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Minimum wage increase doesn’t meet real costs (the CPI is broken)

Written By: - Date published: 7:02 am, January 25th, 2017 - 53 comments
Categories: class war, cost of living, national, poverty, spin, wages - Tags: , , , , , , ,

Any increase in the minimum wage is better than nothing:

Government to increase minimum wage to $15.75

On 1 April, the adult minimum wage will increase by 50 cents to $15.75 an hour.

Mr Woodhouse said the increase to $15.75 would benefit about 119,500 workers and would increase wages throughout the economy by $65 million per year. The increase was much higher than annual inflation, he said.

“At a time when annual inflation is 0.4 percent, a 3.3 percent increase to the minimum wage will give our lowest paid workers more money in their pockets, without hindering job growth or imposing undue pressure on businesses.” …

Sounds good?* Only because inflation (CPI) doesn’t include major real cost increases, notably in housing.

But Labour’s workplace relations spokesperson, Iain Lees-Galloway, said that was cold comfort to those low-income earners who were struggling to pay their rent.

“The government has sold it as being an increase which is well above the inflation rate but the truth is, when you include housing inflation, it simply doesn’t make up for the enormous additional costs that homeowners and renters are facing.”

Let’s dig in to this further.

The skyrocketing cost of buying an existing house is not included in the CPI (“Inflation is 0.4 percent, and Mr Eaqub calculates that if house price growth was included, inflation would have been 2.5 percent, or more, in each of the last three years”).

The cost of rent is factored into the CPI with a weighting of 10%, in fact for low income earners rent can be 40% to 50% of their income or more (“The report said the lowest 20 percent of earners spent 54 percent of their income on housing in 2015, compared with just 29 percent in the late 1980s”). So the CPI already massively underestimates the real inflation that low income earners face – and rents are rising fast in Auckland and elsewhere.

There are similar issues with other basics like electricity, which is how power prices have risen more quickly than the CPI.

Such problems were identified in a 2013 CPI review:

One-size CPI doesn’t fit all

The consumer price index (CPI) is letting superannuitants, Maori and the poor down.

Last week, it was reported how massive rises in the cost of house insurance were not reflected in the CPI. But it seems homeowners are not the only people who can feel hard done by.

The real experience of inflation for Maori, superannuitants, the poor and some regions is that the national CPI does not reflect their experiences because the it is skewed to reflect the experience of white, middle-income New Zealand.

That has been spelled out by a CPI Review Committee, headed by former retirement commissioner Diana Crossan, which said: “Lower-income households had the highest price change and higher-income households had the lowest price change.”

The current lack of sub- national indexes is not considered to be best practice internationally. The International Labour Organisation says: “Significant differences in the expenditure patterns and/or price movements between specific population groups or regions may exist.” …

In short, the CPI is broken, especially with respect to housing. (Over the last three years we have developed a better measure, why aren’t we using it?). Under National minimum wage increase have failed to keep up with the real cost increases experienced by low income earners. That is why we are seeing the rise of the working poor, and increases in homelessness and poverty. Shame.

 


https://twitter.com/DrJessBerentson/status/824014662643499008


* National’s pet blogger tried to spin the snakeoil on Twitter too – an interesting discussion followed.


Oh – and on that old lie that minimum wage increases are job killers:

Minimum wage increases do not appear to be choking the job market

Critics of raising the minimum wage have long claimed the real victims are the poor, because employers cannot afford to take on new workers. “The Government knows very well that hiking the minimum wage faster than inflation means those most vulnerable are priced out of the job market,” Taxpayers’ Union executive director Jordan Williams said, echoing similar warnings from last year.

But in the third quarter of 2016, unemployment fell below 5 per cent for the first time since 2008. The number of hand written signs on shops and restaurants across New Zealand seeking staff this summer is hardly scientific, but it suggests the constraint many companies face is finding workers, not paying them.

Below 5% is a fudged stat “achieved” by a change in the definition of job seeking, but even so steady increases in the minimum wage of the current magnitude have not caused a problem – we can afford bigger increases.

