Living Wages - Canadian economist(s) edition.

Simon Collins's Herald piece on living wages makes for interesting reading.

He opens with a story of a couple who both work shifts cleaning at a mix of buildings, some housing government-owned entities, some private. They both earn $14.10 per hour, less than the union's $18.40 living wage recommendation. He then points out the current version of Labor candidate pledges:

Grant Robertson pledged to set a timetable to pay the living wage to all government workers and contractors.

David Cunliffe promised to "roll out a living wage as a minimum for public servants and, as we can afford it, through the contractor process".

But the third contender, Shane Jones, refused to commit to the policy, and Prime Minister John Key said it would cost $2.5 billion and destroy 26,000 jobs.

If Labour puts in a $18.40 minimum wage for government workers, the featured family would likely only be getting this for their shift cleaning at a school unless the school contracts out facilities maintenance. And the school might shift to contracting out to keep costs down unless the government topped up its budget to make up the difference. If contractors also have to pay it, then the featured family does better in the short to medium term. But recall that if the potential benefits are large, so too are the incentives to shift to renting serviced facilities and so to have cleaners and other maintenance staff out from under the living wage mandate. So either it doesn't do much, or it gets circumvented. Collins also notes in passing that Ofa, one member of his featured family, is a delegate for the Service and Food Workers Union. I expect that the unions as a whole do well out of the measure, if it's extended to contractors, because it blunts the force of contracted outsourcing in keeping costs (and wages) down.

Collins then works through some of the costing estimates on living wage mandates, correctly noting that increasing the minimum wage to $18.40 would be very expensive. He then quotes me on the likely disemployment effects of an $18.40 minimum applied only to the government sector:

Those taxpayers would have less to spend, but low-paid state workers would have more. Even right-wing blogger Eric Crampton, a Canterbury University economist, wrote this week that the net effect would be minor: "Lots of people queue for jobs in the high-paying sector, but they'll take lower-paying jobs in the private sector."

I do expect that there wouldn't be much change in aggregate employment with a living wage mandate applied only to government workers and contractors because I expect that the government has close to a vertical labour demand curve for such workers and tasks.* There would be job rationing - in other words, more people wanting to work as cleaners in the public sector than there are available jobs - and the unions could extract higher dues as consequence. But Councils and Government would be likely, in the short term at least, just to pay more and make it up with increased taxes. In the medium to longer term, I still would expect a shift to government departments taking up tenancies in serviced buildings, but where the cleaning budget is a small part of the overall calculus, the effects mightn't be large.

Collins nicely does cite the literature on that living wage mandates are very poorly targeted and that we could do rather better by increasing targeted benefits. Then he cites U Vic's Morris Altman:

Morris Altman, a renowned Canadian economist who moved to Wellington's Victoria University in 2009, argues that a living wage is "a moral imperative situated in the natural rights of individuals".

His research suggests that a wage rise can actually pay for itself by raising productivity through motivating workers to work harder and stay in their jobs, and by inducing employers to introduce new technology and train workers to work smarter.

But that is only true, he warns, if wages are raised at a rate that productivity can keep up with. "So one has to be ultra-careful about by how much one increases. If it's a radical increase, that might be too much to deal with in the short-term," he says. "You might need a bit of an adjustment period to get productivity up."

I choose to take it as a compliment that Collins seems to have assumed that I'm Kiwi.

I haven't read Morris's work on living wages. I'd disagree pretty strongly with him on moral imperatives and natural rights, but I'm pretty sure neither of us gets to trump the other on that kind of question. And I can believe that, in some cases, salary increases can be self-financing - that's the general basis underlying efficiency wage theories (which also typically generate equilibrium unemployment). But we expect that firms choosing to increase wages on this kind of basis do so because they expect the salary increase to be worth the cost. I'm a bit curious why we'd expect those results to hold where employers are forced to pay more, but I'll perhaps have to look up his book this summer.


* I do hesitate a bit here though. I remember when the University set up a sustainability framing for a change in how they handled departmental waste collection. Instead of cleaning staff going into each office every night and emptying the bin, academic staff were asked to bring their trash and recycling bins to a central waste bin on each floor and those central bins would be collected every night. Maybe you could make some kind of sustainability case for it where staff who hate the cost of shuffling off doing a trash run every night might instead produce less waste. I'm not sure I believe it. But I am pretty sure they were able to cut the costs of building cleaning because of the policy change. At a minute per room for unlocking, collection, and relocking... well, it adds up. So there's often a margin, even where we don't expect there to be one.

