Jim Rose: Wages are raised by productivity, not governments

There has been negligible labour productivity growth over the decades for labour-intensive jobs. File photo / 123RF

• Jim Rose is an economic adviser to the Auckland Ratepayers' Alliance.

The Auckland Council's new living wage policy will lift the pay of its minimum waged employees by 30 per cent. Of course, no minimum wage worker will be shortlisted for these jobs in the future because these jobs will be paying $20.20 per hour. Minimum wage workers will be crowded out by better quality applicants who already earn a similar pay. Shortlisting will be tougher.

The godfather of the living wage movement, Charles Waldegrave, admits "different people" will be hired by councils adopting a living wage policy. Living wage activists prefer to talk about the costs supposedly being offset by labour productivity gains - higher staff morale, fewer absences and reduced staff turnover. These are supposed to make everything right and low risk.

None of these productivity offsets from a living wage are limited to the low-paid. The greater morale, lower staff turnover and improved recruitment pool arguments apply with much greater force to better paid jobs than to low-paid jobs where monitoring employee effort is easier. The further you go up in the workplace, the more you are expected to be a self-starter because of your greater discretion in the way you work.

Local governments are services sector employers notorious for stagnant labour productivity growth. The rest of the economy is a far more fertile ground for the labour productivity arguments of living wage activists than government services jobs.

There has been negligible labour productivity growth over the decades for labour-intensive jobs such as teachers, security guards, cleaners and bus drivers. Bus drivers can rarely do more than keep to their timetable and not crash the bus. Teachers teach a class of a certain size. Security guards and pool attendants spend most of their day just standing there watching out for trouble. Cleaners clean.

Pay in labour-intensive service jobs with hands-on personal interaction is driven by wages growth in the rest of the economy. If their wages did not match the pay in jobs in sectors where there is sustained labour productivity growth, the labour-intensive service sectors with stagnant productivity growth, such as local government, buses, cleaning services and schools, would not recruit.

Pushing for a 30 per cent pay raise for every worker is a reasonable extension of the labour productivity offset arguments for a living wage at local councils but no one cheers on this logical next step.

An obvious reason why we cannot just vote ourselves a 30 per cent pay rise is that it would instantly close the 30 per cent transtasman wage gap. Anyone who suggested the way to close that pay gap was, with a stroke of a pen, to vote ourselves the same wages as in Australia, would not be taken seriously ever again. But that is exactly what is happening in the living wage debate. People are suspending disbelief about pay and productivity.

Private employers have strong incentives to discover the wage rates that balance higher staff turnover and success in recruitment with the wage offered. They survive in competition by paying wages that recruit the best workforce they can at the price they can sell their products.

Exporters are the first to say we just cannot vote ourselves a 30 per cent wage rise. They must accept the world price or go out of business. Import competing businesses face the same sharp cost discipline.

Businesses in the non-traded sector can charge no more than the market will bear and that is a factor in the wages they can pay and still stay in business.

If a private employer pays too much in wages, they go out of business. If they do not pay enough to recruit and retain the right mix of staff, they go out of business because they cannot produce what their market demands at the quality and price available from a competitor.

Local government lacks the competitive market discipline that private sector employers have at their backs every day. Ratepayers carry the can instead.

Living wage activists and unions are right to point out that we live in a low-wage economy compared to Australia. The solution is not to vote ourselves a pay rise.

Increasing productivity, innovation and entrepreneurship is the only way to catch up. The Auckland Council's living wage decision tries to put the cart before the horse.