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.