Chinese birth and death rates and the Chinese population since 1950
04 Nov 2015 Leave a comment
in development economics, growth disasters, growth miracles, labour economics, labour supply, population economics Tags: China, economics of fertility, one child policy, The fatal conceit, The pretense to knowledge, unintended consequences
Is the living wage a form of indirect sex discrimination?
03 Nov 2015 Leave a comment
in applied price theory, discrimination, gender, labour economics, Marxist economics, minimum wage, politics - New Zealand Tags: expressive voting, living wage, offsetting behaviour, rational irrationality, The fatal conceit, unintended consequences
The living wage will certainly be to the profit of incumbent workers at the time of the wage increase but that is provided that their employer stays in business. The introduction of a living wage will result in indirect sex discrimination because of the higher job turnover rates of women. Women also have shorter average job tenures than men in any particular job.
Source: Worker turnover rate in New Zealand by sex – Figure.NZ.
Any benefit premised on not quitting jobs discriminates against women because of their higher job quit rates. More women than men will have to quit living wage jobs because of motherhood and other changes in their personal circumstances. Isn’t that discrimination?
One in six workers change their jobs every year. That job turnover rate is higher among the workers with less human capital simply because both sides of the job match have less reasons to continue. A job quit or job layoff for a less skilled worker does not result as much of a loss of job specific and firm specific human capital than would be the case if the worker was more skilled with more firm-specific human capital.
One of the iconic empirical facts of the labour market is job turnover rates are higher and job layoff rates are higher for less skilled workers. As workers acquire more job specific human capital, they are more reluctant to quit and their employer hesitate before laying them off. This is because of the firm specific human capital which both invested would have to be written off.
Women quit jobs more often than men, work part-time or switch between part-time and full-time work more often than men and enter and re-enter to the workforce because of motherhood and maternity leave. Women also tend to invest in more generalised, more mobile human capital. Women anticipate a more intermittent labour force participation and more spells of part-time work. As such, women have less reasons to invest in specific human capital if they anticipate leaving because of motherhood and either changing jobs more often are working part-time. If you are changing jobs more often, such as women do, investing in more general human capital and less in specific capital increases options when searching for vacancies.
Any benefit of the living wage will erode faster for women because they quit jobs at a higher rate than men. Is this indirect sex discrimination? This higher job turnover rate is driven by human capital investment strategies and career plans. The living wage, which privileges the incumbent workers at the time the living wage increases implemented, discriminates against female workers because they change jobs more often or are likely to quit sooner after the living wage was initially implemented.
The particular form of indirect sex discrimination at hand arises from the Golden Handcuffs effect of the living wage. Closer Together Whakatata Mai – reducing inequalities explain the Golden Handcuffs effect this way:
You may have noticed in the article it is actually the SAME people being paid the living wage (“all of them have stayed on as staff”). This is how labour markets can work if employers make different choices. If you look at the Living Wage employers – they haven’t hired a whole new set of people – they have invested in the people they already have. The world has not ended and many more people are happy and businesses and organisations are doing just fine.
Even the proponents of the living wage admit that a living wage increase will segment the labour market and create insiders and outsiders with the insiders paid more than what used to be called the reserve army in the unemployed by the same crowd of activists. A reduction in job turnover will increase unemployment durations because there are fewer vacancies posted every period.
Hopefully all the existing employees of the living wage employer are capable of the requisite up skilling they need to match their new productivity targets. Not everyone did well at school. One of the reasons workers on low wages are on those low wages because they perhaps didn’t do as well at school as activists who appointed themselves to speak for them. A harsh reality of life is 50% of the population have below-average IQs.
This up skilling answer to the cost to employers of a living wage increase is a variation of the standard policy response in a labour market crisis. That standard labour market policy response in crisis is send them on a course. Sending them on a course as a response to a crisis makes you look like you care and by the time they graduate the problem will probably have fixed itself. Most problems do. I found this bureaucratic response to labour market crises to repeat itself over and over again while working in the bureaucracy.
