Bryce Edwards: Is Working for Families contributing to poverty in New Zealand?

Bryce Edwards: Is Working for Families contributing to poverty in New Zealand?

The people who are most concerned about poverty and inequality in this country are also usually highly supportive of Working for Families. But what if the Working for Families (WfF) scheme was actually part of the problem? What if WfF contributes to this poverty by reinforcing and entrenching the low-wage economy?

This is the argument put forward in today’s New Zealand Herald by Matthew Hooton who says: “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” – see: ‘Communism by stealth’ is here.

He explains how WfF acts as a subsidy to employers: “if there’s a job to do worth $60,000 a year, an employer can hire someone with two kids, pay them just $38,000 a year, and they’ll end up with almost the same pay in the hand. Union bosses rightly feared that it would be difficult to get workers with children to sign up for a pay campaign if it made little difference whether they earned $38,000 or $60,0000 a year. Worse, if government subsidises something, there will be more of if, in this case low-paid jobs.”

Hooton also argues that the effect of WfF payments is to discourage employers from investing in improved productivity measures: “From an employers’ perspective, 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.’ This means there is very little doubt Working for Families had led to lower productivity and before-tax wages across the economy than had Clark not launched it”.

The WfF scheme is being discussed a lot more at the moment, partly because this month saw the Ardern Government inject $370 million more into it on an annual basis.

Last week I wrote a column for Newsroom arguing that Working for Families is corporate welfare. In this column I drew a parallel between the scheme and the Accommodation Supplement: “This has parallels with other modern welfare initiatives – such as the accommodation supplement, which is a subsidy paid by the state to private landlords of those tenants on low incomes. The left blames such payments for contributing to the rapid increases in rentals, because it effectively allows landlords to increase rents for low-income tenants beyond what they can actually pay.”

And I posed the question “what would happen if WfF didn’t exist?”: “One test of the impact of a policy is to look at what would happen if it wasn’t in place. Short term, obviously low-income families would be hit hard if WFF no longer existed. But, beyond that, it’s clear that wages for the lowest paid would have to rapidly increase, otherwise a huge proportion of the workforce would simply not be able to meet their basic costs. Just affording to get to work would be a problem, with higher housing costs pushing workers further and further away from their work locations. Rents at the lower end of the market would likely also fall rapidly, particularly in the bigger cities.”

Former Labour Party activist Shane Te Pou recently wrote a Newsroom column that also explained how the scheme operated as a subsidy for business: “The policy basically worked as a subsidy of employers so they could pay lower wages than otherwise, including below a living wage, knowing that it would be topped up by the state” – see: Let’s keep welfare for the poor. In this column he explains how some unions have been unhappy about the scheme, and how WfF abatement rates punish the recipient.

Economists also seem increasingly critical of its impact. For example, late last year, leading economist Ganesh Nana, who runs the BERL consulting group, gave a speech in which he said WfF “is essentially a subsidy to prop up businesses that adopt a low wage business model” – this is covered in Brian Rudman’s column, Policies for fiscal fairness only right. Nana called for businesses to break out of the low-wage “cul-de-sac” simply by paying much higher wages, and called for more debate on how to do this.

So, how did this low-wage economy come about? This was all explained by Chris Trotter in an Otago Daily Times column last month – see: It’s time to stop subsidising New Zealand’s least efficient employers.

According to this account, the neoliberal reforms of the 1990s instituted this low-wage economy by destroying the power of unions. This set New Zealand on a path which enabled inefficient businesses that are reliant on low-wage workers. Trotter says this approach is at variance with other countries that have maintained the labour market power of workers to bargain, while pushing inefficient employers out of business to allow productive high-wage ones to prosper.

Trotter says that when the Clark Labour Government came to power they took the easy option, in not attempting to reverse this but simply paying out money to those negatively affected by it: “Regrettably, the Labour-led government of Helen Clark and Michael Cullen failed to reverse National’s low-wage strategy. Not only did they decline to restore the trade unions to anything like their former strength, but they augmented National’s low-wage strategy by introducing ‘Working For Familie’ which was nothing more nor less than a massive wage-subsidy to New Zealand’s worst employers”.

And writing in the Herald, Josie Pagani has also reported on how this historic battle between “capital” and “labour” is being won by capital: “The Council of Trade Unions has pointed out that working people’s share of the economy has fallen from around half thirty years ago to barely 40 per cent today, a difference in wage packets of $20 billion a year, which is worth $6000 to $10,000 a year to an average family. That is wealth our economy produces each year, but is no longer going to working people. The Government can’t fix wages in its budget. Only significant changes in the way wages are agreed between working people and employers will increase returns to work compared to returns to capital” – see: Labour won’t have enough in the pie to satisfy all hungry kids.

If this all seems too abstract or esoteric, then the must-read article on all of these issues and how they are playing out for those in lower-income jobs, is Joel Ineson’s When a $16k payrise only gives you $50 a week extra in hand after credits reduced.

This provides the account of one worker who got a promotion at work, which had her “moving from a 30- to a 40-hour week and having her pay increased from $36,000 to $52,000”, yet because of WfF abatement rates, her actual weekly income went from $911 to only $962. She says that WfF has “the unintended result of trapping people in poverty”.

The same article reports on the experiences of a Christchurch budget advisor, David Marra, who says “Whether it was intentional or whether it was an unintended consequence… Working for Families has worked as a mechanism to keep wages down because it removes motivation”. He says that WfF, together with labour laws that aren’t particularly worker-friendly, has contributed to a low-wage economy being entrenched in New Zealand.

We need much more debate about WfF and the low-wage economic model. Helpfully, the Government has promised a review of WfF. However, as Simon Chapple reports, “We’re still waiting to be told when that review will begin, who will be conducting it and what its terms of reference will be. Nor do we know how it will tie in with the Tax Working Group (TWG), even though this will be critical if either is to fulfil its potential. One review disengaged from the other doesn’t make sense” – see: Time to tackle ‘incoherent’ tax policies.

Finally, not everyone is so critical of WfF. And Susan St John of the University of Auckland has taken issue with my own column discussing the problems with the scheme – see: Working for Families perversely misunderstood.