Friday, June 10, 2011

Roger Kerr: Minimum Wage Claims Make Minimum Sense

The Labour Party is promising to increase the statutory minimum wage to $15/hour (from its present level of $13/hour, an increase of over 15%) if it forms the next government. The announcement gave rise to the usual range of claims and counter-claims. Prime Minister John Key said that “if anyone thinks we can just magically increase the minimum wage with no implications for the labour market or costs to employers, they don’t understand basic economics.”

Labour leader Phil Goff argued that unemployment went down, not up, when the last Labour-led government hiked minimum wages, and that the increased spending power of workers would grow the economy. 

Some simple tests help us to evaluate these claims.
If it’s a good idea to raise the minimum wage to $15/hour, wouldn’t raising it to $20 or $30 an hour be even better? Those who maintain an increase has no effect usually baulk at this proposition.

Alternatively, if the minimum wage is a good idea because it raises some workers’ incomes, shouldn’t we mandate increases in other incomes as well? Contractors, for example? And what about the self-employed, some of whom don’t make minimum wages?

Looking at things the other way round, why should the government intervene if a firm and a worker are willing to agree to a wage below the minimum? Should we make voluntary work and unpaid internships illegal?

And if raising the minimum wage is justified on grounds of fairness to workers, where does fairness to employers come in? A minimum wage increase may put an employer out of business. Is that fair?

Such questions are seldom confronted in the minimum wage debate.

Employees and employers are not the only parties with interests at stake. Consumers also have an interest because minimum wage increases will push up the prices of things they buy. Taxpayers will face higher taxes with state sector wage increases. Some of the unemployed will miss out on jobs that firms are unable to offer at the higher rate.

Yet the voices of consumers, taxpayers and the unemployed are seldom heard in the debate. Unions represent the interests of their employed members, not the unemployed.
Some claims make no economic sense.

Boosting the spending power of workers on minimum wages involves a transfer from the incomes of employers. It does nothing to increase production. Indeed it reduces economic growth due to job losses and other effects.

It is true that in a buoyant labour market total employment may increase when minimum wages go up. But the economic effect must be measured on the basis of ‘other things being equal’: how much more would employment have increased were it not for minimum wage effects?

Tapu Misa in the Herald argued that the economics of minimum wages was inconclusive, citing research that did not find harmful employment effects. There are often contradictory findings in any science – think climate change for example. But a big majority of economists agree higher minimum wages reduce employment among young and low-skilled workers. The intuition is simple: if you raise the price of anything, less is usually demanded.

Moreover, the effects are not confined to employment. Firms faced with higher minimum wages may reduce training, leave and other working conditions. The effects of minimum wages are sometimes hard to pick up.

Of course the harm associated with the minimum wage depends on where it is set. The problems arise when it is set above market-determined wages. Employers in competitive markets cannot pay workers more than their productivity warrants. (The idea that raising minimum wages will help close the wage gap with Australia is absurd).

The 2025 Taskforce noted that in 2008, New Zealand had the second highest minimum wage in the OECD relative to the median wage. At 59% of the median wage, it is far above the OECD average of 46%.

The Taskforce also noted the serious effect on youth unemployment of abolishing the separate youth minimum wage in 2008. For young people, getting a foot on the bottom rung of the income ladder is vital: they don’t usually stay there for long. And they are far better off on a starting wage of, say, $10/hour than on an unemployment benefit (effectively about $4.70/hour). Minimum wages are a poor tool for alleviating poverty.

Those promoting higher minimum wages are usually well-intentioned (although history records many examples of unions promoting them to exclude competition from ethnic and unskilled groups). But good intentions are not enough when the consequences are malign.

It has been estimated that the abolition of youth rates may have cost over 9000 jobs and that an increase in the minimum wage to $15/hour could cost a further 6000 jobs. Particularly at a time when the economy is struggling to grow and unemployment is high, such moves make minimum sense.

Roger Kerr is the executive director of the New Zealand Business Roundtable. 


Anonymous said...
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The arguments put forward here are compelling enough, but when looking at it from the point of view of a person taking home a weekly net amount of $429.00, is it that surprising why pressure is being placed on employers to pay more?
I was always of the opinion that if a low wage economy was helping exporters to gain more profits, then a trade off should result, but at the moment low wage earners are paying high world prices for staple commodities while receiving one of the lowest wages in th OECD!
That doesn't seem fair! Surely some sort of subsidy should be offered rather than extra wages?
As the general standard of living continues to erode for low and middle income workers, we will fail to attract skilled workers to New Zealand while Australia will continue to bleed our existing skilled workforce!

Anonymous said...
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Its tough doing business in New Zealand because we are such a small market place. We have a small residential construction company, and employ and train apprentices, usually have two or three at any one time. I am the female partner in the business, I do all the pricing,and administrative work unpaid!! because we are competing in a tight market. During the last twelve months our personal drawings were $500 per week, this enabled us to keep our men on board, we are financially astute and run a tight ship while others around us hit the wall. If the minimum wage moves up the reality is that so do prices. Talking subsidy, I have to state that my quip to our accountant this year was "If we are not paying tax imagine being in Bill English's shoes" so where does one suggest the subsidies come from??? Perhaps we could sell back that overpriced Kiwi Rail Cullen/Clark (Kiwi Fail) lumbered on the taxpayer to pay for subsidies.

Anonymous said...
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Get a grip. Most Kiwis still in NZ are pretty useless really.

if you want NZD20 minimum wage - get on a plane to Aussie where you'll actually have to work and you won't be eligible for any benefits whatsoever

People still left in NZ don't have the guts or skills to move. No surprise then that they're not worth much.

Anonymous said...
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We do have a grip, perhaps our values differ. I am Australian and visit my family at Port Macquarie at least once a year. Our construction company has worked its way to the high end of the market through hard work and a reputation of uncompromised quality, this is supported by a succession of apprentices achieving top honours in the regional apprentice of the year competition. Don't get me wrong we have a very nice lifestyle, however the downturn has hit our industry, so we feel fortunate that we are in a position to cut our cloth to fit; keep our men on and retain the skill base we have built. Taking the tone of your mail, I would suggest that you will be a good fit in the land of increasing obesity and Julia Gillard.