Welfare reforms will drive wages down

Written By: - Date published: 3:58 pm, February 27th, 2011 - 26 comments
Categories: Economy, employment, welfare - Tags:

It strikes me that the coming welfare reform is less a welfare policy and more another industrial relations policy in drag. That’s because it won’t just be beneficiaries that suffer under this new regime but the majority of Kiwi workers too.

Basic supply and demand theory indicates forcing beneficiaries into an already tight job market will increase labour supply and thus lower labour price.

But don’t think that’s just for new jobs. In a two-sided market such as labour and capital power asymmetry results in asymmetrical bargaining outcomes.

It can be expressed as:

BPA(Bargaining Power of A) = (Benefits and Costs that can be inflicted upon B)/(A’s cost of not agreeing)

BPB(Bargaining Power of B) = (Benefits and Costs that can be inflicted upon A)/(B’s cost of not agreeing)

If BPA is greater than BPB, then A has greater Bargaining Power than B, and the resulting agreement will tend to favour A. The reverse is expected if B has greater bargaining power instead.

The key phrase here is “Benefits and Costs that can be inflicted” – when the benefit system is tightened the costs that can be inflicted on labour (job loss) becomes greater and with it the bargaining power of capital.

Back in the 90’s this increase of bargaining power was frequently made manifest at the bargaining table with the phrase “if you don’t like the offer there’s plenty of people happy to do the job for less.” and its many variations. Unsurprisingly the same decade saw a widespread collapse of wages and conditions.

It is equally unsurprising that employer organisations were particularly supportive of the working group more draconian options with the Employers and Manufacturers Association supporting forcing people into unpaid work after six months on the dole, making parents on the DBP work once their child turned one (and transferring them to the unemployment benefit when the child turns six) and cutting benefits the longer people are on them.

You can almost hear them smacking their lips at the prospect of all those desperate souls lining up to sell their labour cheap.

26 comments on “Welfare reforms will drive wages down”

  1. ianmac 1

    Perhaps the Minimum Pay is an impediment to the Supply and Demand model?

    • Tiger Mountain 1.1

      Beneficiaries with a WINZ/MSD or tame doctors foot on their throat are likely to do all sorts of things (as a group), including putting downward pressure not only on wages generally, but the minimum wage too.

      That is why the immediate demand of “$15 minimum wage now” is so important. It is a demand that is easily understandable and supportable and if realised frustrates employers wedge tactics.

      I agree with Irish’s proposition, the WWG report is all about lowering the cost of labour and opportunistically pitting low paid worker against unemployed worker and forced conscripts-(DPB, Invalids and sickness beneficiaries).

  2. Jenny 2

    .
    According to McCarten in his column in the Herald today, Hone Harawira is guaranteed a seat in parliament due to his strong local support, this will leave him free to campaign heavily for the list vote, championing the rights of the low paid and benficiaries as no other political candidate is prepared to do. If successful he could well get a couple of MPs in on his ticket, upsetting National’s majority. Giving this sector of the electorate a very powerful lobby in parliament.

    Irish, if people like yourself gave what support you could to Hone’s campaign, you could well see the Nats turfed out and the return of a Labour led coalition. As McCarten says, “Hell would freeze over”, before Harawira went with National.

    “Let me explain. Harawira now has a safe seat and will be returned in November. For the rest of the year he will run a campaign against the seabed and foreshore changes.
    But more threatening to the status quo is that he will run parallel campaigns against low wages, so-called welfare reform, mining, GST and privatisation.

    These issues will mobilise support among Maori and non-Maori working class.

    You can say what you like about Harawira, but no one doubts his sincerity when it comes to fighting for the poor. This is a constituency screaming out for a staunch champion. In Harawira they’ll get one. Harawira will target these voters for their party list vote.”

    Matt McCarten HOS Sunday, 27 February, 2011

    • Tiger Mountain 2.1

      Needs another thread Jenny, and I am sure there will be one shortly. But… seeing as how you started it… I am most intrigued as to how Hone supporters in Te Tai Tokearau are going to quickly transition from Tino Rangatiratanga principles in a post colonial situation (identity politics) to more class based politics with pakeha involved to boot. Not opposed (with qualifications) but it is a big ask. Hone with a left wing hat on, and he does understand the left world view, would be quite formidable.
      It will be the makeover of the decade if Hone does get involved in such a group. I would have thought standing as an independent this year and letting the dust settle would have been the way to go for him. But then Matt’s disclosure at the end of the article as to his involvement in Hones managed MP exit raised an eyebrow for sure.

