RELEASED BY SSC UNDER OUR COMMITMENT TO OPEN GOVERNMENT

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1 Office of the Minister of State Services Chair, Cabinet Government Administration and Expenditure Review Committee ADDRESSING LOW PAY IN THE CORE PUBLIC SERVICE Proposal 1 This paper seeks Cabinet approval that the lowest rates of pay of employees in the core Public Service are lifted, as a matter of Government policy. Background 2 The Government is committed to a policy package providing fair pay and employment conditions supporting a decent standard of living for all New Zealanders, and addresses the difference between the highest and lowest paid. 3 Addressing the lowest pay in the core Public Service is one step in the Government s broader agenda to reform employment conditions for all New Zealanders. Proposed Approach 4 I propose that as a matter of Government policy: a. all employees in the core Public Service whose base pay is less than $20.20 per hour will receive an hourly rate of at least $20.20, or b. all employees in the core Public Service whose base pay is less than $20.55 per hour will receive an hourly rate of at least $ To give effect to this policy, I propose that Cabinet directs chief executives of Public Service departments listed in Schedule 1 of the State Sector Act 1988 to make a one-off adjustment in pay to: a. $20.20 per hour to all employees, including part-time, fixed-term and casual employees, whose base pay is currently less than $20.20 per hour, or b. $20.55 per hour to all employees, including part-time, fixed-term and casual employees, whose base pay is currently less than $20.55 per hour. 6 I propose that this one-off adjustment is implemented by 1 September 2018 at the latest to allow time for departments to implement the pay adjustment, including engagement with unions, offer and acceptance process, and make payroll changes. Significant bargaining in the core Public Service is due to begin before June/July 2018, and so may provide departments with the opportunity to implement earlier. The State Services Commission (SSC) will work with agencies to address this expectation through collective bargaining. 7 This would be a once-only mandated adjustment. Subsequent adjustments to the affected pay rates will occur through the normal process of employment negotiations, including collective bargaining. 8 The estimated total cost of a one-off increase to the lowest rates of pay to $20.20 per hours for permanent, fixed-term and casual employees is $5.676 million per annum, excluding any flow-on impacts. IN-CONFIDENCE 1

2 9 The estimated total cost of a one-off increase to the lowest rates of pay to $20.55 per hours for permanent, fixed-term and casual employees is $7.227 million per annum, excluding any flow-on impacts. 10 The estimated immediate costs are small, and so the working assumption is that departments will be able to manage this within baselines. However, some may have difficulty and may seek additional funding. Further details are provided in the Financial Implications section and at Appendix The $20.20 rate is considered by Living Wage Movement Aotearoa New Zealand (LWMANZ) to be a living wage for /18. On 4 April 2018, LWMANZ announced an increase to the rate of $20.55 per hour, with effect from 1 September 2018 for Living Wage accredited employers. Issues 12 I have identified the following issues that could arise from increasing the lowest pay to an hourly rate of $20.20 or $20.55 in the core Public Service. Process for the pay adjustment 13 The pay adjustment would need to be offered to and accepted by employees, and employees would need reasonable time to consider and respond. Collective agreements may need to be varied depending on their existing provisions on pay. The offer and acceptance process provides an opportunity for employees and unions to seek a greater pay adjustment. Departments will need to engage with unions early to mitigate this risk. Relationship between increased pay and tax and social assistance 14 Whilst low paid workers in the core Public Service will receive an increase in wages or salary, net household income is also affected by other government interventions, such as taxation and abatement for those receiving income support and tax credits. The increase in pay may result in some employees receiving lower levels of social assistance that abate against income, such as Working for Families. 15 Reduced government spending on social assistance may partially mitigate the flow-on costs identified below. Management of cost pressures in the Public Service 16 Feedback from departments indicates that increasing the lowest rates of pay in the core Public Service may compress pay bands and employers will face pressure to maintain internal pay relativities. 17 It will be important to make departments aware that the Government s intent is that this is a correction to address the lowest pay in the Public Service, and that maintaining internal pay relativities would run counter to this intent. I propose instructing the State Services Commissioner to communicate this message to Public Service chief executives. Management of wider cost pressures 18 Wage bargaining outcomes across the core Public Service and the State sector generally follow each other, which may also put wage pressure on State sector employers. 19 Over a period of time, pressure to extend a minimum rate of pay to employees of nongovernment organisations funded by the State ( State-funded employees ) may increase. For example, if all state-funded employees were to receive the proposed rate of $20.20, preliminary estimates from the Ministries of Health and Education indicate combined flowon costs of at leas (this figure does not allow for double-counting 9(2)(j) prejudice to negotiations the 9(2)(j) prejudice to negotiations IN-CONFIDENCE 2

