Auckland Plan Committee 12 March 2013

The Living Wage – Issues for Auckland Council
File No.: CP2013/03860

Purpose
1. This report provides context and information on the living wage, and seeks direction from the Auckland Plan Committee on whether further work should be undertaken on introducing a living wage for Auckland Council, and/or the Auckland Council Group and the wider Auckland economy.

Executive Summary
2. The ‘living wage’ is an hourly rate of pay considered necessary to provide an individual employee and her/his family with necessities, quality of life and the ability to participate in society. A rate of $18.40 per hour is proposed for New Zealand and possibly $24.11 per hour for Auckland. The living wage is a voluntary measure - an opportunity for those employers who see an ethical and business case, to make a commitment to apply the living wage to their own employees and champion its wider adoption. The social impacts of low pay, and the strong links between income and life chances, especially for children - are well documented. Low-paid workers are disproportionately women, Maori, Pacifica and Asian. Whilst no single action, on its own, will effectively address entrenched poverty, a living wage does immediately benefit individual employees and their families and raise their standard of living. It is important to understand the potential trade-offs and unintended impacts, especially as the proposed national and Auckland living wage rates are significantly more than a small, marginal increase in the statutory minimum wage. Low-paid employees would directly benefit, as long as jobs were not lost. Employers have increased labour costs but could benefit from reduced turnover, reduced absenteeism and sick leave, improved productivity and enhanced reputation. There are also potential broader adverse implications for Auckland’s international competitiveness. If the cost of labour increased without a proportional increase in productivity, unit labour costs could increase and worsen Auckland’s competitiveness. The living wage is a new initiative in New Zealand. There is substantial overseas evidence on the costs and benefits of the living wage, but these require further analysis as to how applicable the findings are to Auckland and New Zealand. There is some evidence of negative impacts of changes in the New Zealand minimum wage. These potential impacts should be considered carefully, as introducing a living wage could adversely affect the vulnerable groups that it is aiming to assist. Should Auckland Council decide to introduce a living wage for its own employees, this would have a direct fiscal impact. Initial estimates suggest implementing a living wage of $18.40 per hour would cost a minimum of $2.5million per annum and implementing a living wage of $24.11 per hour would cost a minimum of $17.3million per annum. An increase in salary costs would need to be met within existing budgets, through savings or a corresponding increase in rates revenue. An increase in rates may also have an inflationary effect and create an economic deadweight loss to society. The fiscal impact could also limit Council’s ability to hire new staff and competitively remunerate, and retain technical and specialist staff. The Living Wage Aotearoa New Zealand Campaign has attracted significant support. Seven local boards have passed resolutions recommending Auckland Council become a living wage employer, along with over 400 written responses received on the “Thriving Communities” discussion document.
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The Living Wage – Issues for Auckland Council

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Auckland Plan Committee 12 March 2013 9.

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Considerable further work is required to provide a rigorous assessment of the likely impacts of the living wage on the Auckland Council and the wider Auckland economy. Officers are seeking direction from the Committee on whether to undertake this work.

Recommendation/s
That the Auckland Plan Committee: a) b) Receives the report. Directs officers to undertake further work on the implications of introducing a living wage for Auckland Council and any implications for the wider Auckland economy, and that this be incorporated into the analysis of submissions to Council’s discussion document “Thriving Communities” (Community Development Action Plan) and in response to resolutions from Local Boards on the living wage. That this report is forwarded to local boards, the Pacific Peoples Advisory Panel, the Ethnic Peoples Advisory Panel, the Youth Advisory Panel and the Disability Strategic Advisory Group for information.

c)