      The labourites and greens will be worried about vote eating from a new left social democratic party so it may come down to testing the truth of Bomber Bradburys contention that there is another constituency out there that can add to the Labour/Green tally rather than merely carve it up differently.

      • just saying 2.1.1

        There is No conflict between “class” and “identity” politics!

        The fact that Labour championed a few “identity” causes while following a neoliberal and imo right-wing agenda is not because “identity” politics are incompatibile with the left. It’s because those few “identity” issues were the only part of the left mindset the Labour Party had held onto. The whole wedge thing worked turned out to be mighty handy for neoliberalism too.

        And good on them for those few successes. We are all in this together. Dignity, respect, social justice, freedom, self-determination, and a living income for every person is achievable, and is surely what the left is all about? No-one said it was going to be easy to achieve, but isn’t that what we should be fighting for, rather than merely the interests of any particular subgroup, be it Maoridom, white working class men, or any other?

    • word 2.2

      Who wants that racist pig in parliament?

  3. Ed 3

    I amazes me that despite evidence to the contrary, people still seem to believe that a “Reform” from this government must be an improvement on the previous situation. It is easy political spin; but in this case the proposals could perhaps be more accurately termed “Welfare Dismantling”. By colluding with the government spin, are we undermining the depth of opposition to the concepts?

    Leaving aside the more stupid proposals that were there to be repudiated to give a semblance of ‘balance’, are there any parts of the proposals in the report that are in fact worth supporting?

  4. Rob 4

    Not convinced it would drive wages down much. Most of the additional people who will be required to seek work will not be people bosses want to hire. The mere fact that more people are applying for jobs doesn’t mean they can offer less wages there has to be more eligible employees.

    • RedLogix 4.1

      Most of the additional people who will be required to seek work will not be people bosses want to hire.

      Given the rapid rise in unemployed in the last few years, due to the GFC and not due to any fault of those caught up in it… this is a fairly weak assumption.

      • Rob 4.1.1

        The majority of recommendations in the Welfare Working Group report however are focused on invalid, sickness and DPB benefit recipients and creating work requirements for this. That is why the estimates number of people required to seek work receiving benefits would increase from 37% to 67%. People who are already on the unemployment benefit are not affected by most the likely changes.

        • RedLogix 4.1.1.1

          So in simple terms… you’re saying that forcing people who bosses are unlikely to want to hire to look for jobs they are unlikely to get is … a good idea?

    • marsman 4.2

      Rob, it drove wages down when Shipley did the same thing.

      • Rob 4.2.1

        Shipley conducted an entirely different form of welfare reform to the type being suggested.

        • lprent 4.2.1.1

          Nope. It is exactly the same. It to was designed to pressure people to get off welfare and go back to work WHEN there was no work. It blamed the beneficiaries for not being in work and chewing up money that could be used for tax cuts that the government preferred to do instead of figuring out how to increase the work available.

          It looks to be just as vindictive and outright dumb as the Shipley / Richardson welfare changes in the early 90’s. Because in the end because if there is work available the vast majority of people already prefer be working than to being on the benefit. But the rapid rise in long term beneficiaries shows that the work isn’t there.

          So as in the 1990s these idiots in government will want to harry all beneficiaries because of the perceived flaws of a small minority, and because the government are too damn lazy to work on the market flaws that are the real problem.

          For example for some reason, as in the 90’s, employers don’t want to hire woman on the DPB with young kids.

          These woman have to have time off to make sure that their kids are safe after school as they are required to do by law. Employers do not want to give time off when their children are sick for such basic things as taking them to the doctor. Employers don’t have many jobs with the part time work that is required because child care gets too expensive when you are looking at 50 hours a week including the commute. That is where you can find child care in the first place.

          Basically employers can find employees without those encumbrances. Similar things apply to people on the sickness and invalids benefits.

    • Draco T Bastard 4.3

      hahahahaha

      Oh, that’s funny. My nephew gets turned down jobs quite often because he’s “overqualified”. Management in NZ is so pathetic that they will hire the cheaper person over the better qualified one.

      • ZeeBop 4.3.1

        If your nephew is so great why isn’t he a manager? If he is so well qualified why haven’t he started up his own co-op, discussed with you your needs and done away with the middle man you use to get your car fixed, you groceries from, or whatever? Its those middle men that you pay for your milk, cheese, wheels to be tested, that are owned by foreign shareholders rent seekers. And you are providing the consent to them. The fact is if the left got off its behind and stopped waiting for managers to get with the lefty program, instead created real alternatives, the managers would be forced to start taking the left seriously! But they don’t, and the media is right wing as a result, because the left aren’t a threat. Sure Labour will win in Nov if the left has any brains, but will Labour do anything serious to change, no. Could they really do anything? raise the min.wage. Geez, don’t you get it, if you don’t own the means of production and keep supporting the overseas landlord paradigm you are the problem, not Labour, not the left, not your nephews manager. If enough people just buy local, shift their patterns of social and fiscal behaviour then the country will not have to hear your whining any longer.