The reason was sending them on a course was so popular with geeks as yourself sitting at your desk as a policy analysis, minister or political activist all did well at university. You assume others will do well through further education and training including those who have neither the ability or aptitude to succeed in education. People don’t go on from high school to higher education for a range of reasons that include a lack of motivation to study or a simple lack of ability no matter how hard they try.
The living wage hypothesis about reduced turnover, up-skilling and greater motivation is a small example of the American company that decided to pay a minimum wage of $70,000 a year. Those workers who cannot earn as much of this elsewhere would never quit. Some of his better employers quit because they resented being paid the same as less productive employees. Hopefully, the minority shareholder suing his brother who is the CEO for offering that above market wage doesn’t end up bankrupting the company. As such, the incumbent workers’ fortunes are unusually closely tied to their existing employer if they are paying above the going rate in their industry and occupation.
I suppose you could hold on like grim death but women tend to have more reasons to move on than men if only because of pregnancy and motherhood. These golden handcuffs are of less value to them than to men. Younger workers are also less advantaged because many young New Zealanders take a overseas working holiday of several years, if not more. If they have a living wage job now that have to give up that advantage.
Workers who lack the labour productivity to earn a wage equivalent of the living wage elsewhere will never quit a living wage job, and will have a much reduced incentive to up-skill or seek promotion. There will be less internal reward for undertaking additional training or job responsibilities among low skilled is because the living wage will mean they will not get a wage rise. That wage rise is gobbled up by the living wage increase if you’re already a low-paid worker.
Naturally, as vacancies arise, recruits will be drawn from a much higher quality recruitment attracted by the higher wage at the living wage employer. The less skilled workers who don’t currently work for the living wage employer will miss out completely.
Child poverty by British Prime Minister since 1961
03 Nov 2015 Leave a comment
in economic growth, economic history, poverty and inequality
When I pointed out yesterday that the only periods of sustained real household income growth in recent British history was under those neoliberal lapdogs Thatcher and Blair, the Twitter Left on Reddit decided rather prematurely I might say that:
The prime minister rarely influences broad economic realities — like commodity prices or interest rates, or double digit economic growth in china. Elections frequently change the party in power AFTER the economy turns downwards. As though that party had anything to do with the down turn.
I’m sure that the morally centred Twitter Left will be equally forgiving of the sustained rise in child poverty due to many more workless households shown in the chart below under Thatchernomics. The only sustained fall in child poverty rates in recent British history was under Tony Blair. The British Left and current British Labour Party leadership dismiss him as a continuation of Thatchernomics.
Source: Incomes in the UK – Institute For Fiscal Studies – IFS.
Top incomes and the decline of unions in Canada, France and Italy
03 Nov 2015 Leave a comment
in applied price theory, applied welfare economics, economic history, entrepreneurship, industrial organisation, labour economics, labour supply, Milton Friedman, poverty and inequality, Public Choice, rentseeking, unions Tags: Canada, entrepreneurial alertness, France, Italy, top 1%, union power, union wage premium
The French ruling class is as lazy as their transnational co-conspirators down under. French union membership is in serious decline albeit from a low base. An opportunity lost for the French ruling class. It has not lifted a finger to extract additional labour surplus from the downtrodden French proletariat now stripped of their only line of collective defence against capitalist exploitation.
Source: OECD Stat and Top Incomes Database.
The top 10% and top 1% in France are no better off than two generations ago despite the decline of French unions. The French Left must be most disappointed. No kicking in the rotten door of the permanent revolution anytime soon after the immiserised French proletariat rises up because it has nothing to lose but its chains. The 21st century version of the Marxist call to the barricades would be a proletariat stirred to revolution with nothing to lose but their suburban home, motorcar, IPad and air points
Source: OECD Stat and Top Incomes Database.
The Italian ruling class has had little success in bringing Italian unions down. The top 10% in Italy is earning no more now than back when the Red Brigades were gunning for them.
Source: OECD Stat and Top Incomes Database.
