The low-wage economy

Cameron has already written an excellent article about Matthew Hooton’s piece in?The Herald?where he describes Working for Families as ‘communism by stealth’. That is actually what John Key called it in 2004 when Working for Families was first introduced. It was widely expected that Key’s government would roll back some of the welfare programmes of the Helen Clark era. But, he didn’t. In fact, he entrenched them by increasing thresholds and lifting welfare payments. It was an extraordinary thing for a National government to do.?The enormous consequences of, first its introduction and secondly its entrenchment are a major headache for the economy and, ironically, for the current government. Quote:

A major but overlooked cause of the low-wage economy driving today’s worsening industrial strife is Helen Clark’s flagship 2004 Working for Families policy.

Key argued cogently that the abatement regime for Working for Families would level net incomes so radically that a two-child family would end up with pretty much the same in the hand whether their gross income was $38,000 or $60,000 a year. End quote.

There is the problem. Employers have taken advantage of welfare to keep wages low. After all, why pay someone $60,000 when you can pay them two-thirds of that, and the government will top up the rest? This isn’t just ‘communism by stealth’. It is utter lunacy. Quote:

Worse, if Government subsidises something, there will be more of it, in this case low-paid jobs. To an employer, Working for Families screams out: “Don’t buy more plant and machinery or invest in on-job training, just hire a few more low-skilled labour units and get the government to pick up a big hunk of the tab.” End quote.

In the intervening 14 years, business has got used to paying not much in labour costs. Quote:

There is very little doubt Working for Families has led to lower productivity and wages across the economy than had Clark not launched it as her big 2004 Budget bribe to fend off Don Brash’s Orewa-speech challenge. End quote.

Entrench people in a poverty trap. They are terrified of a reversal of policy, so they will vote like crazy to keep it in place.

But there are problems with this policy. Quote:

That is bad for everyone but the most pernicious effects of Clark’s bribe are on those without children trying to save for a first home, such as young nurses, teachers, doctors, and police officers.

They suffer from the economy-wide lower wages caused by Working for Families but without the top ups. End quote.

Of course. Because employers are not going to pay wages on the basis of what an individual receives from the government. They don’t have to. If a single person demands too much money, then the employer will simply hire someone with children and then the problem goes away. Quote:

When trying to buy a house, childless people also have to compete with those with children, whose after-tax incomes have been artificially inflated by the state. End quote.

So our ‘housing crisis’ is partly due to low wages being paid to young people starting out, who are not yet receiving sufficient in government subsidies because they have no children? Quote:

Working for Families then creates a vicious economic and political cycle. As it holds back productivity and keeps wages low, the best electoral response is to expand it further, as Ardern and Robertson did in December. End quote.

And then further again, with the introduction of the Families Package on 1 July, that gives wealthy people $60 per week if they have a baby. This is not communism by stealth. It is out and out electoral bribery.

Then there is the other problem.

The problem with Working for Families is that everyone has to come off it at some point. Then the real trouble starts.

The kids have left school and suddenly, your income drops to 70% of what it was. What happens then?

You are in hardship, and there is no government subsidy to help you. You can’t ask for higher wages, because you are just doing the job you always did. Low wages are entrenched in your industry, and you run the risk that your employer will just replace you with someone with children, who will not complain.

But here’s the thing. Quote:

The Government, district health boards and any nurses organisation officials primarily concerned with Labour’s re-election know they have to stand firm against the rebellious nurses in the wards.

Each of these powerful groups know ordinary nurses getting the pay rises they seek, and probably deserve, will cause an industrial contagion, first through the public sector, including teachers, firefighters, police officers, junior doctors and salaried medical specialists, and then through the entire labour market.

Strike action will reach levels not seen since the 1980s. Grant Robertson’s fiscal strategy will be in ruins and Jacinda Ardern will have to forget her dreams of a second term. End quote.

If nurses, teachers and the other government sector workers achieve the pay rises they seek, some of them will suffer from abating welfare payments, but the economy as a whole will benefit eventually. This will spill over into the private sector, and wages, in general, will increase. The industrial action will be memorable, but it just might result in a better economy where employers do not get government subsidies they do not deserve.

But Hooton thinks that this is the very reason why the government must refuse the wage demands. If they give in, Working for Families will finally be on the way out, as low wages will no longer be the norm, and Working for Families payments will abate over time. Quote:

It has transferred the primary economic relationship that determines family income from being that with the employer to that with the state. It is indeed communism by stealth. Clark and Cullen knew exactly what they doing when they set it up. End quote.

But if these wage claims succeed, we just may see the end of ‘communism by stealth’. Bring on the winter of discontent.