Higher min wage = higher prices + fewer jobs

The minimum wage will go up to $17.70 next April, the highest relative to the average wage in any country in the developed world.

On the surface it’s good news for workers.

Below the surface there are risks to jobs and the very real prospect of increased taxes and prices eroding any benefit of higher wages.

Wellington Chamber of Commerce chief executive John Milford points out, it needs to be at least matched by an increase in productivity.

“Research shows that any minimum wage increase has a cascading effect on workers paid above the minimum wage too. This particularly hits SMEs who are unable to pass on or manage their costs easily.

“We urge the Government to accelerate productivity-enhancing policies such as investing in strategically important transport networks, freeing up labour supplies to desperate primary industry employers, and raising the quality of tertiary education graduates.

“MBIE’s minimum wage review estimates the employment restraint impact from today’s announcement at 8,000. But Kiwis have already started to see an impact from the significant minimum wage hikes foreshadowed.

“The past four quarters added 6,000 new jobs per month on average, a marked slowdown from the preceding two years when over 10,000 new jobs were added per month on average, despite the currently hot labour market. . . 

Milford also points out that without tax reform much of any increase will be clawed back in tax.

The Employers and Manufacturers Association also points to problems if wage increases aren’t matched by increased productivity.

 The EMA’s Chief Executive Kim Campbell says, “When you take into account the current rate of $16.50 (up from $15.75 per hour) that came in on April 1 this year, you are looking at a 27 per cent increase in the minimum wage over a four-year period.

“That change was 4.8 per cent (75 cents), to be followed a year later by another 7.3 per cent ($1.20) increase on April 1, 2019. New Zealand already has the highest minimum wage in the OECD relative to the average wage.

“These are significant costs for business to swallow, particularly for those in the small-to-medium [SME] sector or for those large employers with significant numbers of young and entry level staff on the minimum wage.  

And who pays?

Mr Campbell said it was uncertain what impact such a large increase might have on the hiring intentions of employers but he expected such a large wage increase to be passed on in charges to customers and consumers.

“We do know that large increases in minimum wage structures in Canada and the United States led to large increases in unemployment numbers, but we are in an already very tight labour market in New Zealand where employers simply cannot find the staff they need.

“I think we are more likely to see increases in costs to consumers as a result, as many employers are already working to very skinny margins.

“Minimum wage increases also tend to flow through an organisation as other, higher-paid employees want to retain their pay relativity levels and seek adjustments to their own wage rates.

“That puts additional payroll pressure on employers who may also opt out of offering additional benefits to new employees to maintain differentials with existing staff.”

Mr Campbell says the main concern is that while additional costs and conditions were being heaped on employers through multiple changes in employment legislation, there was no focus on measures to boost productivity.

“There is no research anywhere in the world that shows simply boosting wages (and therefore costs) leads to an increase in productivity,” Mr Campbell says.

It doesn’t increase productivity and it can and does have other perverse outcomes.

When wages for resthome carers was increased the difference between their wages and that of registered nurses led to some nurses opting to work as carers rather than nurses.

The added responsibility and stress that came with the nurse’s role simply wasn’t enough to justify the smaller difference in pay.

Arbitary increases in wages also leads to employers seeking ways to do more with fewer staff.

A friend who is in horticulture increases mechanisation every time changes to wages and conditions make it more expensive and difficult to employ people.

Nationals employment spokesman Scott Simpson says:

“You simply can’t just legislate your way to prosperity – if you could you’d simply make the minimum wage $50. But artificially inflating wages is no substitute for an economic plan. . .”

The plan that’s needed for increased productivity to sustain higher wages must include tax reform – at the very least a change in tax brackets to reflect inflation.

It must also include other policies which encourage businesses to take the risks and make the investments necessary the for growth which safeguards existing jobs and provides opportunities for new ones.

 

One Response to Higher min wage = higher prices + fewer jobs

  1. adamsmith1922 says:

    Reblogged this on The Inquiring Mind.

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