A living wage makes sense for bosses as well as employees, argues JIM ARROWSMITH.

Now that the election dust has settled, Prime Minister John Key needs to think about his legacy. If he wants to be remembered for more than securing successive election victories, he needs to direct his attention to the pressing issues of the day.

One of the biggest challenges is something that might not immediately resonate with his core support but which matters to everyone who believes in the traditional Kiwi values of an inclusive society of opportunity for all.

Most of our social and economic problems are linked to New Zealand’s endemic low rates of pay. Low pay means that working families cannot afford decent housing and struggle with basic living costs.

The Children’s Commissioner, a practising paediatrician, reports that international colleagues are astonished to find poverty-related diseases such as tuberculosis and acute rheumatic fever rife in our communities.

Within the workplace, low pay results in a vicious circle of poor motivation, high labour turnover, under-investment in human capital and low productivity. It disincentivises work, or on the other hand leads to multiple jobs and long hours.

All of this leads to stress and ill health, and problems in the home as well as at work. Taxpayers pick up the bill for these externalised social costs, and subsidise employers by topping up low wages with in-work benefits.

Of course, many low-paid workers are young people sampling the labour market and accumulating work experience.

The retail sector, which is the largest private employer in the country, provides opportunities for people to combine part-time employment with studies or dependent care. Many commentators have argued that increasing minimum pay would simply lead to higher costs, which would then lead to higher prices and job losses. But how far is this true?

One of the biggest costs for retailers is dealing with the expense and disruption of labour churn. A related challenge is ensuring that frontline staff are committed to the business, since it is they who present the actual customer service.

When Henry Ford doubled the pay of his workers a century ago, economists had to come up with a new concept to explain why paying above the lowest possible “market” rate made sense. “Efficiency wages” refers to offsetting returns from labour stability, motivation and productivity.

Governments, too, first legislated for minimum wages on efficiency as well as equity grounds. Minimum rates mean that businesses have a level playing field and are encouraged to compete on product quality, innovation and investment in staff, rather than a race to the bottom by sweating labour.

Many service firms operate within very tight margins, but there are also potentially significant offsetting costs to higher pay.

Research at Massey University shows how small businesses, including retailers, have benefitted from moving to a living wage.

Even in extremely competitive and cost-driven sectors such as security, our case studies demonstrate the benefits of a skills and rewards strategy that recognises staff as effectively investors in the firm.

Big companies. too, such as the Warehouse Group, are introducing versions of the living wage to encourage and reward staff retention and development. Introducing a living wage is not easy, but a uniform approach by raising the minimum wage would eliminate first-mover disadvantage. Our emerging evidence shows that this could deliver wins to employers as well as their staff and society as a whole.

Professor Jim Arrowsmith is from Massey University’s School of Management. He is part of a team researching the living wage. Click here to participate in its living wage survey.

– The Press

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