53 comments on “Minimum wage increase doesn’t meet real costs (the CPI is broken)”

  1. Carolyn_nth 1

    oh, so looking at the linked twitter debate, DPF is accusing the government’s critics (as indicated in the above post) of presenting “alternative facts”. Yet, it is DPF and the government that is mis-representing the reality for low income people.

    Through the looking glass stuff – government says “poverty is exactly what I say it is”

    • Keith 1.1

      We in NZ have had 8 years of alternative facts from the master himself John Key and his poodle David Farrar. We are now veterans of this 1984 world.

  2. Keith 2

    Honestly, were it not for this pseudo minimum wage rise PR stunt annually, wage growth in this country would be nil, which in reality it is. And the Nat’s know it.

    And I say “pseudo” because National know they have got the immigrant desperation for residency competition level so high it leads to employees accepting of under the table – sub minimum wages, which keeps enough employers/donors happy and makes the minimum wage level a mockery.

    And if you don’t believe that there is enough evidence of the very few, tip of the iceberg, investigations our “officials” carry out into wage and conditions exploitation by employers in the hospitality industry. Of course most are smarter employers still exploiting all the same with the same desperate migrants but balance staff low wages with just enough incentive or even worse disincentive to keep them from doing something about it.

    • Skeptic 2.1

      Yep – between “Labour Hire” companies, decentralised apprenticeship training, low paid immigration workers and temps, and “commissions” for the major rebuild players, no wonder the EQ rebuilds are ripping off the taxpayer big time.

  3. DH 3

    There does look to be a flaw in the way they’re collecting data on rents. The rent index in 2016 was 1233 and that just can not be right. Rents nationwide must have increased by way more than 23.3% since 2006.

  4. jcuknz 4

    I do not trust the figures coming from either side as I know figures can be made to prove anything and have known and seen this happening for decades. The make-up of the CPI has been unrealistic for ever … so it is not broken just assembled incorrectly and has been since it started I guess.

    • Skeptic 4.1

      Quite correct – it was changed in 1991 when the Bolger government was embarrassed by the impact of the Employment Contracts Act

  5. Bob 5

    “Inflation is 0.4 percent, and Mr Eaqub calculates that if house price growth was included, inflation would have been 2.5 percent, or more, in each of the last three years”
    So the fact that National have raised the minimum wage by 3.4%, 3.3% and 3.2% (greater than Mr Eaqub’s adjusted inflation numbers) over this 3 year period is a good thing or a bad thing Anthony?

    You seem to have written a big piece on why the CPI is broken as a measurement, and ignored the fact that minimum wage increases have outstripped even the adjusted CPI rates that you mention.
    Is this actually a covert piece congratulating the National party on looking after the lowest earners in our society?

    • I don’t think the lowest earners in our society are buying a lot of houses. You might need to read it again.

    • saveNZ 5.2

      Don’t forget Mr Eaqub ex Goldman Sachs Group Inc, also advised people for many years not to buy a property as it was a bad investment – since then in Auckland most properties have doubled in price. So personally I’m not going to rely on any of Mr Eaqub’s figures.

      Economists clearly don’t live in the real world or can actually think beyond their own paper based world view. Most of them are the enablers of neoliberalism.

    • UncookedSelachimorpha 5.3

      @Bob.

      Mr Eaqub’s figure of 2.5% relates to national house price growth. It does not capture the cost of housing faced by low-income people i.e. people on the minimum wage.

      If you jump on the reserve bank CPI calculator and choose housing inflation, you can see there has been a 35% increase (10.5% compounded annually) in cost of housing in the three years from Q2 2013 to Q2 2016. Presumably this is across-the-board, and some locations (I guess Auckland) are much higher than this.

      Re-read the original post and note where it says low-income people pay around 54% of their income on housing. So housing alone likely contributes over 5% p.a. (10.5% x 54%) increase in total cost of living, before adding non-housing inflation. The minimum wage increases you mention don’t cover this – in fact will cover less than half the actual increase in cost of living, for many poor people.

      So no, National are watching the poor become much poorer under their watch and are allowing the minimum wage to fall in real terms.

      • DH 5.3.1

        No doubt they’ll have their excuses ready but there’s still a good political angle in that RBNZ CPI calculator. They’re so ashamed of their misleading CPI they don’t even use the CPI data when calculating housing inflation.

