Oram: A living wage is an investment in the future

00:38, Feb 25 2013
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UNFAIR: A living wage is an investment for business, not a cost, writes Rod Oram. Pictured is Sosofina Masoe, who lives off the minimum wage as a cleaner. Sosofina and her husband also support grandchildren Anamaria, 1, Joyce, 2, Tristian, 4, and Plessment Patelesio, 5.

"We can't afford it" is the response of most employers to advice they would benefit if they paid their people a living wage.

But "we can't afford not to pay it" is the answer from employers who understand a living wage is an investment in their people and businesses.

The upside for companies is obvious in abundant case studies overseas. Hopefully we'll start to see local leaders emerge thanks to the launch this week of Living Wage Aotearoa New Zealand (www.livingwagenz.org.nz), a campaign by a broad coalition of unions and other organisations.

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Research by the campaigners shows that $18.40 an hour is the pay a New Zealand couple with two children need for a basic standard of living, with one parent working full time and the other half time.

Yet, the adult minimum wage is currently only $13.50 an hour. This is meant to be a legal floor to protect vulnerable workers. But it does not apply to youths; and some unscrupulous employers illegally pay much less.

However, mandating a minimum wage that matched the living wage would be a shock many companies would have no idea how to handle. Lost jobs and failed businesses would result.


So it is far more effective to raise awareness among employers who can respond positively. They will invest in their staff, thereby lifting their productivity and the performance of the business or organisation. They will attract the best people and put the pressure on other employers to raise their game.

Any NZ employers who say their sector is too poor or too competitive to pay more should consider the wealth of evidence from overseas. One of the most arresting examples is of Walmart and Costco, since US retailing through warehouse clubs is one of the most ruthlessly competitive sectors in the world.

The following analysis of the arch rivals' performance is by Prof Wayne Cascio. It was published in the Harvard Business Review in December 2006. You can read the full article http://bit.ly/WJSh8O.

At the time, Costco had a 50 per cent market share and Walmart's Sam's Club had 40 per cent. Their respective operating profits per employee were US$21,805 and US$11,615.

The key was Costco had 38 per cent fewer employees than Sam's Club but paid them around US$17 an hour compared with Sam's US$10-US$11. The Costco employees also had much better health and pension provisions, yet made a much smaller contribution to them from their pay than staff at Sam's.

"These figures challenge the common assumption that labor rates equal labour costs. Costco's approach shows that when it comes to wages and benefits, a cost-leadership strategy need not be a race to the bottom," Prof Cascio concluded.

Costco saved money because its staff turnover rate was only 17 per cent a year compared with Sam's 44 per cent. Crucially, the staff were more engaged in the company and more helpful to customers.

"Costco gets one of the most loyal and productive workforces in all of retailing, and, probably not coincidentally, the lowest shrinkage (employee theft) figures," Prof Cascio reported.

Such success is, of course, a more complicated than just paying people more. It takes work structures and cultures that train and equip staff, measures and incentivise their performance and builds on their ideas and engagement in the business.

A helpful guide to such successful workplaces is Profit at the Bottom of the Ladder: Creating Value by Investing in Your Workforce, a book by Jody Heymann and Magda Barrera, published by Harvard Business Press in 2010.

"By combining improved work organisation with well thought-out incentives, [employers] increased the productivity of their existing employees two to threefold. Their subsequent recruitment efforts demanded far fewer advertising and marketing resources. These companies had their choice of the best employees available in their sectors, and this in turn further increased productivity and product quality," the authors conclude.

In New Zealand, we have urgent economic and social reasons for applying such practices. The median income is around $15 an hour in retailing, accommodation and food services and around $18 in agriculture, forestry and fisheries. But while other sectors have median pay above the proposed $18.40 an hour living wage, there is widespread hardship among people paid less than the median.

We have abundant evidence of the damage to society. For example, the Office of the Children's Commissioner devoted its summer 2011 edition of its journal, available at http://bit.ly/YXIcDX, to child poverty. Similarly the University of Otago's longitudinal study of 1,037 people born in 1972 is world famous for its insights into lifelong and inter-generational harm caused by economic and other kinds of deprivation.

But consider the economic damage of less-than-living wages. They perpetuate a cycle of low skill, low productivity and low reward work which hobbles the economy. They minimise rather than maximise the human potential in New Zealand.

Take, for example, the poorly paying primary sector. It could play a vital role in the country's transformation to a high value, more sophisticated and resilient economy. To do so, it needs to develop and apply a lot more science and skills from farm to market. But unless it invests more in its people, it won't.

Low pay service sectors such as retailing, accommodation and food service present a different challenge. There are limits to how much extra value they can create, although better service will earn some reward from locals and tourists.

Typically, though, those sectors suffer from excess capacity - shops and cafes with too few customers and motels and hotels with too few visitors. If the best businesses in those sectors won more customers they could afford to pay their staff more. This would drive some competitors out of business but hopefully others would better employ their assets, particularly their staff.

The sector with the biggest challenge of all is commercial office cleaning. It is notoriously low paying and very labour intensive. It will take brave pioneers to find a better way of doing business.

But this is the task across the economy, not just poorly paid sectors. New Zealand is squandering its human talent - and we have low GDP per capita to prove it.

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