Living wage will cost jobs, kill businesses

A “living wage” is one of many expensive policies based on emotion rather than research which Labour’s aspiring leaders are promising to implement.

Prime Minister John Key said the policy would cost about $2.6 billion and predicts 26,000 jobs would be lost.

The Motel Association said the introduction of a living wage will cost jobs in the motel sector, with some owner-operators indicating they do not have the capacity to pay more in wages, and would instead lay off staff.

. . . While it’s all well and good for politicians to talk about raising wages, but thought needs to be given to the businesses that end-up footing the bill, MANZ Chief Executive Michael Baines says.

“It’s a simple equation, raising the minimum wage to the so-called ‘living wage’ level of $18.40 will cost jobs. That is a fact,” Mr Baines says.

“Motels are being hit on one side with sharply increasing costs, often in the form of rating and compliance costs that are forever being cranked higher by greedy local government. On the other side we are facing competition from the likes of B&Bs and holiday homes which are untaxed, unregulated and can dodge these compliance costs.”

The majority of motels are owner-operated, so when costs increase but revenue does not, usually the only option is for the owner to lay off staff and do more of the work themselves. This is what will happen under the living-wage scenario.

“If politicians wanted small business owners such as in the motel sector to have the capacity to raise wages then they should cut the red tape, reduce compliance costs and create an even playing field across accommodation providers,” Mr Baines says.

 

“If you create an environment where quality businesses can flourish, especially small businesses, then the rewards will flow for everyone.”

Max Whitehead, CEO of the Small Business Voice said the policy would cause economic disaster for working New Zealanders:

Mr. Whitehead says that 97% of New Zealand enterprises employ less than 20 people — mum and dad businesses struggling to keep afloat.

“These are Kiwis who mortgage their homes to have a go at running a small business. They give people in the dole queue a job and hope for the future. If their businesses go well, then you’ll find that employees’ wages, along with job security, will increase too.”

Mr. Whitehead says a 34% wage increase will hit these business’ hard. David Cunliffe and Grant Robertson’s over-generous declaration with “other people’s money” will most certainly bring many of the small businesses down and, ironically, cost jobs.”

The costs will be put back to the consumer; inflation will go up; the Reserve Bank will respond by raising interest rates and, in turn, mortgage rates will go up.

“ The very people this bribe is designed to please will be the ones who suffer. Is this what Labour wants?

Eric Crampton at Offsetting Behaviour runs an economists eye over the proposal:

. . . Were the government promising an $18.40 minimum wage across the board, things would be rather worse. The median hourly wage in the 2012 NZ Income Survey was $20.86. A minimum wage that’s 88% of the median wage would be rather, well, breathtaking. Recall the median wage is the one where half of all wage earners earn more and half earn less. Workers vary in ability; a minimum wage at 88% of the median would disemploy anyone who cannot produce value equal to just a bit less than the median worker. This would obviously be very bad. Recall that unemployment weighs far more heavily in disutility than do wages. . .

The proposal here isn’t for an $18.40 minimum wage but rather for a living wage mandate for government workers. The effects then are more minor. . .

The main effect will be an increase in the cost of providing some government services. At the margin, this should mean that we have a few fewer things done by government, albeit within the context of an expansion in the size of government under a future Labour government. There would also then need to be an increase in taxes to fund it, or reduced spending in other areas to compensate, or higher deficits. I suspect Labour would bridge the gap via tax.
Bereft of ideas which would foster economic growth and so increase the tax take, one of few tools it has to fund its wild spending is to increase tax rates.
There will be some transitional unemployment as marginal jobs undertaken by government get shifted away from the government sector. If some of these workers were earning substantial rents in the government sector and are not employable above the legal minimum wage in the private sector, there could be some increased longer-term unemployment from that. . .
Another important effect: contractors will enjoy less of a cost advantage relative to government departments; we could easily read the policy as a way of trying to knock out contracted services to benefit public sector unions.. .
A policy that benefits unions but costs jobs – where’s the economic and moral argument for that?
If you want to increase the wages of the working poor, you hardly should be starting with government workers, who earn more on average than those in the private sector and who typically also enjoy greater job security and flexibility. And if you want to run transfers to the working poor, generalised wage subsidies are the least distortionary way of doing it. Labour’s proposed mechanism would be likely to reduce the efficiency of government services by pushing away from contracting out, and to skew the optimal balance between government services and other goods and services by increasing public sector costs. . .

That would increase the burden of government and  make it more difficult for businesses outside government to compete for staff.

Improving incomes is a laudable aim but imposing a “living wage” is not the way to do it.