3 impact of other Government policies impacting on low pay such as pay equity). This 9(2)(j) prejudice to negotiations estimate includes a component of in the Government-funded health and disability sector. The social services sector is likely to be an additional area of flow-on impact Flow-on pressures are more likely to occur in the State-employed sector, and are likely to be weaker in the State-funded workforce due to lower levels of unionisation, and noting that differential pay rates for similar jobs across sectors are already common. 21 Either option, $20.20 or $20.55, is unlikely to alter the fundamental dynamics and likelihood of these flow-on pressures. The $20.55 option would increase the cost of any flow-on impact. 22 These risks can also be partially mitigated by emphasising that the proposal is a one-off correction to address the lowest pay in the Public Service, and that this Government has made no commitment to increase other pay rates. Interaction between increased pay and pay equity 23 The State-funded health and disability sector includes the aged care, disability and home support sectors covered by the Care and Support (Pay Equity) Settlement. 24 As noted above, the cost estimates at paragraph 19 do not take into account risks of some double-counting of wage costs, because it is likely that future pay equity settlements could lift some pay rates to the same or higher than the proposed one-off increase to $20.20 or $20.55 per hour. 25 It also does not include any cost arising from maintaining relativities within the Care and Support (Pay Equity) Settlement if the lower steps of the scale were increased. As noted above, however, the adjustment to low pay in the core Public Service is unlikely to flowon to the State-funded sector in the short-term. Wider economy 26 Addressing the lowest rates of pay in the core Public Service may also have flow-on impacts for the private sector, including on employment relationships and bargaining. Interaction between increased pay and the Minimum Wage 27 The Government has raised the Minimum Wage to $16.50 from 1 April 2018, and has also committed to lifting the Minimum Wage to $20.00 by This means that for at least four years, there will effectively be two baseline rates of pay (one in the core Public Service and the Minimum Wage for the remainder of the economy), until the Minimum Wage reaches $20.00 in 2021 or $20.55 thereafter. This may produce some movement within and across the State and State-funded sectors due to changes in the relative attractiveness of positions. Consultation 28 The following departments were consulted on the development of this paper: Ministry of Business, Innovation and Employment, The Treasury, and the Department of Prime Minister and Cabinet (PAG). 29 The following departments were consulted on the operational and flow-on implications of applying a $20.20 hourly rate in the core Public Service: Departments of Corrections, Conservation and Internal Affairs; Ministry for Children Oranga Tamariki; the Ministries of Business, Innovation and Employment, Education, Health, Justice and Social 2 These cost estimates were prepared to inform the Government s decision to raise the adult minimum wage rate to $ Lifting the minimum wage to $20.20 per hour was one of the options presented in the advice to Government, but $20.55 was not, and so a cost estimate for a $20.55 rate in the Health and Education sectors is not available. IN-CONFIDENCE 3

4 Development; Crown Law; Inland Revenue; New Zealand Customs; Statistics New Zealand. The following departments were consulted on the manageability of the potential cost of both options ($20.20 and $20.55) within baselines: Departments of Conservation, Internal Affairs, Prime Minister and Cabinet; the Ministry for Children Oranga Tamariki; the Ministries of Business, Innovation and Employment, Education, Justice and Social Development. These departments were identified as likely to be the most impacted by the potential cost of the proposals. The Treasury comment 30 The Treasury notes that this paper highlights a risk of flow-on fiscal costs of at least, in addition to the policy s estimated immediate cost of either $5.676 million or $7.227 million per year. Additional costs could eventuate as a result of: $20.20 or $20.55 becoming the base pay expectation in the wider state and statefunded sector increases at the lower end of pay scales in the state and state-funded sector, to maintain pay relativities between wages the increased cost of maintaining the pay rates of employees who receive the pay adjustment, and/or the increased cost of maintaining earnings in addition to base pay, such as overtime. 31 The Treasury acknowledges that the materiality of this fiscal risk is difficult to assess precisely, but notes the State Service Commission s view, informed by their consultation with affected departments, that sufficient mitigations exist to ensure the flow-on impacts outlined above will not eventuate. Financial Implications 32 The estimated total cost of a one-off increase to the lowest rates of pay to $20.20 per hours for permanent, fixed-term and casual employees is $5.676 million per annum. 33 The estimated total cost of a one-off increase to the lowest rates of pay to $20.55 per hours for permanent, fixed-term and casual employees is $7.227 million per annum. 34 The calculations for these cost estimates are outlined in the tables below: Table 1: Estimated one-off cost of a minimum pay rate of $20.20 per hour in the core Public Service Affected Total Annualised Total Total Minus Plus cost Total FTEs at 30 June (A) Annual Salary based on salaries at 30 June (B) $20.20 Rate (C) Annual Salary based on $42,016 (A*C) $42,016 minus Total Annual 30 June Salary (A*C) - B impact of increased Minimum Wage of $16.50 on affected FTEs estimate for casual employees at 31 Oct 1,688.7 $66.014M $42,016 $70.952M $4.938M $62,000 $800,665 $5.676M Based on total salaries from unit record data (calculated using [Full Time Equivalent]*[Full Time Equivalent Salary]), State Services Commission, Human Resource Capability data, as at 30 June 9(2)(j) prejudice to negotiations IN-CONFIDENCE 4

