Caution on minimum wage

Labour is fortunate the first of its large increases in the minimum wage has come at a time when jobs are relatively plentiful. This has meant any job losses because of the increases are being more than made up for by new positions in an economy that has been growing.

An enduring debate in economics is about the effect on employment of minimum wage rises. Some employers, already with minimal profits, will be unable to pass on the extra costs and will be forced to employ fewer staff or go out of business. Others will take on fewer staff than they might have. There is also more impetus towards using machines (automation) rather than people.

On the other hand, higher minimum wages can lead to more money, and therefore more jobs, washing around the economy.

The issue is that, in the long run, New Zealand will only become richer by making and selling more products or services and by improving productivity. Just as printing more money debases a currency, so raising minimum wages does not add wealth to New Zealand. In fact it potentially degrades it.

As well as making this country more expensive for everyone including those on the minimum wage, New Zealand has to be careful it does not make itself too costly and less competitive. This country has just posted its widest annual current account deficit since 2009, $10.5billion or 3.5% of GDP. Higher costs make exports less competitive and imports more so, undermining both jobs and New Zealand's ability to pay its way internationally. Offshore debt increases and more of New Zealand is bought up.

The MBIE itself, in reviewing the rise to $17.70, notes increased inflation pressure and higher employment costs. It estimates 8000 fewer people will be in jobs because of the increase. But it also observes this is in a time when about 56,000 new jobs will have been created.

What higher minimum wages are about, therefore, is the distribution of wealth. The state is mandating that employers and employees can only negotiate wages above a certain level, at present $16.50 an hour and due to go up $1.20 to $17.70 an hour from April 1 next year. It then rises in two steps to $20 in 2021. The likes of accommodation supplements and family support are for the same redistribution purposes. They can better target family and child poverty than blanket wage increases that will include, for example, single young people living in wealthy households.

Labour signalled the increases and so there are no surprises. National, too, steadily increased the minimum wage during its nine years in power. In 2008 it was only $12, and it rose in small amounts to $14.75 in April last year, a 23% increase.

There are restricting starting out and training rates at 80% of the adult rate, but no youth rates as in Australia or many other parts of the world. In principle, this seems fair. In practice, though, at the same time as alcohol is being made less available, as cigarette taxes are hiked to save lives and as fast cars kill young people, remuneration to young people increases substantially.

This has parallels to the unfortunate lowering of the drinking age to 18. It seemed proper to do so, but led to further harmful consequences.

The increased costs fall directly on businesses and not the Government. While its long-term economic position might be weakened, it receives a little more tax and pays a little less family support after rises in the minimum wage.

When the economy turns - growth has already slowed - and jobs become scarcer, it could well be that the $20 minimum wage (levels at present are said to be the highest in the OECD compared to average wages) contributes to higher unemployment, especially among the young. One just has to look to Europe and youth unemployment to realise how essential long-term competitiveness remains.

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