Sustainable wage increases must be based on productivity and profitability, not government dictate.

16 Responses to Living wage will cost jobs, kill businesses

  1. TraceyS says:

    I wonder about contractors who do council work only some of the time. Will they have to have a two tier wage system? So when working for the Council pay rates go up and then back down again when working for the private sector? What message does that send except that public money is better than private? A message already being communicated loud and clear by some councils.

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  2. Dave Kennedy says:

    Interestingly raising the minimum wage incrementally will probably not cause the end of the world. Most of those who are on the minimum wage are employed by large profitable businesses (Rymans, Supermarkets, Kidicorp) and many small businesses pay well above the minimum.

    One of the problems when you have great disparity of incomes is that when money is captured by an elite few then the domestic economy shrinks (A wealthy family can only eat a Family’s worth of groceries). When the minimum wage is gradually and steadily increased then the disposable income of ordinary families increases and they are more likely to spend it on consumables. This means more money in the domestic economy, more money in the pockets of small businesses and therefore more money to afford the next increase of the minimum wage.

    This has worked before:
    http://localbodies-bsprout.blogspot.com/2012/06/lessons-in-history.html
    and there is no reason why it wouldn’t work again.

    If we keep wages and salaries low the domestic economy shrinks as family’s disposable incomes get eaten up by inflation and rising power charges. We should not be using public money to subsidise wages and rent, individuals and families should be able to buy the necessities of life on a minimum income. It is crazy to let wages drop so that Government revenue also drops and yet the government has to spend more (on a reduced income) to support struggling families. Our taxes should not be subsidising businesses when most can actually survive without support (see NBR Rich list). It is just bad economics to have the minimum wage sitting below a living wage and especially bad economics to have 25-30% of the workforce earning incomes below the living wage.

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  3. homepaddock says:

    No-one is suggesting wages should stay low or drop. The issue is that foisting the so called living-wage on all businesses will lead to more unemployment and business failure.

    The minimum wage is a floor not a ceiling.

    Only a very few businesses have owners who feature in the rich list. Most in NZ are small to medium, owner-operated businesses. Few if any could afford to increase costs without first increasing their profits.

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  4. Dave Kennedy says:

    Ele, the wage floor should be a livable one. Someone who works hard at a meaningful job for 40 hours a week should be able to survive independent of the state on their income.

    Those on the rich list may own a few businesses but those businesses are huge and employ much of the workforce. SMEs employ around 30% of the workforce and I understand many pay their workers well above the minimum.

    I don’t understand why there is so much scare mongering about raising the minimum wage when the logic for doing it is so obvious and few advocating it think it should happen over night.

    Every time the current Government has raised the minimum wage by 30-50 cents an hour there has been no problems. Raising it by $1 an hour every six months for several years will allow economic adjustments and may be achievable.

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  5. Andrei says:

    You don’t grasp the fundamental point Dave Kennedy – if you raise wages then the price of everything has to rise to pay those wages.

    And the price also rises for those who have had their wages increased so in the fullness of time the new wage they receive cannot buy anything more than the old wage they received before could – this is called “running the red queens race” the faster you run the faster you get nowhere.

    The way to improve peoples standard of living is not to wave a magic wand with a stroke of the legislative pen but to make people more productive.

    So for example when engineers figured out how to use steam to drive looms then one person could produce the same amount of cloth that had before taken six or more people, the cloth could be sold more cheaply while the person who produced it could be paid more handsomely for his/her labour.

    The funny thing is of course there were people back then who vehemently opposed weaving by steam and smashed the looms even though they made everybody wealthier for working less hours and the same mindset exists today – it is well entrenched in the Green Party and also ubiquitous among Labour supporters as well as washed up celebrities and movie stars

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  6. Dave Kennedy says:

    Andrei, you have a very narrow view of how the economy works. If wages are raised then it actually doesn’t follow that a direct adjustment needs to made in the cost of goods and services that are produced, it is far more complex. In the case of the larger employers I have mentioned many already have strong profits and the cost of wage increases can easily be absorbed. It doesn’t always follow that all positions will need an increase either, especially when those in management positions have often had increases well above the workers below them over time (disparities have been growing for a while). When workers have a greater disposable income they will spend more and most business will experience increased profits and not need to increase prices to cover the increased wage bill.

    Some businesses, like 2nd hand clothing shops, may see a downturn in custom but the overall effect of a raised minimum wage will be positive.

    The Government will also have more money as they will earn more in tax revenue and at the same time have to spend less on WFF and rent support. There will be more money to invest in health and education and less need to sell off assets.

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  7. Andrei says:

    Andrei, you have a very narrow view of how the economy works.

