OPINION:The campaign for a living wage is now an international movement. Local authorities in places as diverse as London, New York and San Francisco are making serious moves to pay their workers a living wage. Even some conservative politicians, such as Britain's Prime Minister David Cameron, like to promote their policies as a version of it.

So Wellington City Council is not doing anything extreme or absurd in deciding to require its security service contractors to pay a living wage. The cost is not excessive or reckless. It would increase a worker's hourly rate by rather less than $4 an hour to $18.55. The council estimates the cost over seven years of the security contract would be about $1.7m. This is a very small annual increase given the council's large budget.

But calculating the cost of a living wage is not a straightforward business. The important notion here is what labour economists call the efficiency wage. This says that the wage bill doesn't go up much, or possibly even at all, when workers are given a living wage pay rise. That's because the higher wages lead to a reduced turnover of staff because they are happier in their work. And happier workers can also be more productive.

Minimum-wage workers are in dull jobs and on poor wages, so life is a struggle. Higher wages change this, and the workers become more loyal. This seems psychologically plausible and it is an economically respectable argument. What's more, Wellington City Council's finances are in good shape, as its recent long-term plan shows. Wellington doesn't have Auckland's expensive transport problem or Christchurch's enormous earthquake rebuild issue. So even a modest rise in the wage bill won't cause a crisis.

These arguments swayed most councillors in the debate this week. Some were possibly unnerved by CEO Kevin Lavery's claim that the decision was open to legal challenge. Under the Local Government Act, councils can't pay more than they need to for services without any corresponding benefit. But it is by no means certain that the council would lose such a challenge. If the efficiency wage argument is right, the council could point to the benefits of lower staff turnover and increased productivity.

The main drive for living wages is a mounting concern about economic inequality and its social and economic costs. Local councils have taken up the cause because many think central governments aren't doing enough about the problem. This argument is plausible in New Zealand, where the Key Government has never shown much concern about inequality.

Critics point out that living wage pay increases are only a patchy response to poverty. The main problem of poverty is families with children – and some low-paid workers don't have children. But the city council doesn't have many levers to pull. It can pull this one, and give its workers and contractors a fairer wage without doing anything economically and fiscally silly.

The wider problem of poverty and inequality, of course, remains where it always has – with the Government.