  5. randal 5

    well golly gee irish bill.
    this government has been in power for over two yers and you have just woken up to the fact that they are fighting a class war.
    they want to lower wages as a matter of prinicple just to watch ordinary people squirm and now the current economic situation gives them an excuse.
    time to stop talking and give ’em hell.

    • The Voice of Reason 5.1

      A bit harsh on IB, Randal. He’s one of the most class conscious posters here and has been on National’s case since well before the election. Decades, in fact. This post draws the link between the new welfare ‘reforms’ and Key’s stated desire to see NZ wages drop, so it’s an updating of what Irish (and lots of us mere contributers) already knew; that National hate the majority of NZers and only value them in terms of wealth extraction.

      The intention here is clear. The Nact/Maori party Government want to create a permanent underclass of desperate and coerced workers without permanent jobs who can be used to scare fully employed workers into giving up their wages and conditions for the benefit of the employing class. As you say, it’s a class war. Bagging each other isn’t going to help win it, aye?

    • lprent 5.2

      IrishBill was writing posts about the class effects well before this government got elected – click on his name and look back amongst the long stream of class orientated posts back into the 2007.

      If you want to look at someone who is a *lot* less interested in class as a concept, then look at me. My extended family has a wide range of ‘class’ in it to the point that class becomes a somewhat meaningless concept. We are so mobile in class terms both going ‘up’ and ‘down’ and sideways at any point durig our lives. What I’m more interested in is people having access to opportunities if people want to take advantage of them.

      As far as I am concerned that means that having education systems that are accessible. That don’t depend on who your parents are and where you live is of upmost importance. Having adult education readily available is just as important so that decisions made as the usual incoherent and horny teenager don’t limit the rest of your life. Having accessible and available child care so these opportunities and work opportunities are available to people with children is critical as one of the most common periods for retraining is whilst children are young (and that also provides a lot of motivation). Being able to retrain when your previous profession goes obsolete and you hit unemployment.

      Of course this government is steadily accumulating a massive fail on all of these.They are steadily working towards putting people into poverty traps that they can’t get out of. Which does no-one in our society any good over the long term.

      I don’t look at these as being ‘class’ issues (Irish would disagree). I just think that they are a result of the National parties typical short-term ideological stupidity.

  6. just saying 6

    Exactly VoR, they virtually said so in the first report. It’s worth quoting from Anne Else’s excellent analysis of it last year:

    ” To be fair, there is one revealing hint in the report that the demand for labour – or at least for cheap, flexible labour – did influence the WWG’s thinking:

    “Allied Workforce also notes that employment legislation (personal grievance laws, the ever-increasing minimum wage, and the now defunct youth rates) can be counter-productive to the interests of those they seek to help.”

    Allied Workforce says it is now the largest supplier of casual and temporary labour-hire in New Zealand…
    …Its managing director, Simon Hull, says “a number of businesses are … rediscovering the ways in which contract labour can reduce costs and increase productivity for industry.” He hopes businesses will shift to hiring casual labour, rather than keeping on permanent staff they don’t need: “Hopefully, we won’t see a return to the patterns of four to five years ago where businesses clung on to staff, often even when they couldn’t keep them fully utilised, as they were afraid of losing the capacity.”…

    …It doesn’t take much thought to understand why it would suit Allied Workforce and its shareholders – 25 of whom own 18.6 million shares – to have a lower or no minimum wage, a return to youth rates, and easier dismissals. And the government is listening – the last has already been achieved, with the extension of the 90-day provision to all workplaces.

    Creating a larger pool of desperate job-seekers partly subsidised by the state would be a big help too.

  7. frizaxojx 7

    Just done a calculation with the proposed new abatement schemefor pt workers. At the moment I gross $165.75 a week and have $60 taken off my SB. With the proposed changes I will lose $80.16. Even if I get 20 hours a week with the new minimum wage of $13 I will still be $6 a week worse off under the new scheme.

  8. randal 8

    fair comment voice of reason.
    but I am a working man and I hate to see reality dressed up in policy nalyst language as if the working class were a problem to be solved and not real life blood and muscle entities who think and feel.
    the tories hide behind the numbers and think tank speak but the labour party must not fall into this trap.

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