    No I don’t Dave Kennedy – There is no such thing as a money tree.

    If it costs the management of a supermarket more money to stack the goods on the shelves then they have to charge more money for those goods when they sell them – there is no way around, under or over this sad fact of life.

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  8. Dave Kennedy says:

    Then how come there wasn’t an increase in costs for goods and services last time the minimum wage increased? It also doesn’t happen every time fuel and power costs go up. In the case of wages they actually put more money into the economy, which actually stimulates activity.

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  9. TraceyS says:

    “It also doesn’t happen every time fuel and power costs go up.” But it does happen eventually Dave. Face it, Andrei is teling it like it really is.

    Do you know why it doesn’t happen straight away Dave? It’s because none of us like putting the prices we charge for goods and services up. Why not? Because it is widely appreciated that this will reduce the demand for those goods and services.

    Put the price of wages up articificially and there will be a reduced demand for labour. Sure, some businesses will buck the trend. But that will be because they find a way of innovating alongside the increased wage costs. Not all of them will however.

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  10. Andrei says:

    Then how come there wasn’t an increase in costs for goods and services last time the minimum wage increased?

    There was, it wasn’t instant, there is a lag in these things. The inflation doesn’t match the extra costs because businesses face with extra costs find ways of trimming costs elsewhere – for example in a coffee bar favoured by my wife they used to put an after dinner mint on the saucer of their fancy coffees but that vanished now and the coffee costs more. The makers of after dinner mints have seen a slight downturn in business as well of course – whether this is trivial or not I couldn’t say, maybe they have had to lay off a mint maker as coffee bars abandon mints with coffees, who knows but that is illustrative of how this initiative leads to declines in economic activity

    The post shop where both my girls were employed at different times, one only for three months or so but little N for the four years of her study and they had at that time three girls employed (one full time, a manageress and two part time). Now the Owners wife is there by all herself for the best part of the opening hours and there is one part timer whereas in N’s time there the owners wife only came in to help out when someone was sick or they were particularly busy

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  11. Dave Kennedy says:

    Then why is it that countries that have livable wages and less disparity survive? You are refusing to acknowledge that if sales increase due to greater economic activity, which will occur, it will help to offset the cost of wages. I am not discounting entirely what you are saying but there are many other factors to consider, like economies of scale. Businesses can afford to pay more and employ more staff if their turnover increases. You are assuming that business incomes will remain static, which they won’t.

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  12. homepaddock says:

    “Businesses can afford to pay more and employ more staff if their turnover increases.”

    What you can afford depends on profit not turnover.

    You can have a very high turnover and still make a loss or very little profit.

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  13. Andrei says:

    New Zealand’s got a “livable wage” Dave Kennedy – nobody dies in the streets of starvation here, the vast majority of citizens have a roofd over their heads and the very few that don’t are usually schizophrenics and/or alcoholics ie are ill – that this sorry state exists is a failure of our society I’ll grant you, though these people are hard to deal with and it is a fairly intractable problem).

    The vast majority own cars (even the poorest), cell phones that connect to the internet and you’ld be hard pressed to find a home without a TV or three.

    Give us a break about “livable wage” even the poorest live well compared to the rest of the world and their ancestors

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  14. TraceyS says:

    Dave, you are talking about growth. Isn’t that a dirty word in the Green Party? (http://www.odt.co.nz/news/dunedin/270494/change-way-life-coming).

    You know Dave, I recently spent some time with a knowledgeable person who voiced that Green social and environmental policies were completely at odds. That’s very clear now. Is it clear in your mind?

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  15. TraceyS says:

    But WFF has distorted realities Andrei. I think it would be fair to say that pre-WFF we did have mostly liveable wages. Now we have the wages of 75% of families topped up by the government. If only the Labour Party realised that WFF would have the effect of creating a new normal, a new liveable-wage level. If only they had your common sense Andrei. No good them moaning about it down the track. They should fix it properly. Not add another layer of nonsense. But that wouldn’t win the election would it?

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  16. Andrei says:

    WFF is a con they tax the working man and then pretend that Government Largess is great as they give him some of the money they took from him in the first place back.

    In more honest times they allowed the working man to claim tax rebates for his dependents, including his wife and even aged parents in some cases. A much simpler system and more effective besides.

    All tax is theft anyway – we should contribute to things like the police force and army because we all benefit from having those things to protect our interests from the forces of chaos but nobody can explain to me why we pay the people to tell us we a are bad because we smoke, drink and eat too much fatty food, let alone pay for those who corrupt children with their perverse ideas about human sexuality or those who dismember babies in our hospitals

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