The top 1% in Italy is doing a little bit better than when the Red Brigade was gunning for them, but not much more. Unions don’t figure in explaining that small rise in Italian top 1% incomes over the last 40 years. Italian unions are pretty much a strong as they were 40 years ago in membership. Italian employment protection laws are pretty much as strong as they used to be too.
Source: OECD Stat and Top Incomes Database.
The Canadian ruling classes even more incompetent than their transnational co-conspirators over in Italy. There appears to have been next to no decline in union membership in Canada. The Canadian top 10% is not earning any more than back in the 60s.
Source: OECD Stat and Top Incomes Database.
The Canadian top 1% is doing a little bit better than 25 years ago also but not off the back of unions which are almost as strong as in the past. The Canadian Left will have to look for a different hypothesis than the ravages of the top 1%.
Source: OECD Stat and Top Incomes Database.
All in all, the Economic Policy Institute simply got lucky with a spurious correlation between top incomes and union membership in the USA.
Did the British disease pass retirees by? British retiree and non-retiree median real household income by Prime Minister since 1977
03 Nov 2015 Leave a comment
in applied welfare economics, economic growth, economic history, macroeconomics, poverty and inequality Tags: British economy, British politics, Margaret Thatcher, Tony Blair
The British disease and the horrors of Thatchernomics past British retirees by as did pretty much the Global Financial Crisis. Slow and steady as she goes under every Prime Minister since 1977 has been year in year out result for the real disposable median incomes of British retired households. Despite it all, British retiree household incomes increased by 170% since the winter of discontent. The fastest growth in retiree incomes was under Tony Blair.
Source: Release Edition Reference Tables – ONS.
Notes:
1 Households are ranked by their equivalised disposable incomes, using the modified-OECD scale.
2 1994/95 represents the financial year ending 1995, and similarly through to 2014/15, which represents the financial year ending 2015.
3 Income figures have been deflated to 2014/15 prices using an implied deflator for the household sector.
It has been a much rockier ride for British households yet to retire. Once again, the only time a sustained real income increases for non-retired households was under Thatcher and Blair. Despite it all, household real incomes have doubled since the winter of discontent. The majority of that doubling was under the dead hand of Tony Blair. British Labour now spends a considerable amount of time repudiating that time of unusually rapid household income growth across all of British society.
Source: Release Edition Reference Tables – ONS.
Notes:
1 Households are ranked by their equivalised disposable incomes, using the modified-OECD scale.
2 1994/95 represents the financial year ending 1995, and similarly through to 2014/15, which represents the financial year ending 2015.
3 Income figures have been deflated to 2014/15 prices using an implied deflator for the household sector.
The gender divide on Facebook vocabulary
03 Nov 2015 Leave a comment
in economics of media and culture, gender Tags: Facebook
Huge gender differences: Words clouds based on 75,000 Facebook users' messages.
(From: journals.plos.org/plosone/articl…) https://t.co/kkTSSoMtLe—
Max Roser (@MaxCRoser) October 24, 2015
@resfoundation shows @jeremycorbyn how good it was under Blair
02 Nov 2015 Leave a comment
in applied welfare economics, economic history, labour economics, poverty and inequality
@EconomicPolicy showed gender pay equality when arguing the opposite @CHSommers @Mark_J_Perry
02 Nov 2015 2 Comments
in applied price theory, applied welfare economics, discrimination, gender, human capital, labour economics, labour supply, occupational choice, politics - USA Tags: asymmetric marriage premium, compensating differentials, gender wage gap, marital division of labour, power couples, top 1%, top incomes, Twitter left, union power, union wage premium
The Economic Policy Institute were good enough to dig out unit record data on the unadjusted US gender wage gap by percentiles. In attempting to show there was a persistent gender pay gap, the impeccably left-wing Economic Policy Institute showed that the unadjusted gender pay gap has all but disappeared in the USA.
There is next to no gender wage gap even in unadjusted terms towards the bottom of the labour market. This is despite all the protestations of the Left of an inherent inequality of bargaining power between the bosses and workers.