        (On that site they’re using the House Price Index from PropertyIQ as a reference)

        • UncookedSelachimorpha 5.3.1.1

          Thanks, good point.

          One question I don’t know the answer to – the degree to which house sales prices and housing rents are linked. Obviously they will be linked, but how closely?

  6. Siobhan 6

    I would like to see a a bigger conversation around the labour income share, or LIS.
    It’s hard work trying to ferret around on the internet and figure out where we actually stand right now. But to me this is the most important factor…’What share of the wealth, what share of the ‘economy’ are the workers, ALL workers, actually getting.

    Personally, if Labour stepped forward and spelt out the numbers, and said we are going to legislate companies into giving workers a decent slice of the economic “cake” I might consider them to be an actual bona fide Labour Party.

    • UncookedSelachimorpha 6.1

      Completely agree!

      This issue is at the heart of rising inequality and social deterioration in the last 30 years. And is a good number for public discussion that many can appreciate and understand.

      Piketty wrote a fair bit about this in his book.

  7. saveNZ 7

    Clearly CPI is not working! Rents are high because property prices are high and all the expenses relating to property are exorbitant and have sky rocketed up, such as insurance and repairs like plumbing or building. Any up grades such as insulation, heat pumps and so forth will set someone back around $10k depending on the size of the house.

    The reason prices are not falling in property are also because it still costs more to build a new house than to buy an old one and inward immigration numbers is at a record high. The density is not working as people are using the rules to build more expensive properties and actually knock the cheaper ones down OR lock people into expensive Body Corporate levys with apartments that are more expensive to build and have much greater expenses that owners can’t control like the BC fees.

    Terraced housing without BC is a better option but in areas where this is happening they are going like hot cakes and the prices are now beyond what a person on an average wage can afford. This should have been what was built on the bare land SHA by the government.

    I still can’t believe why more people are not holding the government to account for the sale of state houses. It is madness and stupidity all in one unless you really are corrupt arseholes.

    It would have been cheaper to upgrade the state houses or make better use of the sites, than to sell them cheap and then subsidise developers selling houses and rocketing the prices of those affordable houses up and selling them to flippers.

    • Siobhan 7.1

      Its mind blowing that landlords can still go out there, buy an overpriced house, charge rents above what the market can afford…and be subsidised to the tune of $2.2 billion a year, not to mention help with insulation and heating etc to bring their investment up to standard.

      Why on earth is the tax payer propping this failed business model?.

      Landlords should step aside, let the market go down, and let working families buy their own homes. Especially in the so called poorer areas. I can’t believe it when people tell me they are buying an investment property in some working class neighborhood, with absolutely no shame over outbidding some poor family who just want to put down roots somewhere.

      • saveNZ 7.1.1

        I think you will find that landlords are stepping aside in Auckland and selling their properties…. that’s why there is a massive shortage of rental properties….

        Apparently even in the small ghost towns of NZ, landlords are getting out of the market and now their is a massive shortage…

        Added to the fact that nobody can afford to pay rent anymore on NZ’s crap wages which is why the government subsidies employers wages with working for families and accommodation supplement.

        If there were loads of landlords then there would be plentiful rentals… there isn’t (in Auckland at least), that’s not happening because over $200,000 people need accommodation here at the current working visa, student visa and migration levels….

        • Siobhan 7.1.1.1

          “Apparently even in the small ghost towns of NZ, landlords are getting out of the market and now their is a massive shortage”

          I’m not sure about that. Think about it logically.
          Are small towns full of empty houses while the population sleeps in their cars??
          That seems odd.
          Why, if there are people in those towns needing a house, are they not buying the houses as the landlords ditch them?? Are the ex landlords pricing their now vacant houses out of the true realistic market??

          • Sabine 7.1.1.1.1

            where my partner and i bought is not quite a ghost town, but on the other side it also has nothing much going for it.
            We bought there as my partner has been shifted by his company to work out of the next larger city and we liked the house/garden.

            Most of the houses that are selling – again like clockwork literally every 12 month, is by out of towners who buy these houses as a batch for their anual holiday and the rest of the year these houses are on book a batch.