Living wage mandates revisited

Two candidates for the Labour Party leadership have promised that they will require the payment of "living wages" for all government employees and for all government contractors. Matthew Hooton asked about the likely effects.

Were the government promising an $18.40 minimum wage across the board, things would be rather worse. The median hourly wage in the 2012 NZ Income Survey was $20.86. A minimum wage that's 88% of the median wage would be rather, well, breathtaking. Recall the median wage is the one where half of all wage earners earn more and half earn less. Workers vary in ability; a minimum wage at 88% of the median would disemploy anyone who cannot produce value equal to just a bit less than the median worker. This would obviously be very bad. Recall that unemployment weighs far more heavily in disutility than do wages. Chris Dillow made the case a few months ago. Those who want to improve the lot of the working poor do far better by pushing for wage subsidy schemes like Working For Families [New Zealand's EITC] than by making it too expensive to hire lower productivity workers.

The proposal here isn't for an $18.40 minimum wage but rather for a living wage mandate for government workers. The effects then are more minor. Imagine that we have rent control on a bunch of apartments but no rent control on new buildings. We'd then expect excess demand for the rent-controlled flats, but a clearing market elsewhere. Similarly, a living wage mandate in the government sector shouldn't have huge equilibrium unemployment effects. Lots of people queue for jobs in the high-paying sector, but they take lower-paying jobs in the private sector.

The main effect will be an increase in the cost of providing some government services. At the margin, this should mean that we have a few fewer things done by government, albeit within the context of an expansion in the size of government under a future Labour government. There would also then need to be an increase in taxes to fund it, or reduced spending in other areas to compensate, or higher deficits. I suspect Labour would bridge the gap via tax.

There will be some transitional unemployment as marginal jobs undertaken by government get shifted away from the government sector. If some of these workers were earning substantial rents in the government sector and are not employable above the legal minimum wage in the private sector, there could be some increased longer-term unemployment from that. But that shouldn't be any substantial part of the market. There will also be rather a few transitional costs where bureaus start renting fully serviced buildings with gardening and cleaning provided as part of the rent rather than either hiring those kinds of workers directly or through a contractor.

Another important effect: contractors will enjoy less of a cost advantage relative to government departments; we could easily read the policy as a way of trying to knock out contracted services to benefit public sector unions. See my discussion on the same issue when some city councils were talking about similar ideas. Some of my discussion of the likely effects of maximum wage gap mandates in government also apply.

Note as well that government sector workers are already overpaid relative to their private sector counterparts. While this may worsen the imbalance, it means that fewer government workers would be caught in the interval from the minimum to the proposed "living" wage than would be the case among private sector employees. The costs of a living wage mandate may be lower where imposed on the government sector than where imposed broadly. Imagine it in the limit: a $500/hour minimum wage in government. I expect that while government workers would earn a lot more, government would be a much smaller share of the economy. And think of the productivity gains in government: we'd only be choosing to use government rather than markets where we expected the social value of some government function were exceptionally high indeed.  

So while I wouldn't expect large disemployment effects from the policy, it's hardly a great idea. If you want to increase the wages of the working poor, you hardly should be starting with government workers, who earn more on average than those in the private sector and who typically also enjoy greater job security and flexibility. And if you want to run transfers to the working poor, generalised wage subsidies are the least distortionary way of doing it. Labour's proposed mechanism would be likely to reduce the efficiency of government services by pushing away from contracting out, and to skew the optimal balance between government services and other goods and services by increasing public sector costs.

Update: John Key also is no fan of Labour's proposal. He suggests additional costs where aggregate wages are bid up, or at least that's my interpretation of his argument that companies wind up having to pay more and that consumer costs then go up. That's possible within particular labour markets but I have a hard time seeing big aggregate effects.

Let's think of the market for service workers in restaurants. Suppose that the lowest-skilled workers work the cashier's station at the cafeteria in some government office. And let's suppose that this cafeteria continues to exist rather than the venue being leased out to a private sector firm, which it would under a $18.40 living wage mandate. The highest-skilled workers work at the fancy high-end restaurants, or work more complex jobs requiring a lot of balancing of tasks.

