Will Labour’s Increase in the Minimum Wage lift Incomes?

The new government has taken no time extolling its desire for a higher minimum wage. $20 by 2020 is the number they’ve chosen, probably more for marketing purposes than anything evidence based.

In a world of casualised and contract work the minimum wage means less than it used to. For those who it does affect however, a minimum wage rise is not always a good thing. As we have previously discussed, small regular increases in the minimum wage can encourage employers to lift productivity, which is a good thing. But push too far or too fast, and minimum wage rises can cost jobs.

If the minimum wage rises faster than economic conditions allow there will be a market reaction – most probably accelerated automation and/or greater contracting in those areas where the minimum wage still is relevant. It would be naïve to think that a politician can wave a magic wand and determine wage rates without any consequence. Markets always react.

The impact is likely to be greatest for young people who are struggling to get into the job market and once they get some experience wouldn’t stay on the minimum wage for long. Meanwhile those hard working parents who really need the extra money will only get about half of it anyway once Working for Families reductions are taken into account.

Internationally speaking New Zealand’s minimum wage is already very high (it is the highest in the OECD relative to the average wage). This implies that it would be reckless to extrapolate the experience of such countries who have found that rises in their minimum wage have not had significant detrimental effects on employment. Nobody is suggesting we can ramp up the minimum wage to what we like and have no employment effect.

This doesn’t for one moment take away from the fact that in New Zealand many are struggling. But it does suggest that the problem there isn’t wage rates, it is the cost of living. Our accommodation costs in particular are far above those in similar countries.

So what does Labour think it’s doing? Does it believe this is a way to boost the incomes of the lower paid in a world where globalisation and technological change is wiping out some jobs? Or does it believe that employers are exerting monopoly power over these workers and are boosting their profit margins through paying peanuts because they can?

Some businesses are certainly ripping Kiwis off, thanks to our out-dated competition law and their inordinate market power. However, as mentioned above it isn’t workers that are suffering compared with overseas, it is consumers. Logically this means the Government should take on big businesses to make life cheaper, rather than penalise all businesses by making labour more expensive.

We don’t know what Labour thinks about all this because they haven’t told us. More likely they have no idea themselves what the reality is but it sure serves the appeal to their traditional support to be seen to be “doing something” to improve the workers’ lot. In terms of having any overall positive impact on household incomes, Labour’s move on minimum wages is more than likely nonsense, but that can be irrelevant in the world of politics and headline grabbing.

What would TOP have done?

Firstly we would attend to the problems at the root cause. Many of the problems faced by our poorest members of society are because we have expensive housing and poor productivity. Closing the income tax loopholes (including those on owner occupied housing) will sort both those problems out. Wage incomes will be higher in the hand due to the tax rate cuts of our reform, and they will grow faster than they do now as the country invests in businesses rather than houses. We would also reform competition law to stop big businesses ripping consumers off.

Secondly our policy recognises 21^st century realities. We acknowledge that globally inequality has shrunk massively since the onset of globalisation and economic liberalisation in hitherto fortress economies like China. We also can see the huge role that artificial intelligence and automation will be playing in destroying employment over coming years.

Our UBI policy is designed to address this. So far the response of the New Zealand government has been Working for Families. While that’s an explicit acknowledgement that the market value of many jobs is below the cost of living now in New Zealand, it does not address the growing issue. To deal to this reality we need a massive rise in productivity, which our tax reform is all about, and to ensure that labour is as mobile as we can make it in terms of responding to job opportunities. That is what the UBI is all about – removing the poverty traps that contaminate targeted welfare – and ensure people can respond to jobs at the market wage, because they already have an income base that enables them to afford to take on work. 

We’re sure Labour’s underlying aims are commendable – to lift the incomes of those whose value in the marketplace is no longer sufficient for them to live on. We certainly endorse that objective. But there are two strands to doing that effectively and enduringly – a UBI instead of Working for Families, and the boost to productivity and lowering of tax on wages that closing the loophole in the income tax regime would finance. Dictating large leaps in the minimum wage is so bereft of any evidence of success, that one is left seeing Labour’s contribution in this area as rhetoric and nostalgia for old 1970’s-style wage-setting.

This is supposed to be a progressive Government. They need to be applying policies that are attuned to this century’s global reality, not last’s. Evidence-based policy please.