.

Will Weimar-style inflation ruin the time-honoured Kiwi coffee break or was the Prime Minister just pulling our collective ponytail?

The key detail here is not the headline figure of the wage itself, but the pledge to index minimum income to the average income. Hiding behind this headline piece of policy is a seismic shift in the political alignment of all of these parties, particularly Labour. By indexing the minimum income to the average income, there is a tacit acknowledgement that poverty is a relative, not absolute measurement and that when incomes rise at the top end of the spectrum, the cost of living rises at the bottom end too.

Currently, the Minimum Wage Act 1983 stipulates that the Minister for Workplace Relations and Safety must review the minimum wage rates annually. Each year, MBIE prepares a report for the Minister modelling minimum wage increases and suggests increasing the wage by a certain amount. There is no statutory protocol the review follows, but it generally takes into account CPI, to measure the cost of living, as well as increases to the median wage, to set a low benchmark.

Under these new proposals minimum wage would change from being a benchmark below which one should not fall, to a measure that helps those on the bottom keep track with those at the top. Inequality would shrink as massive pay increases at the top of the spectrum would be reflected in relative increases to the minimum wage.

So do we want it? Well, it appears not. The minimum wage issue was done to death in the last two elections, with John Key having defended the fairly modest rises that took place under his watch. Considering how tempting it is to vote for a pay rise, Key’s success here vindicates his powerful political skills.

The arguments he deployed against minimum wage rises are nothing new — especially not in New Zealand. Using the example of a coffee, Key argued that an increase in the minimum wage would raise the cost of employing the barista, the employer would pass that cost on to the consumer, meaning all the products that barista consumed would be more expensive, negating the usefulness of the pay rise to the barista and kicking off an inflation spiral for everyone else.

On incomes, he claimed that policies like Working for Families were far more effective than minimum wage increases as they targeted support at individuals who needed the money most, reducing the cost to the economy; 18-year-old students don’t really need a pay rise, working mums do. Tax credits raise incomes whilst keeping a lid on inflation.

This is the logic behind National’s Family Incomes package, reducing taxes and increasing targeted benefits to raise incomes, whilst avoiding a wholesale minimum wage increase that might provoke an inflation spiral.

If the productivity issue gets as much airtime as it has done recently, it might be worth politicians considering whether raising incomes would provoke businesses into investing the skills and training necessary to get the most out of our low-paid workforce.

Was Key right? Will Weimar-style inflation ruin the time-honoured Kiwi coffee break or was the Prime Minister just pulling our collective ponytail? And what about a new threat — not discussed in 2014, but which was implicit in Owen’s question to Fox: automation. Would an increase in the minimum wage simply encourage employers to shell out the capital for a robot employee?

It’s not an easy question. In the UK, a rethinking of right-wing values has seen the Conservative Party loudly champion raising the minimum wage since 2015, taking the opposite tack to National under Key and English. The Tories are committed to gutting tax credits whilst raising the minimum wage from £7.20 to £8.75 of the living wage.

The worry in the UK is not a wage spiral, but the fear that increasing the minimum wage will cause large numbers of minimum wage workers to be laid off. The Institute for Fiscal Studies has said that minimum wage increases will encourage employers to invest in capital-intensive ways to automate their workforce, effectively deciding that a large one-time investment in an automated workforce is cheaper than being committed to paying a high minimum wage in perpetuity.

In this scenario, governments are caught between a rock and a hard place, committing the working poor to a lifetime of in-work benefits and poverty or increasing their incomes so much they get laid off.

The UK has something else to teach us here too, however. As the value of the pound plummeted in the wake of the Brexit referendum, supermarkets, clothing chains, and other retailers selling imported products have found efficiencies in their supply chains to minimise the impact on consumers. While the cost to supermarkets of importing euro-priced fruit and vegetables from Spain has skyrocketed, the cost passed on to the consumer has been minimal. Goods like hummus, crisps and pre-made meals have had their recipes altered, chocolate bars have shrunk slightly in size and, more importantly, employers have invested in ways to make their businesses and employees more efficient, finding cost savings elsewhere in the business to offset the rising cost of imports.

While we may not relish cuts to the quality of our food, rising costs might be the spur New Zealand employers need to start investing in making their workforce more productive. If they’re going to be paying a worker $20 an hour, businesses need to make sure that employee isn’t giving them $15 worth of value.

If the productivity issue gets as much airtime as it has done recently, it might be worth politicians considering whether raising incomes would provoke businesses into investing the skills and training necessary to get the most out of our low-paid workforce.

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