The low paid are supposed to be powerless unless unionised. Declining unionisation is a leading explanation on the Left of the rising income shares of the top 10%, top 1% in the top 0.1%.
If that inherent inequality of bargaining power trundled out at every opportunity by the Twitter Left explains anything in the labour market, this inequality of bargaining power should be operating with greatest strength at the bottom of the labour market.
Clearly the inherent inequality of bargaining power between the bosses and workers is not doing its job regarding the gender wage gap. The gender wage gap in the USA increases as you move up the income ladder rather than the other way around.
The explanation of the Economic Policy Institute for greater gender pay equality at the bottom is the minimum wage and male wage stagnation:
It is interesting to note that the wage gap between genders is smaller at the 10th percentile than at the 95th. At the 10th percentile, women earn 91 percent of men’s wages while women make only 79 percent of men’s wages at the 95th percentile.
The minimum wage is partially responsible for this greater equality among the lowest earners—it sets a wage floor that applies to everyone, which means that people near the bottom of the distribution are likely to make more equal wages. Also, low-wage workers are disproportionately women, which means that the minimum wage particularly bolsters women’s wages.
…Although women have seen modest wage gains in the last several decades, the main reason the gender wage gap has slowly narrowed is that the vast majority of men’s wages have stagnated or declined.
It is a bit rich for the Economic Policy Institute to praise the minimum wage as a force for increasing incomes after spending so much of its time saying how the minimum wage has fallen way behind wages growth in general.
The gender gap lingers at the top of the labour market despite the quite substantial wage gains for women as compared to men over the past 15 years. The Economic Policy Institute dismissed the substantial gains as modest despite their own documenting of them.
It is even richer for the Economic Policy Institute to start extending the male wage stagnation hypothesis to the top 20% and top 10%.
The top of the income distribution has not been known previously known as victims of wage stagnation.
The gender wage gap remains stubbornly high at the top end of the US labour market at 20% for the last few decades. The gender wage is so large and has stayed large at the top half of the labour market for the past few decades because of compensating differentials. Women on higher incomes are balancing families and careers in choosing the occupations that best suits each individual woman, their talents and educational choices.
Source: OECD Employment Database.
Studies of top earning professionals show that they make quite deliberate choices between family and career. The better explanation of why so many women are in a particular occupation is job sorting: that particular job has flexible hours and the skills do not depreciate as fast for workers who take time off, working part-time or returning from time out of the workforce. Low job turnover workers will be employed by firms that invest more in training and job specific human capital.
- Higher job turnover workers, such as women with children, will tend to move into jobs that have less investment in specialised human capital, and where their human capital depreciates at a slower pace.
- Women, including low paid women, select careers in jobs that match best in terms of work life balance and allows them to enter and leave the workforce with minimum penalty and loss of skills through depreciation and obsolescence.
This is the choice hypothesis of the gender wage gap. Women choose to educate for occupations where human capital depreciates at a slower pace. This gender wage gap for professionals can be explained by the marriage market combined with assortative mating:
- Graduates are likely to marry each other and form power couples; and
- There tends to be an age gap between men and women in long-term relationships and marriages of two years.
This two-year age gap means that the husband has two additional years of work experience and career advancement. This is likely to translate into higher pay and more immediate promotional prospects. Maximising household income would imply that the member of the household with a higher income, and greater immediate promotional prospects stay in the workforce.
This is consistent with the choice hypothesis and equalising differentials as the explanation for the gender wage gap. As Solomon Polachek explains:
At least in the past, getting married and having children meant one thing for men and another thing for women. Because women typically bear the brunt of child-rearing, married men with children work more over their lives than married women. This division of labour is exacerbated by the extent to which married women are, on average, younger and less educated than their husbands.
This pattern of earnings behaviour and human capital and career investment will persist until women start pairing off with men who are the same age or younger than them.