            Rentals are very very hard to come by in my little ghost town, and the houses there are now out of reach for locals that work part time, casual or are full time in dairy / other farming.

  8. Skeptic 8

    The problem with this “minimum wage” debate is it’s so constrained by neo-lib/neo-con parameters masquerading under the guise of “Economics 101”. Well, really? Whose economics – Milton Friedman’s? Chicago School economics? The current generation of debaters knows no other and accepts blindly the opinions of Don Brash and his ilk. Regrettably for them (the neo-cons, etc) Friedman’s “Freedom to Choose”, the basis for almost all modern Economics studies – is unfortunately an Americanized version of Adam Smith’s Wealth of Nations (duly updated and modernized by ideology) written in 1776. Like most single track American Professors, Friedman ignored Smith’s earlier work “Theory of Moral Sentiments”. This earlier work postulated that an individual’s life (male or female) is made up of four overlapping influences, family life, community life, personal life and business life, with separate and distinct modes of engagement for each. Characteristics of altruism, selfishness, necessity etc affect individual behaviour in each sphere to varying degrees. Generalities for business are different from and cannot be replicated for family life, nor community or personal life. Friedman was either unaware of this or chose to ignore it; so to do adherents to the Chicago School of Economics and all neo-cons and neo-libs. They also forget there are many, many other types of economies than “free market”, most of which are better. These range from co-ops, collectives, Keynesian, interventionist to name just a few. When looking at the minimum wage in this light, and falsely impressing the “inflation” scare on this, one is merely “thinking inside the box”. Sorry, neo-cons, but just like Friedman, you’re imprisoned within your own argument and ignorance of other economic theories. Anyone who has come across the Mondragon system knows that to prevent extreme income/wealth divergence the lowest income bracket must be tied permanently to a percentage of the highest – this can a ratio range of 1 to 3, to 1 to 7. Any higher than that, the perception of unfairness isolates, marginalizes and excludes sections of the workforce creating inefficiency and disinvolvement. As far as the NZ minimum wage goes, anything less than an independently assessed “livable wage” (currently $19.30/hr) as the absolute minimum is unjust, and unacceptable in a country of just 4.5m. This “livable wage” should be the minimum demanded by every New Zealander as a matter of birthright. The answer is to legislate for a “minimum wage” directly tied to a percentage of the average of the top 10% income bracket (say 20% for example). If this were to happen, two direct consequences would be almost immediate. The top CEOs who cared about NZ would immediately moderate their income packages (the rat bags would squeal like stuck pigs and fuck off – good riddance) and much disharmony in the workforce would disappear as “fairness” would replace “greed”. I have however yet to see any Political Party in this country with the courage to articulate such as policy – will we ever?

    • Wayne 8.1

      Well, Labour has its chance. A minimum wage of $20. An easy to remember figure.

      Probably about $3.50 to $3.75 above what it will be in April 2018, if the current order of increases continues. I am assuming under National (if they are elected) next years announcement would be 50 cents or 75 cents.

      Surely $20 would be enough to prove to Standardnistas that Labour has broken its neo-liberal shackles. Or would it simply show that Labour is keeping neo-liberalism alive by softening its edges?

      • james 8.1.1

        of course they will not do this – because even labour know its unworkable.

        They will gnash and moan, and then do exactly the same thing.

        • Skeptic 8.1.1.1

          “of course they will not do this – because even labour know its unworkable.”

          Sorry James, but google search “Mondragon” and find out – shock horror – it has worked so well for 70 years in Spain that many of the longest lasting and top Corporations in the EU have adopted it. Of course, the UK, USA & Aust are so far behind the EU they’re an insider joke – just like Kiwi employers (you know what EU insiders call Kiwi employers – JACKEs – Just Another Cheapskate Kiwi Employer). I think that about sums up the real reputation of NZ business people overseas – they really should be embarrassed – but I think they’re too egotistical to care.

          • james 8.1.1.1.1

            Just checking you are putting Spain up showing us how to do it correctly and as a working example.

            Lets look at this shall we:
            Spain

            Youth unemployment – 44%
            Unemployment rate – 18.91%
            Government Debt to GDP 99.2 %

            New Zealand
            Youth unemployment – 11.1%
            Unemployment rate – 4.91%
            Government Debt to GDP 24.6 %

            No wonder the EU is stuffed with brilliant insiders like that.