The living wage mandate then comes in. Currently employed cafeteria workers then are earning huge rents. Suppose we then have a lot of job applications from higher-skilled restaurant workers and, as consequence, job redefinitions to make better use of the more highly skilled staff. We then have more competition for more highly skilled restaurant staff and could see some bidding up of wages within that market. But there would still be low-skilled cafeterias in the private sector. With migration into that sector from former public sector workers who had been displaced, we could see some bidding down of wages in that part of the market. I can see mechanisms where there's bidding up of private sector wages in some markets, but I'd also expect potential bidding down where lower-tier government workers move back into the private sector. 

Real minimum wages

Despite inflation outcomes slightly below the lower-bound of RBNZ's inflation target, and despite high unemployment rates, New Zealand's increased the minimum wage by $0.25 to $13.75.

It's mildly interesting to check the CPI-deflated series and one indexed to average wages.
The blue and red lines track the nominal and CPI-adjusted minimum wages on the left hand axis; the yellow line traces the adult minimum wage as a percentage of the average wage on the right hand axis. In 1996, the minimum wage was 40.6% of the average wage. That increased to 50.4% of the average by 2008 and has held steady there since then.

NZ youths in their first 200-hours of work are now eligible for a new-entrant's wage that's 80% of the adult minimum wage: $11. That's 40.3% of the average wage (not the median, the average) for a new 16 year old worker with no experience.

Australia allows a youth minimum wage of $7.55 for 16 year olds.

Maybe there are reasons in the behavioural economics literature for nominal wage rigidity. But government does seem to like to turn that into real wage rigidity for the bottom of the wage distribution.

If National can't countenance holding the minimum wage steady when inflation is below 1%...

Minimum wages and climate change

Stephen Gordon wants to construct a Venn diagram showing the proportion of people who accept the evidence on minimum wages (it's a poor way of helping the poor) and who also accept the evidence on global warming (the place does seem to be getting warmer); he expects the intersection to be disappointingly thinly populated.

I can't help him out exactly, but I can add a bit.

The 2008 New Zealand Election Survey asked whether the government should control wages and whether strong action is needed on global warming, but had no questions on the employment effects of minimum wages. It's not the best: maybe some folks want maximum wages but don't like minimum wages, and maybe some (like me) are happy to take the evidence on global warming but are less convinced we need to invest massive resources in mitigation today - I'd have been somewhere between neutral and support on that question.

Here's the raw cross-tab.

Those who accept the science on government wage controls should oppose or strongly oppose them; those who deny the science on government wage controls will be more likely to support or strongly support them.

There are 1,471 of 2,892 respondents who accept the science on wages and 542 of 2,892 who reject it. Among those accepting the science on wages, 46.6% support or strongly support government action on global warming while 27% oppose or strongly oppose it. Among those neutral or opposed to the science on wages, 60.4% support or strongly support government action on warming while 15.2% oppose or strongly oppose it. These hit the 7+ t-stats. So disagreeing with the science on wages seems to predict stronger support of climate policy.

Among those supporting or strongly supporting strong government action on global warming, 45.8% accept the science on wages and 22.9% reject it. Among those neutral or opposed to strong action on climate, 59.7% accept the science on wages while 12.9% deny it. The t-stats on these across groups are higher than 7.

So if those supporting government action on climate are more likely to have supported the science, those supporting climate science seem significantly less likely to accept the science on wages and significantly more likely to reject the science on wages. And supporting the science on wage controls correlates with lower support for government action on climate and stronger opposition to it.

It's not a pure test because it's not anti-science to say that the scientists are right about mean expected warming over the next century but still to oppose "strong action" because you don't think it passes cost-benefit analysis. But you'd expect that there'd at least be a positive correlation between accepting the science and wanting action - it would seem odd to want action on climate change while thinking there's no warming.

The survey also has a measure of self-reported ideology: 0 left, 9 right, 5.4 mean. Another fun fact: dropping all the "don't know" respondents, mean self-reported ideology is 5.5 among those accepting wage science and 5.2 for everyone else; mean reported ideology among those wanting strong action on climate change is 4.8 and 6 for everyone else. The t-stat on group differences in ideology on climate is 11.9; on wages, 3.6. So the ideological divide on climate policy seems greater than that on wage controls.