In low-paying jobs, there is little in the way of trade-offs other than full-time or part-time work. Low-paid jobs do not involve choosing majors at university, choosing careers, industries and employers that call for long hours and uninterrupted careers or not so long hours, fewer human capital and promotional penalties for time off and more work-life balance. The choice hypothesis is the far better explanation for the persistence of the unadjusted gender wage gap in the USA as Polachek explains:
The gender wage gap for never marrieds is a mere 2.8%, compared with over 20% for marrieds. The gender wage gap for young workers is less than 5%, but about 25% for 55–64-year-old men and women.
If gender discrimination were the issue, one would need to explain why businesses pay single men and single women comparable salaries. The same applies to young men and young women. One would need to explain why businesses discriminate against older women, but not against younger women. If corporations discriminate by gender, why are these employers paying any groups of men and women roughly equal pay?
Why is there no discrimination against young single women, but large amounts of discrimination against older married women? … Each type of possible discrimination is inconsistent with negligible wage differences among single and younger employees compared with the large gap among married men and women (especially those with children, and even more so for those who space children widely apart)
The main drivers of the gender wage gap are unknown to employers such as whether the would-be recruit or employer is married, their partner is present, how many children they have, how many of these children are under 12, and how many years are there between the births of their children.
@economicpolicy Top incomes and the decline of unions in the US, UK, Australia and New Zealand
02 Nov 2015 4 Comments
in applied welfare economics, labour economics, Marxist economics, politics - Australia, politics - New Zealand, politics - USA, unions Tags: top 1%, union power, union wage premium
The Left in the USA and the UK like to show correlations between top incomes and the decline of union membership.
I thought I would check how this hypothesis travelled to European offshoots such as Australia and New Zealand. For example, in the USA, top income shares have been increasing while union membership has been in decline since 1960.
Source: OECD Stat and Top Incomes Database.
Source: OECD Stat and Top Incomes Database.
In the UK, the relationship between union membership and top incomes is gentler than in the USA.
Source: OECD Stat and Top Incomes Database.
Source: OECD Stat and Top Incomes Database.
Moving down under, the relationship between top incomes and union membership is non-existent in New Zealand.
Source: OECD Stat and Top Incomes Database.
Source: OECD Stat and Top Incomes Database.
The same pretty much goes for Australia in terms of no relationship between top incomes in union membership to extent that this relationship is anything more than a spurious correlation.
Source: OECD Stat and Top Incomes Database.
Source: OECD Stat and Top Incomes Database.
Did the New Zealand film industry just eat our lunch? By Jason Potts
01 Nov 2015 Leave a comment
in applied price theory, economics of media and culture, fiscal policy, industrial organisation, job search and matching, labour economics, labour supply, macroeconomics, politics - Australia, politics - New Zealand, Public Choice, rentseeking, survivor principle Tags: film subsidies, Hollywood economics, industry policy, offsetting behaviour, The fatal conceit, The pretense to knowledge, unintended consequences
James Cameron is going to film the next three instalments of the Avatar franchise in New Zealand. He promises to spend at least NZ$500 million, employ thousands of Kiwis, host at least one red-carpet event, include a NZ promotional featurette in the Avatar DVDs, and will personally serve on a bunch of Film NZ committees, and probably even bring scones, all in return for a 25% rebate on any spending he and his team do in the country (up from a 20% baseline to international film-makers) that is being offered by the New Zealand Government.
The implication that many media reports are running with is that this is a loss to the Australian film industry, that we should be fighting angry, and that we should hit back at this brilliantly cunning move by the Kiwi’s by increasing our film industry rebates, which currently are about 16.5% (these include the producer and location offsets, and the post, digital and visual effects offset) to at very least 30%. These rebates cost tax-payers A$204 million in 2012, which hardly even buys you a car industry these days.
So what are the economics of this sort of industry assistance? Is this something we should be doing a whole lot more of? Was the NZ move to up the rebate especially brilliant? First, note that James Cameron has substantial property interests in New Zealand already, so this probably wasn’t as up for grabs as we might think. But if that’s how the New Zealand taxpayers want to spend their money, that’s up to them. The issue is should we follow suit?