5 Table 2: Estimated one-off cost of a minimum pay rate of $20.55 per hour in the core Public Service Affected Total Annualised Total Total Minus Plus cost Total FTEs at 30 June (A) Annual Salary based on salaries at 30 June (B) $20.55 Rate (C) Annual Salary based on $42,744 (A*C) $42,744 minus Total Annual 30 June Salary (A*C) - B impact of increased Minimum Wage of $16.50 on affected FTEs estimate for casual employees at 31 Oct 2,048.0 $81.265M $42,744 $87.538M $6.272M $62,000 $1.017M $7.227M Based on total salaries from unit record data (calculated using [Full Time Equivalent]*[Full Time Equivalent Salary]), State Services Commission, Human Resource Capability data, as at 30 June 35 Analysis of SSC HRC data shows that for permanent and fixed-term employees: a. 1,688.7 FTEs as at 30 June had an FTE salary below $20.20 per hour (or $42,016 per year assuming a 40-hour working week) b. 2,048.0 FTEs as at 30 June had an FTE salary below $20.55 per hour (or $42,744 per year assuming a 40-hour working week). 36 The SSC HRC data is current as at 30 June, and some agencies have since taken steps to address their lowest pay bands through remuneration rounds and collective bargaining, which will not be captured in the estimate. Feedback from agencies suggests that these cost estimates are therefore an overestimate. 37 The SSC HRC survey collects data on permanent and fixed-term employees but not casual employees. Agencies were asked to estimate the annual cost of lifting the pay of casual employees to $20.20 as at 31 October. The resulting cost estimate was $800, The 2018 Living Wage rate of $20.55 had not been announced by LWMANZ at the time agencies were asked to estimate the cost for casual employees, and so the cost estimate in Table 2 of $1.017 million of casual employees receiving the $20.55 rate was extrapolated by applying a 27% increase to $800,665. This is likely to be an overestimate The impact of raising the adult Minimum Wage to $16.50 on 1 April 2018 is estimated to reduce the estimated cost to $4.876 million from $4.938 million, for permanent and fixedterm employees. The cost of lifting pay for casual employees does not include the impact of the rise in the Minimum Wage. 40 The estimate does not include the following potential flow-on impacts: pressure to maintain internal relativities within departments pay systems, despite positioning of the one-off increase as a correction flow-on impacts to the State sector and to State-funded employers, such as nongovernment organisations, however it is expected that wage pressure will be weaker in the State-funded sector due to lower levels of unionisation (see paragraph 19 for preliminary estimates). 41 The estimate does not include the following expected impacts: the cost of earnings in addition to base pay, such as overtime, allowances, and employer contributions to superannuation the shift in cost from decreased government spending on social assistance to increased wages. 3 27% was used because it is the size of the increase between the cost estimates for permanent and full-time employees from $4.938M (for the $20.20 rate) to $6.272M (for the $20.55 rate). This extrapolation assumes that the distribution of pay among casual employees mirrors that of permanent and fixed-term employees, and so $1.017 million is likely to be an overestimate. IN-CONFIDENCE 5