Discussion
10. The discussion below first provides a context and identifies some key issues about the concept of the living wage; and, then provides an initial assessment of potential issues and impacts if Auckland Council introduced a living wage for all directly employed staff. The Living Wage Aotearoa New Zealand Campaign begun in May 2012 encourages employers to pay a ‘living wage’ – i.e. an income sufficient to provide employees and their families with the necessities of life, have quality of life and participate in society. The Family Centre Social Policy Research Unit has calculated a national living wage rate for New Zealand as $18.40 per hour [King and Waldergrave, 2013]. This is based on the needs and expenses of a two adult, two child family, with one adult working full-time and the other adult working half-time. The research takes into account government assistance, such as Working for Families tax credits, childcare support and the Accommodation Supplement. The proposed national living wage is $4.90 per hour higher than the current minimum wage ($13.50 per hour) - a 36% increase. The researchers suggest that a rate of $24.11 p.h. is required in Auckland, because of the higher costs of accommodation. This is $10.61 per hour (or 79%) higher than the current minimum wage. The researchers note that the Auckland living wage differential could be made up through increases in Accommodation Supplement entitlements, rather than a wage rate of $24.11. The Campaign has met with the Mayor and made presentations to thirteen local boards, the Social and Community Development Forum, Pacific Peoples Advisory Panel, Ethnic Peoples Advisory Panel and Disability Strategic Advisory Group. Hundreds of public, private and third sector employers throughout the United States Canada and United Kingdom have living wages policies. One of the most high-profile examples is the London Living Wage (LLW). Since its introduction in 2005, 200 public, private and third sector employers in London have signed up to pay the LLW to 11,500 employees. The LLW at £8.55 is 38% more than the UK minimum wage. An evaluation of the LLW, consistent with many other studies, found benefits to employers such as lower staff turnover, increased productivity, and improvements in reputation; with no evidence of substantial negative impacts [London Economics, 2009, Chapman and

New Zealand Context 11.

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The International Context 15.

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The Living Wage – Issues for Auckland Council

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Auckland Plan Committee 12 March 2013

Strategic Context - The Auckland Plan 17. Whilst not explicitly mentioned in the Auckland Plan, or local board plans, there are strong links with the concept and aims of a living wage, including:  Act fairly  A fair, safe and healthy Auckland  An Auckland of prosperity and opportunity  Dramatically accelerate the prospects of Auckland’s children and young people  Substantially raise living standards for all Aucklanders and focus on those most in need  Significantly lift Maori social and economic well-being  Create a strong, inclusive and equitable society that ensures opportunity for all Aucklanders  Develop an economy that delivers opportunity and prosperity for all Aucklanders and New Zealand  House all Aucklanders in secure, healthy homes they can afford

Principles Outcomes Transformational shifts

Strategic directions

Economic Development Strategy 18. The EDS aims to strengthen collaboration, provide and develop supporting infrastructure, and attract, build and retain talent and business capability in Auckland, re-engineering Auckland’s economy from a low wage economy to an economy that delivers opportunity and prosperity for all Aucklanders and New Zealand. There is a strong focus on job creation and on increasing Aucklanders’ core and foundation learning skills. In this respect the EDS seeks to improve incomes through increases in productivity. The "Thriving Communities" discussion document, produced in October 2012, was the beginning of the process to develop a strategic action plan on Council’s roles in community and social development. The discussion document briefly raised the concept of a living wage and there was significant support for this - 70%- or 400-of the written responses and strong support expressed in community-led workshops.

Community Development Strategic Action Plan 19.

Economic Policy Implications Minimum wage and employment effects 20. Factors considered when setting the minimum wage (policy advice given by MBIE) include the principles of fairness, protection of vulnerable workers, income distribution and work incentives. However, economic theory and some research, suggest that increases in minimum wage rates may have negative and unintended consequences. Lifting minimum wage increases the cost of labour for businesses, leading to a reduction in demand for labour. The Minister of Labour, Hon Simon Bridges (as reported in the NZ Herald) has estimated increasing the minimum wage to $18.40 per hour would lead to a loss of 26,000 jobs nationally. Officers have requested the supporting information and calculations used to derive this figure. Over the last decade, the minimum wage has increased every year, from $8 per hour in 2002 to $13.50 per hour in 2012. This is a real increase of 1.7% per year over the last decade. From 1 April 2013 the minimum wage will be $13.75. A New Zealand study [Maloney and Pacheco (2010)] estimated that in 2008, 12.1% of workers were on the minimum wage; with approximately 40% of them in households from the bottom three-income deciles, and, 60% in households in the top seven income deciles.