The basic economics of this sort of give-away is the concept of a multiplier “”), which is the theory that an initial amount of exogenous spending becomes someone else’s income, which then gets spent again, creating more income, and so on, creating jobs and exports and all sorts of “economic benefits” along the way.
People who believe in the efficacy of Keynesian fiscal stimulus also believe in the existence of (>1) multipliers. Consultancy-based “economic impact” reports do their magic by assuming greater-than-one multipliers (or equivalently, a high marginal propensity to consume coupled with lots of dense sectoral linkages). With a multiplier greater than one, all government spending is magically transformed into “investment in Australian jobs”.
So the real question is: are multipliers actually greater-than-one? That’s an empirical question, and the answer is mostly no. (And if you don’t believe my neoliberal bluster, the progressive stylings of Ben Eltham over at Crikey more or less make the same point.)
But to get this you have to do the economics properly, and not just count the positive multipliers, but also account for the loss of investment in other sectors that didn’t take place because it was artificially re-directed into the film sector, which no commissioned impact study ever does.
This is why economists have a very low opinion of economic impact studies, which are to economics what astrology is to physics.
What does make for a good domestic film industry then? Look again at New Zealand, and look beyond the great Weta Studios in Wellington, for Australia and Canada both have world-class production studios and post-production facilities. Look beyond New Zealand’s natural scenery, for Vancouver is an easy match for New Zealand and Australia pretty much defines spectacular.
No, the simple comparison is that New Zealand is about 20% cheaper than Australia and 30% cheaper than Canada. New Zealand has lower taxes, easy employment conditions and relatively light regulations (particularly around insurance and health and safety). It’s just easier to get things done there.
If Australia really wants to boost its film industry, it might look more closely at labour market restrictions (including minimum wages) and regulatory burden and worry less about picking taxpayer pockets and bribing foreigners.
This article was originally published on The Conversation in December 2013. Read the original article. Republished under the a Creative Commons Attribution No Derivatives licence.
@Greencatherine 1996 US welfare reforms and the employment of single mums who were high school dropouts
31 Oct 2015 Leave a comment
in labour economics, labour supply, politics - USA, poverty and inequality, welfare reform Tags: 1996 US welfare reforms, paternal labour supply, single mothers, single parents, social insurance, welfare state
https://twitter.com/hamiltonproj/status/659776768094547968
There was a step increase in the employment rate of single parents and in particular high school dropouts straight after the implementation of the 1996 US federal welfare reforms.
These single mothers who dropped out of high school were thought to be least employable and most at risk to the 1996 US welfare reform. There was a large increase in their employment and this massive improvement in their rates of employment is enduring to this day.
Mises on Nazi socialism
31 Oct 2015 Leave a comment
in applied price theory, Austrian economics, comparative institutional analysis, constitutional political economy, defence economics, economics of bureaucracy, economics of regulation, industrial organisation, labour economics, Ludwig von Mises, Public Choice, survivor principle Tags: Nazi Germany
#TBT Ludwig von Mises' 1942 Letter to the Editor in the @nytimes on Nazi socialism. http://t.co/kv7TFekY8J—
Mises Institute (@mises) October 15, 2015
The shape of things to come
30 Oct 2015 Leave a comment
in health economics, labour economics, personnel economics
The low skilled won’t be hired for living wage jobs @nmjyoung @EtuUnion @WellingtonMayor @FIRST_Union
30 Oct 2015 3 Comments
in applied price theory, human capital, labour economics, minimum wage, personnel economics, politics - New Zealand, rentseeking Tags: entrepreneurial alertness, expressive voting, living wage
The upshot of the Wellington City Council paying a living wage to employees and including those of sub-contractors is over time the composition of their low skilled labour force will change. The Council will recruit people who can earn in other jobs $19.25. Workers who don’t have the capability of producing at that level of productivity will never be interviewed.
The Council is required by law to recruit on merit and to be a good employer. Workers who would never have previously applied for Wellington City Council jobs covered by the living wage decision because they can earn better pay elsewhere will now do so because of the higher pay of these council jobs.