I'd previously put together a couple of factor scores pulling together responses on social questions to get a measure of social liberalism and one on economic questions to get a measure on economic liberalism. I'd left the climate action question out of both factor analyses because supporting "action" on climate is neither pro- nor anti-market.* So I have a mean zero, SD 1 measure on social liberalism (higher is more liberal) and on economic liberalism (higher is more liberal).

A couple quick and dirty specifications have social liberalism strongly predicting support for climate policy, economic liberalism strongly predicting opposition to climate policy, household income not affecting preferences, and education predicting increased support for climate policy. In the ordered logit specification, a standard deviation increase in social liberalism predicts a 0.41 standard deviation increase in support for climate policy; a standard deviation increase in economic liberalism predicts a 0.6 standard deviation decrease in support for climate policy; a standard deviation increase in education predicts a 0.17 standard deviation increase in support for climate policy. There aren't any other measures in there that could capture generalised attitudes towards science, alas.

There are plenty of reasons why economic liberals could come out less in favour of strong action on climate change. A few candidates, some better than others:

1. Accept the science, but reckon future mitigation is more likely to pass cost-benefit, or that other projects are more worthwhile (a la Lomborg). Or, in stronger form, accept the science, be sceptical about the prospects for policy to fix things, and recognise that a warmer world could well be a better world up through, say, three degrees of warming. David Friedman makes the best argument along these lines** (his earlier blog post here). I don't think anybody who grew up in Manitoba can deny that there are some positive effects from a gradual warming.
2. Accept the science, see a need for policy, but reckon that the "strong action" mentioned in the question means something more than the standard economic advice of a revenue-neutral carbon tax that can ramp up over time.
3. Accept/agnostic on the science, but see that most of the folks shouting loudest for climate action are a bit nuts on other economic issues and be hanged if you'd ally with them - heck, some seem to think that reduced economic growth is a feature rather than a bug of some climate policies. And the same bunch that shouts about global warming also reckoned that peak oil was a serious concern - which was utterly insane given that, if peak oil had been right, it would have been a part of the solution to warming! As David Friedman put it: even if there were zero evidence of global warming, many of the proponents of anti-warming policies would still support those policies, but on other grounds. 
4. Reject the science: the loudest proponents are completely wrong on the economic issues you know something about, and really seem to have worked backwards from "policies I support" to "the data must have said X" in assessing things on those margins, so you can't reject that they've done the same here. Note that this is stronger than the explanation immediately prior: it says that the scientists are part of some kind of conspiracy.
5. Reject the science: macroeconomic models are a bit nuts, and climate change models have all the nuttiness of some of the big macro models but with even more uncertainty about cloud feedback loops. If economists can barely get a consensus on the government spending multiplier, how can we trust coefficients on climate sensitivity? And if sensitivity were scary bad, how did the planet ever manage not to turn into Venus a few million years ago? Sure, the models look ok over the period of calibration, but their out-of-sample predictions of warming in the 2000s weren't all that great. Until the models can figure out why warming leveled off in the 2000s, should we really trust what they say about 2150? 
6. Pure mood/expressive affiliation, or that in combination with that pretty much every other prediction of global doom has been rather wrong.

I'm personally somewhere between 1 & 2: a low carbon tax capable of being ramped up over time could slow the pace of warming, giving more time for adaptation, and helping to guard against the scarier warming scenarios.***  I suspect that some of the opposition to climate science among those who are not climate scientists and who are not in a position to personally evaluate the quality of the literature comes from 4 & 6.

There's a reasonable contingent of pro-market people**** who are happy to take the science on climate and figure a revenue-neutral carbon tax isn't all that bad. Would that more of the pro-climate-policy crowd would come over to the intersection of Stephen Gordon's Venn diagram. It's mildly frustrating that the New Zealand Green Party excoriates those opposed to rather strong action on global warming as anti-science while rejecting the consensus views of economists on economic policy.

* Club Pigou is pro-market; Club ban-everything-that-emits isn't. Note that the appropriate domain of Club Pigou ought to be bounded.