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The Living Wage – Issues for Auckland Council

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Thompson, 2006]. Further analysis is required to assess the extent to which these benefits might be replicated in the Auckland and New Zealand economic and social context.

Auckland Plan Committee 12 March 2013 23.

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At present, there is no youth minimum wage in New Zealand. There is a trainee/new entrant’s wage, set at 80% of the adult minimum wage, which typically applies to youth aged 16 and 17 with less than 3 months full time work experience. At a pay rate of $18.40 per hour, the trade-off between wages and employment is even sharper for youth as businesses may choose to employ workers with more work experience over inexperienced workers. There is some evidence of mixed effects for young people and Maori because of increased minimum wages. Maori workers experience significant falls in their employment propensity (i.e. their likelihood to be employed) and usual total weekly hours worked. There is some risk that the implementation of a living wage may have a similar effect, but this requires further investigation. It is important to consider this in the context of Auckland’s unemployment rate. Auckland’s unemployment rate for the 2012 year was 7.8%. For youth in the 15 – 19 year age bracket, the unemployment rate was 31.0%. The rate for Maori was 14.7% and for Pacific Peoples the rate was 15.4%. These rates are very high by historical levels. A further consideration is that New Zealand’s Official Cash Rate has fallen from 8.25% in 2008 to 2.5%. Capital has become cheaper while the cost of labour has increased. Should businesses want to expand output, the current economic environment provides incentives to do this through investment in plant or machinery, rather than employing more staff. Lifting the minimum wage could adversely impact Auckland and New Zealand’s international competitiveness. Even a voluntary increase to the wage rate paid makes Auckland’s labour market less flexible and efficient, as this creates an imbalance between wages received and productivity/economic output. Unit labour costs, one indicator of a country’s cost competitiveness, have risen by 18.6% for New Zealand between 2005 and 2009, more than double the average rate for the OECD and 50% faster than Australia. This indicates that wages have risen faster than increases in labour productivity in New Zealand. There is a large and growing body of evidence about the social costs of low wages and families being unable to meet the costs of basic needs. Impacts include reducing intake of fresh fruit and vegetables, cutting back on heating and medical appointments, living in crowded, sub standard housing and parents having little time with their children [Expert Advisory Group on Solutions to Child Poverty, 2012; Salvation Army, 2012]. The strong links between income and life chances, especially for children- are also well documented [Ball et al, 2002]. Low-paid workers are disproportionately women, Maori, Pacifica and Asian. There is increasing attention to the growing number of “working poor”. An estimated 270,000 New Zealand children are living in poverty: 8% of them in households where both parents are working, and 4 out of 10 of them in households with at least one parent working [Statistics NZ, 2011]. Low wage work can provide a first step, especially for young people, in a career towards better-paid work. However, it can also persist for all or most of a working life. For example, a survey of 100 Auckland cleaners found that 80% were aged 31 years or older, and 35% were 50 years of age or older [Service and Food Workers Union, 2013]. There is consensus that no single action, on its own, will achieve significant advances in tackling poverty. A suite of actions is required addressing health, housing, education and skills, employment, taxation and economic and social policy settings. However, a living wage does immediately benefit individual employees and their families, and for many, even a modest increase in income, has a significant impact on their standard of living. The Human Resources department has done an initial assessment of the impact of introducing a living wage to staff employed directly by the Auckland Council Group. These figures are based on the employment structure as at 26 February 2013 and exclude
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Auckland’s competitiveness 27.

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Social Policy Implications 29.