These higher skilled workers will crowd out the lower skilled workers that currently apply for the low paid jobs covered by the upcoming living wage increase. The workers with the type of skills that currently win those jobs covered by the living wage increase will not be shortlisted because the quality of the recruitment pool will increase because of the living wage. There will be an influx of more skilled workers attracted by the higher wages for council jobs because of the living wage policy. They will go to the head of the queue and displaced workers who currently apply for and win those council jobs.
A living wage is an exclusionary policy where ordinary workers, often with families who are not productive enough to produce $19.25 per hour plus overheads will never be interviewed by the Wellington City Council or council subcontractors for a job covered by the living wage increase.
In a cruel twist of fate, because the council is implementing its living wage on 1 July 2016, higher quality workers will start applying for jobs covered by the living wage increase now. This will further reduce the number of initial beneficiaries of the living wage increase. Council workers recruited between now on 1 July 2016 will be applying in anticipation of that increase.
The living wage adopted by the Wellington City Council is a classic case of rent capitalisation. With the council paying over the odds for a job, workers will have every incentive to compete for the higher wages. The most obvious way of winning that race for these limited number of higher paying jobs is to be a more productive worker than the other job applicants.
The living wage jobs will attract a higher quality pool of job applicants. These higher quality job applicants who would not otherwise applied but for the living wage will outcompete existing low skilled low paid workers who would otherwise benefited from the living wage increase. In some cases, these higher quality, more skilled recruits will be taking a job at the Council or its contractors covered by the living wage increase on much the same pay as they command anywhere else in the labour market. As such, ratepayers are paying about 20% more for no reduction in poverty.
The existing employees of the Wellington City Council and its subcontractors will be locked into golden handcuffs. Workers who lack the labour productivity to command a wage equivalent of the living wage elsewhere in the job market will never quit. Wellington City Council employees covered by the living wage will also have a much reduced incentive to up-skill will seek promotion. There will be no internal reward for undertaking additional training or job responsibilities among low skilled is because the living wage will mean they will not get a wage rise at the Council.
The windfall gains to the current low paid council employees but no future council employees illustrate the folly of a living wage policy at the Wellington City Council. Some of these existing Wellington City Council employees will have children so child poverty rates may improve. That is all that will be gained for a permanent increase of about 20% in the price paid for council services.
Because of the change in the recruitment pool for all future vacancies, the impact on the poverty rates among future council employees will be minimal. These recruits to future council vacancies covered by the living wage increase will be recruited from other jobs where they already earn a similar pay to the living wage paid at the Council. Ratepayers will pay about 20% more for services in return for a small reduction in child poverty among its existing council employees.
As these existing employees move on, and they will one day, ratepayers will continue to pay about 20% more until either the Council sees the errors of its ways or the policy is overturning on judicial review. There will be no reduction in family poverty because new recruits are switching to the Council for the usual wage premium from moving to one job to another and that’s it. As the existing council employees leave, any child poverty reduction from the living wage policy will fade to zero.
As mentioned, potential recruits who are productive enough to earn a competitive market wage equal to the living wage level in their existing jobs will be the most qualified applicants. The best of these higher quality applicants will fill future council vacancies covered by the living wage policy. Workers who are not productive enough to earn the living wage in other jobs simply won’t be shortlisted for council jobs. The Council must by law hire the best qualified applicant for any vacancy.
Source: Peter Kolesar, Garrett van Rysin and Wayne Cutler.
Any extra labour productivity from a living wage at the Wellington City Council is in doubt because low skilled service sectors are notorious for their low potential for productivity gains. They are the bread-and-butter of Baumol’s disease.
Source: Chris Rauchle.
It’s kicking the Wellington City Council when it is down to mention that low paid workers with families will lose a considerable part of the living wage increase because of reductions in their family tax credits – reductions in the Working for Families in-work tax credit. Any living wage increase at the Wellington City Council is the subject of multiple clawbacks by IRD. There is income tax, a 25% abatement rate on Working for Families tax credits on any family income above about $36,000 and 15% GST. All in all, the transfer out of the pockets of ratepayers to IRD would be at least one-third.