** The first half-hour of the linked Friedman video provides a wonderful exposition of how economists think about externality and policy; strongly recommended.

*** I take David Friedman's point on that the Nordhaus / Weitzman insurance argument for climate policy is flawed where it considers fat tail risks of doing nothing while ignoring fat tail risks of doing something. But if the main potential low-probability high-cost risk of emitting too little is another ice age, it seems easier to ramp up CO2 emissions if things look like they're heading that way than it would be to remove CO2 that's already been emitted.

**** Did I mention Club Pigou?

It's Complicated: Oz minimum wage edition

Hey, Australia has a high minimum wage and low unemployment! Why can't America have that too!

Well, it's worth looking a bit beyond the headline rates.

Now I could have a whole lot of this wrong; I sure am not an expert on Australia's Byzantine labour awards system. Go find Judith Sloan over at Catallaxy Files and ask her if you're really keen. But here's my rough take.

Recall that economists worry most about disemployment of young workers just starting out - for them, a high minimum wage will be binding. Or it's most likely to be binding there. That's why people keep studying effects on youths.

Here are some of the exceptions to Oz's national minimum wage.

First, there's blanket exemption for youths. Sixteen year olds are paid half the adult minimum wage; things ramp up by age after that. Apprentices are on another schedule.

National minimum wages for apprentices, juniors & trainees

Special national minimum wages have also been set for trainees, apprentices and juniors who are not covered by any other award or agreement. These apply from the first pay period on or after 1 July 2012.

For junior employees, the minimum rates are:

• Under 16 years of age  $5.87
• At 16 years of age   $7.55
• At 17 years of age   $9.22
• At 18 years of age   $10.90
• At 19 years of age   $13.17
• At 20 years of age   $15.59.

For apprentices, the rates are:

• Year 1 of apprenticeship $10.22
• Year 2 of apprenticeship $12.08
• Year 3 of apprenticeship $14.87
• Year 4 of apprenticeship $17.65.

What about other groups we might expect would be ruined by high minimum wages - those with disabilities that affect their job performance? They're exempt too. If you've a disability and you're assessed as being 70% as productive as other employees, you get 70% of the minimum wage. And if you work in a sheltered workshop, there's another system that applies other lower minimum wages.

So if you're all rah rah rah, America needs to have a high minimum wage because Australia does, then you also might consider having a youth minimum wage that scales from a much much lower rate. Or at least mention that one reason the Oz system doesn't end up killing youths' employment prospects is because youths are exempt from the worst of it.

For youths who are covered by one of the ridiculously complicated national awards categories, there are specific proportionate clauses for youths. So take cleaners, for example. The standard minimum wage for adult Level 1 workers is $15.96. But a 16 year old gets 47.3% of that. A first year apprentice is paid 55% of the minimum wage. If you have a disability and your assessed capacity is 50% of other workers' capacity, you get 50% of the minimum wage provided the minimum amount isn't less than $76 per week. There's a separate minimum wage schedule for those who are completing traineeships and working as part of that, and the pay depends on both the highest level of schooling completed and how long it's been since you dropped out. The earlier you dropped out, and the more recently, the lower the minimum amount of pay. So a school leaver who completed Year 10 gets $8.96 instead of $15.96 as a part-time traineeship.

So:

• Matt Cowgill really should point out that if the US wants to follow Oz, it really needs to add in alternative and lower minimum wages for groups most likely to suffer disemployment effects of high minimum wages. 
• UPDATE: Matt notes that Oz also has some minimum wages that are higher than the national baseline minimum. That's certainly true. But it also highlights that an across-the-board minimum wage is likely to be worse than one that takes better account of industry/job-specific factors. And what about regional characteristics? The optimal minimum wage has to be lower in Alice Springs than in Sydney. The marginal cost of implementing all this in Oz is lower than it would be in the US because Oz already has this big convoluted wage determination system of national awards. 
• UPDATE 2: Tyler Cowen wonders how Oz determines disability quanta; I also have no clue.
• New Zealand's adult minimum wage is lower than that in Oz, but the minimum wage for a 16 year old here is way higher than the minimum wage in Oz. And NZ knocked out the differential lower minimum wage paid in sheltered workshops. The unions here said it was horrible to pay youths 80% of the adult minimum wage; in Oz, it's as low as 50% depending on the age. 
• I'm not sure that raising US minimum wages from 38% of the median full time wage will have that huge a disemployment effect; I'd be pretty surprised if it were noticeable. But I'd bet on effects if they start getting into the 45% and up range if they don't couple it with exemptions for vulnerable groups. 
• If Obama wants to index the minimum wage, he should index it to some fraction of median wages rather than to the CPI. At least if he wants monetary policy to be able to affect employment by cutting real wages at the bottom. 

