25th July, 2018

Why a living wage is gathering steam

Both Australia and New Zealand have some of the world’s highest minimum wages, but going above and beyond is an idea picking up steam as something which can help businesses succeed.

Each year the Fair Work Commission and its NZ equivalent independently take a whole heap of data to calculate a figure that they deem to be the minimum amount somebody can live on.

In Australia, that figure is $18.93 per hour, while in New Zealand it’s $16.50 per hour.

READ: How to not just survive the minimum wage increase, but thrive

Australia is the second highest minimum-wage paying country in the world, just below San Marino.

New Zealand isn’t far behind in sixth place.

While economists argue whether the two economies can sustain, or even increase, a high minimum wage, an idea gathering steam in recent years is whether to have a “living wage”.

What is a living wage?

A living wage is loosely defined as 60 percent of a country’s median wage (but there’s no set definition). It’s meant to make sure people can live with a bit of prosperity rather than just scraping by.

In New Zealand, it’s defined at $20.55 per hour, which is 24 percent above the minimum wage.

Advocacy group Living Wage has been going around NZ, talking to employers about the benefits of going above and beyond the minimum wage to a living wage.

So, why would you consider paying your staff more than you legally must?

The positives

Living Wage conducted a qualitative survey of organisations [PDF] in 2017, including not-for-profits and the private sector, which had agreed to move to a living wage. There was some surprising stuff.

No business went broke or couldn’t pay the bills because of the move and their casual staff went home with more money.

The business may add 5 percent onto its wage bill, but the person receiving the living wage goes home receiving 24 percent more.

So, isn’t it a win-win?

Interestingly, the perceived benefits of being defined as a “living wage employer” changed depending on whether the respondent was male or female.

Males saw the main benefit of a living wage structure was a boost for the organisation’s reputation.

Meanwhile, female respondents were more likely to see the move as a positive for team harmony and culture.

As could be reasonably expected, the survey also found that it became easier to retain casual staff who were being paid the higher rate.

For employers who were new to business, the move also had another, perhaps unforeseen, benefit: it gave them peace of mind.

“I really don’t know that much about being an employer, its new to me, I had no training, so in one way this has been great for me as I don’t have to fret about whether I am paying fairly, I have less anxiety and can get on with the stuff I do know about,” noted one respondent. 

Given all the recent publicity on employers not paying their staff fairly, setting a wage above what you need to and fitting the business around that can head off any challenges down the road.

But bumping up wages by 25 percent in some cases isn’t without road bumps.

The challenges

Even though the Living Wage report noted that there wasn’t a huge upheaval in moving to a living wage, there were some things employers had to do to adjust to the new way of paying.

One respondent said that while the actual dollars and cents impact wasn’t too much to handle – there was a need to measure the impact it had on the existing pay hierarchies.

This goes to a phenomenon known as the “relativity squeeze”.

READ: Mind the relativity gap

In a nutshell, the theory is if you increase the wages of the people on the bottom of the pay ladder but keep other people in your organisation on the same pay rate with no change, then people on the existing rate will start to question how they’re valued by the organisation.

Before, there was a defined hierarchy to the people in an organisation and, while it’s sad, dollars seem to matter as a marker of value for employees.

That’s why employers noted “changes to organisational hierarchy” as one of the key challenges associated with lifting their minimum wage to a living wage.

They also said making sure they got the best out of their employees (or, getting more bang for their buck) was a challenge.

After all, if you’re paying more for labour you want to make sure you’re getting the best out of your investment.

So, if you were interested in moving to a living wage structure, how would you figure out what impact it brings to your business?

Measure the impact

The first port of call is to talk to your accountant or bookkeeper about the impact of changing wage structures in your business.

Before you get to the dollars and cents impact of the move, take a wider look at the implications on your organisation.

When you’re ready to run the numbers, you can conduct what’s known as a “dummy pay run”.

It’s basically like a normal pay run, but you don’t submit it.

You go through all the steps of a regular pay run, plugging in a different wage figure for those you want to bring up to the living wage.

Then, run the pay run. But again, do not hit “submit”.

Then, note down the figures the report gives you and exit out of the system.

Once you have those figures, you can plug those into a cash flow projection report.

READ: How to succeed with cash flow forecasting