I have not included any accommodation supplement, childcare subsidy or community services card the low paid worker is receiving from WINZ. The winding back of these social benefits to the low paid worker and his or her family is a pointless transfer from Wellington City ratepayers to the national taxpayer.
It will be kicking Wellington City Council even further to remind of the enforcement and compliance costs of living wage ordinances in the USA at the city level.
The Wellington City Council this week acted against legal advice to require contractors under joint services agreements with other councils in the Wellington region to pay employees who work within the boundaries of Wellington city the living wage. The American cities had to define the minimum number of hours in a day that minimum wage workers who are mobile for their jobs had to spend within their city limits before their employer was subject to their living wage ordinance.
It is standard to put forward an efficiency wage argument for a living wage. The higher wage paid as result of the introduction of the living wage will motivate workers to work harder and cheer each other on.
Source: John Horton.
These workers paid the efficiency wage will require less supervision because under an efficiency wage, a rate of pay that is more than the going rate for their skills and experience with other employers and in other industries and occupations, these workers paid the efficiency wage have more to lose if disciplined or dismissed. By the way, the theory of the efficiency wages is an American theory where there is employment at will.
This additional effort and greater motivation from the efficiency wage, from the above market rate of pay, will reduce the costs of supervision to the employer of teams of employees as well as increase output per worker. This is supposed to offset some of the costs of the living wage increase.
At bottom, this efficiency wage hypothesis is entrepreneurs are unaware of the higher quality and greater self-motivation of better paid recruits for vacancies but wise bureaucrats and farsighted politicians notice these gaps in the market. Bureaucrats and politicians notice these gaps in the market before those who gain from superior entrepreneur alertness to hitherto untapped opportunities for profit do so and instead leave that money on the table.
I won’t mention that many of the modern theories of the firm focus, in part or in full on reducing opportunistic behaviour, cheating and fraud in employment relationships. The cost of discovering prices and making and enforcing contracts and getting what you pay for are central to the Coase’s theory of the firm put forward in 1937.
In Barzel’s (1982) theory of the firm, measurement costs drive the emergence and organisation of the firm. The firm arose to minimising the cost of measuring what is to be exchanged by bringing some of those measuring tasks in-house. Much of the organisation of the firm, including the degree of vertical and horizontal integration and many different forms of contracting are driven by ensuring owners and managers get what they pay for and are not overcharged through manipulation or cheating.
Alchian and Demsetz’s (1972) theory of the firm focused on moral hazard in team production. As they explain
Two key demands are placed on an economic organization-metering input productivity and metering rewards.
The main rationale in personnel economics from everything ranging from employer funding of retirement pensions to the structure of promotions and executive pay including stock options is around better rewarding self-motivating employees and reducing the costs of monitoring employee effort.
Source: Department of Labour (2009).
The profits of entrepreneurs for running a firm is directly linked from their successful policing of the efforts of employees and sub-contractors to ensure the team and each member perform as promised and individual rewards matched individual contributions (Alchian and Demsetz 1972; Barzel 1987). The entrepreneur is a residual claimant to the revenues of the firm net of paying all other inputs. Entrepreneurs must successfully police the contributions of their employers and contractors if they are to survive in competition. The better they are at this, the more the alert entrepreneur profits.
Every profit minded entrepreneur seeks to hire the group of workers with the lowest cost per unit of output produced by them. Those that do not will not survive in competition with more alert rivals. The trade-off between worker quality and wages in setting hiring standards is a routine entrepreneurial decision in every firm when recruiting:
Managers often say that their goal in hiring is to obtain the best quality workers. It sounds like a good idea, but is it? The most productive workers are also likely to be the most expensive. Should the goal instead be to hire the least expensive workers? …The best worker is not the cheapest, nor the most productive, but the one with the highest ratio of productivity to cost. We should hire as long as the marginal productivity of the last worker hired is greater than or equal to the cost of the worker.
Source: Lazear and Gibbs.
Utopia, you are standing in it! 
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