6 42 Departments are expected to meet the cost within baselines in the first instance. The estimated immediate costs of $5.676 or $7.227 million is small, and so the working assumption is that departments will be able to manage this within baselines. Further engagement occurred with eight departments identified as likely to be the most impacted by the potential cost of the proposals (see paragraph 29). All of these departments indicated that they intended to meet the cost within existing baselines. A cost estimate broken down by department is at Appendix 1. Human Rights 43 This policy is consistent with Article 7 of the International Covenant on Economic Social and Cultural Rights recognises the right of everyone to the enjoyment of just and favourable conditions of work, including specific reference to a decent living for themselves and their families. Legislative Implications 44 No legislative implications have been identified in this paper. Regulatory Impact Analysis 45 A regulatory impact analysis is not required. Gender Implications 46 Analysis of SSC HRC data shows that, as at 30 June, 70% of the 1,688.7 FTEs with an FTE salary below the annualised equivalent of $20.20 were women. The lowest paid women in the core Public Service will benefit from this initiative. Disability Perspective 47 Disability is not measured in the SSC HRC data, so it is not possible to see if disabled employees are more likely to be paid below $20.20 or $20.55 per hour. However, a Statistics NZ release notes that for those earning a wage or salary in the June quarter, people with disabilities with have an average hourly income ($26.40) that is lower than for people without a disability ($31.01). Communications 48 I propose that the Government make an announcement prior to the implementation of this policy. To help mitigate flow-on cost pressures, any announcement could emphasise that the initiative is a one-off correction to address the lowest pay in the Public Service. 49 To address stakeholder expectations, any announcement could emphasise that: a. The proposal reflects the Government s desire to support fair pay and employment conditions that supports a decent standard of living for all New Zealanders, and addresses the difference between the highest and lowest paid. b. Future adjustments to low pay rates in the core Public Service will occur through the normal process of employment relations negotiations, including through collective bargaining. c. The proposal is part of a range of steps the Government is taking to set an example as an employer. These steps include new Government Expectations for Employment Relations in the State Sector, which set clear expectations that Public Service employers will work to narrow the gap between the highest and lowest earners in the organisation, and that negotiations for collective agreements must include rates of salary or wages pay payable to employees or transitional arrangements to reach this point. IN-CONFIDENCE 6

7 50 Departments will develop communications strategies for employees and unions, including information on the likely impact on employees from the abatement of social assistance. 51 I intend to proactively release this paper following final decisions by Cabinet on the paper, subject to any considerations under the Official Information Act Recommendations 52 I recommend that the Committee: 52.1 Agree that as a matter of Government policy: i. all employees in the core Public Service whose base pay is less than $20.20 per hour or annual equivalent, will receive an hourly rate of at least $20.20 or annualised equivalent; OR ii. all employees in the core Public Service whose base pay is less than $20.55 per hour or annual equivalent, will receive an hourly rate of at least $20.55 or annualised equivalent Direct (to give effect to the policy at Recommendation 52.1) chief executives of Public Service departments listed in Schedule 1 of the State Sector Act 1988 to make a one-off adjustment in pay to: OR i. $20.20 per hour to all employees, including part-time, fixed-term and casual employees, whose base pay is currently less than $20.20 per hour, with effect by 1 September 2018; ii. $20.55 per hour to all employees, including part-time, fixed-term and casual employees, whose base pay is currently less than $20.55 per hour, with effect by 1 September Agree that the adjustment at Recommendation 52.2 will be a once-only adjustment Agree that subsequent adjustments to the affected pay rates will occur through the normal process of employment negotiations, including collective bargaining Note that the core Public Service is defined as the Departments of the Public Service listed in Schedule 1 of the State Sector Act Note that Living Wage Movement Aotearoa New Zealand announced its 2018 living wage rate of $20.55 in April 2018, with effect from 1 September 2018 for Living Wage accredited employers Note that the costs arising from Recommendation 52.2 are expected to be met within departmental baselines 52.8 Note that increasing the lowest rates of pay in the core Public Service may cause flow-on fiscal pressures through spillover effects into the wider State sector and changes in wage relativities, however this pressure is likely to be weaker in the State-funded sector due to lower levels of unionisation Note that I intend to instruct the State Services Commissioner to write to chief executives to ensure that departments are aware that the Government s intent is that this is a correction to address the lowest pay in the Public Service, and that maintaining internal pay relativities would run counter to this intent. IN-CONFIDENCE 7

8 52.10 Note that the total cost of raising wages and salaries in the core Public Service to $20.20 per hour is estimated to be $5.676 million per annum, and $7.227 million per annum at $20.55 per hour, for permanent and fixed-term and casual employees, excluding flow-on impacts. Authorised for lodgement Hon Chris Hipkins Minster of State Services Date: IN-CONFIDENCE 8