Living Wages and Raising Rivals' Costs

In an impassioned plea against the unions' forthcoming 'living wages' campaign, Matt Nolan deplores that unions push for this kind of thing without considering the costs:

I mean I swear to god unions, and their determination to get what they want without thinking about the consequences for other people, makes me sick.  There are people who struggle, and as a society I think we should try to help them – part of this is ignoring faux research by unions, and making sure that we actually push government to sufficiently redistribute to the poorest among ask (with the acknowledged cost that this redistribution does lead to less income/production overall).

I'm not sure that they're failing to consider the consequences; raising rivals' costs is a pretty established technique for improving one's position. But that might not be everything that's here going on either.

The Herald reports* that the campaign will first target local councils. As John Gibson showed a couple of years ago, public sector workers already earn an 18-22% wage premium over the private sector, correcting for a big pile of worker and job characteristics. His paper didn't split Council workers from other public sector workers, so maybe Councils pay substantially less, but it hardly seems likely. They're not the first place you'd look to push if you were wanting to raise low-band wages. But they are likely the most sensitive to political pressure from union-based campaigns.

A few things to note:

• If Councils push wages up for Council employees, non-Council companies will start winning more of the tenders for contracted-out services. If Councils then are likely to require that companies taking tenders implement living wages, we could view this as a Union strategy for raising rivals' costs. 
• If the cost of Council services as a whole go up, the burden falls on ratepayers; Council service provision seems likely to be pretty inelastic to costs, and I'd expect especially so since Auckland city cartelisation.
• Private business owners will rightly ignore the campaign, unless they think that warm glow enjoyed by customers would make the wage increase worthwhile. My bigger worry on this front is that some future government could formalise things by requiring living wages for all government contractors. 
• In general, the burden of assisting the working poor is better born through things like Working For Families - the overall tax system - than by the firms employing low productivity workers and the people purchasing their products and services.

Chris Dillow very nicely made the case against living wage mandates last week: the costs of disemployment far outweigh the gains made by those remaining in employment. And recall as well that there is no particular reason that all wages need be sufficient for raising a family anyway: there are tons of jobs that are usefully done by high school students and other part time workers before they move on up to bigger things. Forcing those jobs to pay a lot more than they otherwise would will kill a lot of entry level positions.

As I suggested last year,

We can mandate that all wages are living wages, but we can't mandate that all the people who'd like to have work at that pay are able to find jobs.

* I'm not sure if they're reporting or campaigning here. A week-long series of articles timed to coincide with the Unions' policy launch? How much did the Herald charge the unions for the advertorial? The Herald advertises the forthcoming series:

The series
Today: Who earns below $18 to $20 and why
Tomorrow: Exploited migrants
Wednesday: Cleaning wars
Thursday: Living wage unveiled

Update: Partial retraction. The "Exploited migrants" story is rather good, much of it being about what you'd expect given how immigration policy runs (though they don't quite paint it that way). Restrict students on a visa to 20 hours work, and those willing to work more are then complicit with their employer in visa fraud. They can't really then do much without risking deportation. Require evidence of employment for a permanent resident's visa, and some will pay people to hire them.  

The Unemployable and the Unemploying

Well, which is it then? Are large hikes to minimum wages desirable because they transfer money to low wage workers with no real disemployment effects, or because they get rid of those jobs that shouldn't be there anyway?

Early American advocates of the minimum wage sought its disemployment effects, to make "unemployable" those whose employment was undesirable: immigrants who would "under-live" upstanding American workers, and women whose proper place was in the kitchen rather than in employment binders.