            • Skeptic 8.1.1.1.1.1

              Did you check “Mondragon”? When you do please respond.

              • James

                No I looked up Spain and smart arse EU insiders then laughed at the figures that someone was trying to tell me how well it worked in Spain.

                I’ll quite happily stick with it didn’t work.

                • Skeptic

                  Thought so – you haven’t done your homework (bet you were a lousy student at school too) – FYI Mondragon is an area in Spain where a private co-op started in 1956 with specific rules. They have a dedicated website and their system has been copied in, among other places, Germany, France, UK, USA, Canada and Australia – plus a few small co-ops in NZ. It is now renown for fairness and longevity, something that very, very few private corporations are (LLCs generally last less than 5 years & co-ops between 7 & 10 – Mondragon has lasted 70) I suggest James you do a bit of basic research before posting if you want people to take you seriously and not laugh at you. While you might sneer at the EU, I suggest you also check out a couple of facts about them – like which monetary zone invests the most into other areas and zones (be advised the US does not rank first neither does China) and which supra-national group in the space of 24 hours in 1991 foiled an attempted coup in the former USSR. (again NATO was powerless, but not the EU). To use the southern EU states (Spain, Greece & Italy) with weak economic foundations as reasons to scoff at the most powerful economic zone on the planet merely shows up your ignorance. The relevance to the article is that under the present government, NZ seems wedded to the US/UK/Aust economic ideology – a failed system that is both inefficient and wasteful. There are plenty of better systems tried, tested and proven. A fully integrated and appreciated workforce with a fair wage system outperforms profit driven cowboy corporations every time.

      • Skeptic 8.1.2

        If you were to take the 1984 $NZ and cost of living/ wage structure as a base line (when NZ standard of living was on par with Australia) the minimum wage today would be $33/hr, with the average at $45/hr. That is the real measure of how far NZ living standards have fallen since Rogernomics and Ruthenasia.

        • Chris 8.1.2.1

          Basic benefit rates are even further out of whack, and have been even before the cuts in 1991. Benefit rates haven’t reflected the true cost of living since the 1970s. Annual CPI increases have been meaningless ever since because they’re based on a percentage increase of a figure plucked out of the air. Add the further pressure of maintaining a wage/benefit gap in a climate of low wages and all you get is our ever-burgeoning underclass. Well done to all involved.

      • Chris 8.1.3

        Good to see a neo-con accepting that Labour firmly embraces the neo-liberal model, instead of dog whistling accusations of being “far-left” or “socialist”.

      • The Chairman 8.1.4

        “Surely $20 would be enough…”

        Not if inflation also increases, offsetting the fiscal benefit.

        • Tricledrown 8.1.4.1

          Inflation is only happening in housing and
          Interest rates.
          Elsewhere stagflation.

          • The Chairman 8.1.4.1.1

            If the minimum wage were to increase to $20 per hour, the concern is employers will increase prices to maintain margins. Thus, diminishing the expected fiscal benefit such a wage increase would produce.

          • Chris 8.1.4.1.2

            But the cost of living is still increasing. It’s still harder and harder to get by. Isn’t that the point?

      • Tricledrown 8.1.5

        Labour had coalition partners that prevented the Clark govt from putting more effective poverty reducing policies in place.

        • Chris 8.1.5.1

          What policies do you mean? And which coalition partners prevented the Clark government putting them in place?

      • Sabine 8.1.6

        well some 3.5 years ago labour campaigned on a $ 16 wage/per hour.

        While not quite 20$ it would have been way more then National has achieved so far, considering that even with the current increase they still are well below $ 16.

        so how many terms do you think National will need to achieve $ 20?

        http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=11301505

        • UncookedSelachimorpha 8.1.6.1

          “so how many terms do you think National will need to achieve $ 20? ”

          Until inflation makes it worth $14.50 in today’s terms, I am guessing.

          • Wayne 8.1.6.1.1

            Uncooked,

            It seems to me that $15.75 is worth $15.75, so what is the point you are making?

            • Chris 8.1.6.1.1.1

              Perhaps it’s that CPI benefit increases don’t keep up with the real effects of inflation?