9 Appendix 1: Cost estimates by department Table 1: Estimated cost of raising salaries to the equivalent of $20.20 per hour, by department Department FTEs as at Total Annual Annualised Total Annual Total $42,016 Minus impact of Plus cost Total 30 June Salary based $20.20 Rate Salary based on minus Total increased estimate for (A) on salaries at (C) $42,016 Annual 30 June Minimum Wage casual 30 June (A*C) Salary of $16.50 on employees at (B) (A*C) - B affected FTEs 31 Oct Crown Law Office 17.3 $646,776 $42,016 $726, $79, $1,000 DOC 89.0 $3,534,386 $42,016 $3,740, $205, $75,264 Department of Corrections 33.7 $1,288,731 $42,016 $1,413, $125, $666 Department of Internal Affairs 68.3 $2,717,407 $42,016 $2,870, $152, $4,250 Inland Revenue Department $10,563,387 $42,016 $11,175, $612, $6,863 Oranga Tamariki $4,649,321 $42,016 $5,141, $492, $489,614 MBIE $9,129,450 $42,016 $9,893, $763, $122,795 Ministry of Education $4,943,102 $42,016 $5,557, $613, $12,373 Ministry of Health 40.6 $1,653,674 $42,016 $1,706, $53, Ministry of Justice $7,809,105 $42,016 $8,409, $600, $2,000 Ministry of Social Development $12,568,841 $42,016 $13,540, $972, $1,368 NZ Customs Service 92.1 $3,723,511 $42,016 $3,867, $144, $1,296 Statistics New Zealand 43.3 $1,745,276 $42,016 $1,818, $73, $40,339 Other Public Service 25.9 $1,040,967 $42,016 $1,089, $48, $42,837 Total Public Service 1,688.7 $66,013,934 $42,016 $70,951, $4,937, $62, $800,665 $5.676M Source: State Services Commission, Human Resource Capability data, as at 30 June Table 2: Estimated cost of raising salaries to the equivalent of $20.55 per hour, by department Department FTEs at Total Annual Annualised Total Annual Total $42,744 Minus impact Plus cost TOTAL 30 June Salary based $20.55 Rate Salary based on minus Total of increased estimate on salaries at (C) $42,744 Annual 30 June Min Wage of for casual (A) 30 June (A*C) Salary $16.50 on employees (B) (A*C) - B affected FTEs at 31 Oct Crown Law Office 21.3 $816,776 $42,744 $909, $92, DOC $4,462,458 $42,744 $4,739, $276, Department of Corrections 37.2 $1,437,393 $42,744 $1,587, $150, Department of Internal Affairs 91.3 $3,696,449 $42,744 $3,902, $206, Inland Revenue Department $12,185,044 $42,744 $12,999, $814, Oranga Tamariki $7,830,200 $42,744 $8,433, $603, MBIE $9,910,980 $42,744 $10,856, $945, Ministry of Education $5,128,547 $42,744 $5,840, $711, Ministry of Health 48.6 $1,992,869 $42,744 $2,078, $85, Ministry of Justice $8,719,936 $42,744 $9,474, $754, Ministry of Social Development $17,982,230 $42,744 $19,222, $1,240, NZ Customs Service 93.1 $3,765,986 $42,744 $3,977, $211, Statistics New Zealand 50.3 $2,042,223 $42,744 $2,149, $107, Other Public Service 31.9 $1,294,390 $42,744 $1,364, $70, Total Public Service 2,048.0 $81,265,480 $42,744 $87,537, $6,272, $62,000 $1.017M $7.227M Source: State Services Commission, Human Resource Capability data, as at 30 June Notes: Other Public Service includes departments with a very small number of FTEs receiving less than $20.20 or $20.55 per hour. The data has been aggregated into this category to protect the privacy of the employees. Some departments listed above have fewer or no employees paid less than $20.20 or $20.55 per hour, since the data was published as at 30 June, so these cost estimates are likely to be an overestimate. Table 1: the data on casual employees was supplied separately by departments, which were asked to estimate the annual cost of lifting the pay of casual employees to $20.20 as at 31 October. Table 2: the estimated cost of $1.017 million of casual employees receiving the $20.55 rate was extrapolated by applying a 27% increase to $800,665, however, this is likely to be an overestimate (see paragraph 38 above). IN-CONFIDENCE 9