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Operational, Budget and Human Resources Implications for the Auckland Council Group 32.

The Living Wage – Issues for Auckland Council

Auckland Plan Committee 12 March 2013

Rate per hour: No of staff: Cost per annum:

$15 per hour 468 $181,255

$16 per hour 839 $518,194

$17 per hour 1,205 $1,139,486

$18 per hour 1,421 $2,071,201

$18.40 per hour 1,544 $2,533,762

$19 per hour 1,752 $3,345,794

$20 per hour 2,152 $5,084,382

$24.11 per hour 3,354 $17,283,793

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If $18.40 p.h. was applied to staff directly employed by the Auckland Council Group (excluding Watercare and Auckland Transport) the increase in the salary budget would be 0.6% ; if $24.11 was applied the increase would be 4% . An initial analysis by Finance indicates that the increase in rates needed could be 0.2% and 1.2% respectively. Imposing additional rates to fund increased salary costs would create an economic deadweight cost on society’s welfare as disposable incomes fall. An increase in rates may have an inflationary effect for consumers, as rates are in the basket of goods for the Consumer Price Index calculation. It must be stressed that these are initial estimates only and do not include “on-costs” like ACC levies, kiwisaver. These figures also do not include contractors, or potential flow-on upwards affects on other employees’ wage rates. There are potential management and human resource issues for Council, including the impact on wage differentials between more and less experienced staff; and the ability to attract and retain technical specialists typically in higher pay bands. There may be some savings to be gained such as reduced staff turnover but the impact for Council could be small as Council’s staff turnover rate is already low. More investigation is needed to identify and assess impacts and how an increase in labour costs could be managed. Any increase in wages for Auckland Council employees could result in greater operating costs which will need to be met through, either reductions in service levels, an increase in rates or offsetting savings. At this point these effects have not been modeled. In terms of the wider Auckland economy, any increased wage directly benefits people in paid work. However, there are risks of unintended negative effects including greater overall unemployment, which have not been modeled or investigated for Auckland. Direction is sought from the Committee as to whether this further work is undertaken by officers.

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Next Steps 36.

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Consideration
Local Board Views
39. In late 2012, the Living Wage Aotearoa New Zealand Campaign made presentations to thirteen local boards. Seven local boards passed resolutions setting out their specific support for the principle of a living wage as a means to enhance community well-being (attached as Appendix 1). The resolutions also requested that Auckland Council commission a report on the impact of a living wage on Auckland Council. There is some risk, based on evidence from minimum wage increases, of adverse, unintended impacts on Maori, if a living wage results in a trade-off between wages paid with the number of jobs or hours worked. Maori women are the largest population group whose median hourly wage is less than the living wage. Although less than 6% of wage/salary earners are Maori women, they represent 52% of people (all women) where the median wage is less than $18.40. The living wage
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Maori Impact Statement
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The Living Wage – Issues for Auckland Council

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Auckland Transport and Watercare employees as these staff are paid by independent payroll systems and information was not available at the time of writing this report. The results are shown in the table below.

Auckland Plan Committee 12 March 2013

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could help to lessen the ongoing inequality between Maori women and the rest of the workforce.

Implementation Issues
42. Discussed above.

Attachments
No. A Title Local Boards - Living Wage Resolutions Page 31

Signatories
Authors Raewyn Stone - Manager, Community and Cultural Strategy Melanie Luen - Economist Geoff Cooper - Chief Economist Harvey Brookes - Manager Economic Development Ree Anderson - Manager Auckland Strategy and Research Roger Blakeley - Chief Planning Officer

Authorisers

The Living Wage – Issues for Auckland Council

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Auckland Plan Committee 12 March 2013

The Living Wage – Issues for Auckland Council

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Attachment A

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Auckland Plan Committee 12 March 2013

Attachment A
The Living Wage – Issues for Auckland Council

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Auckland Plan Committee 12 March 2013

The Living Wage – Issues for Auckland Council

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Attachment A

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