        • Wayne 8.1.6.2

          Sabine,

          Well, how about (any political party could pick this up);

          $18 in 2018,
          $19 in 2019,
          $20 in 2020.

          In politics it is best if things are simple and easy to remember (provided there is at least some level of connection with the real world).

          • Sabine 8.1.6.2.1

            so you think that between 2017 and 2018 National would increase the mIn wage by 2.25$?

            you base this on wishful thinking? Or past experience? They have yet to reach 16$.

            • Wayne 8.1.6.2.1.1

              Sabine,

              Probably not. As you point out, too large an initial jump.

              But you never know. No-one predicted the $25 increase in benefit levels.

              • Sabine

                so essentially You just made shit up with nothing to back it up.
                that is so National Party of you.

                However, the Labour party had a policy 3.5 years ago to raise the minimum wage to a higher level then it is today after 3 increases under National.

                ahh, sorry Wayne, Go back to your handlers and get your talking points sorted. You seem very confused by the difference of a ‘benefit’ and ‘ minimum wage’.

              • John up North

                ahhh! yet again the good ol echo chamber BS of the wonderful, caring and ever loving Nat party (under the owesome Key) giving all the poor benes a free hand-out in the form of a $25 upgrade.

                Big time Bull shit! The folks that trot this line out probably also believe we have 10 new bridges in Northland.

  9. Wayne 9

    Skeptic,

    The gap opened up at three points of time.

    The first was the recession of 1987 to 1992. This was very sharp in NZ, but barely touched Australia. The second was 1997 to 1998 with the Asian crisis, which caused a recession in NZ but not in Australia. The third was the early 2000s, when the Aussie economy grew faster than NZ’s.

    The cumulative effect is that Aussie GDP per capita is about 33% larger than NZ. The bulk of that gap occurred in 1987 to 1992, when they had 5 years of growth and we had 5 years of recession. I recall how sharp it was. There was actually less traffic on Auckland’s roads in 1992 than there had been 5 years previously. Unemployment was high, and huge numbers had decamped to Australia.

    Since the GFC, and with the Key govt, the gap has started closing. It is about 5% less than it was in 2008.

    Anyway the gap between Australia and NZ is all very interesting, but a bit irrelevant to the level of the minimum wage as a percentage of average wages. After you can’t legislate that NZ should have the same GDP per capita as Australia. That can only occur in the real economy. Just as it took time to occur, so it will take time to close.

    • Skeptic 9.1

      Essentially correct if a bit simplified on the reasons. Read Dr Shaun Goldfinch’s doctorate dissertation on how the Aust economic review in the 1980s was conducted above board and inclusive to all sectors, while NZ was conducted in secrecy through manipulation and deception by a select few in the Labour Party caucus and in Treasury. I think you’ll reach the same conclusion I did two decades ago – the NZ economic recession was caused directly the two “ACT” governments headed by Lange and Bolger which directly impacted on almost all NZ home grown internal economy, including the wage structure. Overseas factors would have minimal impact if “free market” economics had not been followed. NZ economy was hijacked and we suffered, Aust’s wasn’t and it didn’t. The reasons and data supporting this fact are fully referenced to Cabinet papers in the above dissertation

      • Red 9.1.1

        Not to mention country was bust and had to react to a crisis in contrast to Australia

        • Skeptic 9.1.1.1

          Actually that urban myth perpetuated by neo-cons is long past its use by date. FYI NZ was not bust in 1984 – go study the treasury papers fully, then factor in how large and robust NZ internal economy was. Yes we had significant O/seas debt, but this was mostly private and fluctuated according to currency rates. The only crisis was a manufactured one – a straw man type crisis – a myth started and put out by certain people who over the course of the following decade ripped of the NZ taxpayer big time then got knighted for it. This travesty was documented and exposed in the late 90s. Why are you trying to resurrect it?

  10. Tamati Tautuhi 10

    Obviously housing is not in the Inflation Index as house price inflation in New Zealand is creating an underclass of people here in NZ who can not afford to live in a warm comfortable home.

    The Neoliberal Economic Model has been a disaster, National’s mass immigration policy is causing headaches for everyone.

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