Most advocates of higher minimum wages in New Zealand point to recent American studies showing little disemployment effect of minimum wages. And they're right: the most recent American work does show little measurable effect. Minimum wages are far lower there; non-binding constraints largely fail to bind. The effects on poverty aren't that simple though: the products of minimum wage workers are disproportionately bought by poorer people; incidence analysis warns that a reasonable proportion of mandated wage hikes will be passed through to customers. And, in places like Canada where the minimum wage is higher and more binding, there's some evidence that minimum wage hikes increase poverty: the losses to families losing second-earners because of disemployment effects outweighed the gains to those families enjoying a small salary increase.

Here's Chris Trotter with an alternative take. After reasonably critiquing Labour Leader David Shearer's immigrant-bashing, Trotter reads the tea leaves:

This means that any Labour government led by Shearer is likely to shy away from direct interventions in the labour market. It will not pass legislation designed to reverse the flow of wealth from wage and salary earners to owners and shareholders. It will not, by substantially lifting the minimum wage, engineer a wholesale winnowing-out of New Zealand's most inefficient businesses. It will not pass legislation restoring universal union membership or the national award system. It will not use the government's ability to set wages and salaries in the public sector to provide both a guide and a goad for private sector employers. In short, it will not do any of the things required to raise the incomes of New Zealand's wage and salary earners. [emphasis added]

Is Trotter there really saying that part of the point of a minimum wage is to clear out firms employing low-cost labour? Where the old-school Americans wanted to make undesirables 'unemployable', Trotter seems to want to make lower productivity firms 'unemployingable'.

You can maybe build a model where this works. Specify that workers are really really sticky with a current employer: actual wage differences from shifting jobs have to be really high before they'll engage in any search or entertain new job offers. Other, more efficient, employers would love to hire them, but they can't. You'll also have to specify either that markets for corporate control are just broken, preventing the takeover of less efficient firms by more efficient management, or that the firms are in sectors that are simply inherently less productive. Killing those firms allows the workers to shift over to alternative, more productive, employment. It sure doesn't seem a plausible model though.

Further, it can often be the case that lower skilled workers are complements to higher skilled workers. Here at Canterbury, a few years before the earthquakes, the University got rid of some of the cleaners and started making staff empty their own waste baskets into central bins on each floor of each Department.* It saved on some low cost workers' salaries, but at a higher and unmeasured opportunity cost. For every low productivity firm that's killed by Trotter's prescription, how many lower productivity tasks in higher productivity firms are also ended? What do we do with those whose endowment of human capital means that their marginal revenue product will never be higher than the current minimum wage?

* The veneer: sustainability, we should be throwing less stuff out, etc.

Starter Wages

The hyperbole around National's "Starter Wage" legislation has been pretty amazing, given how limited the Bill's provisions really are.

Recall that, when Labour abolished the Youth Minimum Wage, which allowed employers to pay 16-17 year olds 80% of the adult minimum wage, they kept a "New Entrant" Wage. A young worker could be paid a lower minimum wage in the first 200 hours or first three months of employment. Employers found it intractable: you needed to figure out an applicant's entire work history on the New Entrant Wage to see for how long the employee would be eligible for the New Entrant Wage if you hired him. So employer uptake was very limited.

The new bill lengthens the period of applicability from three months to six and extend it to 18 and 19 year old workers coming off of benefits and into work. As advertised a year ago. National is hardly enacting Sir Roger's proposed reinstatement of the full lower youth minimum wage.

The Mana Party apparently thinks that the lower youth minimum wage is slave labour. Maybe some employment arrangements with lower paid workers fail the conditions for euvoluntary exchange, but they're still at least voluntary.

I fielded a few calls yesterday from radio stations looking for comment on the legislation. I noted that the legislation seems pretty much in line with what was promised a year ago, that's it's far more a rejigging of the prior New Entrant Wage than a reinstatement of full youth minimum wages, that the potential harms are rather exaggerated, but that the gains from the policy aren't likely to be spectacularly large either. More employers will take it up as it is an improvement over the prior New Entrant provisions. In response to the worry that employers might use the provision to churn through cheap workers every six months, I noted this to be fairly unlikely where employees go through any kind of on-the-job learning: the wage savings would quickly be eroded by the new worker's lower productivity as compared to the worker who's already figured out how to do the job.

Whether you love minimum wages or hate them, it's pretty hard to get too excited about the new starter wage. I think it's a small step in the right direction.