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Does raising the minimum wage really hurt employment?

Written By: - Date published: 10:47 am, February 3rd, 2009 - 23 comments
Categories: national/act government, wages, workers' rights - Tags:

National’s excuse for illegally* failing to complete the annual review of the minimum wage is that it wants to ensure any increase doesn’t cost jobs.

So, it seems pertanent to ask, does raising the minimum wage result in job losses?

Every year, the Department of Labour, presents the Minister with a regulatory impact statement with a set of options for the minimum wage, including a prefered option. Here’s what the last one says about the employment consequences of the different options:

No change: No loss of jobs
Match inflation: No loss of jobs.
30 cent per hour increase above inflation: 300-1400 jobs lost, 0.015%-0.065% of the workforce. Small as those numbers are, they’re also just theortical. In practice, it’s impossible to separate any job loss from such an increase from other varibles. We can’t actually prove that any jobs are lost from a marginal increase.

Yeah, if you were going to increase the minimum wage to 30 bucks an hour it would cost a lot of jobs but no-one is talking to kind of increase. The DoL reckons even a large increase of $3 an hour to $15, as proposed by the Greens and Labour’s Trevor Mallard, would cost as few as 2,500 jobs.

Put that in context, the rise to $12 directly increased the incomes of 120,000 people and many more got increases to maintain their jobs’ margin above the minimum wage. An increase to $15 would directly boost the pay of 450,000 – nearly a quarter of the workforce.

So, remember when National says it’s protecting jobs by keeping the minimum wage increase small, they’re doing no such thing. And, also remember that National campaigned on turning us into a higher wage economy.

*[s5(1) of the Minimum Wage Act 1983 reads: “The Minister of Labour shall, in each year ending on the 31st day of December, review [the minimum wage]”. Kate Wilkinson failed to do so. Anyone feel like playing Fitzgerald to her Muldoon?]

23 comments on “Does raising the minimum wage really hurt employment? ”

  1. Graeme 1

    A minister of Labour must, during each calendar year, review the minimum wage. Why wouldn’t it be the job of the person who was minister of labour for most of the year. And why would you assume the minister hadn’t delegated this, as ministers do with most of their powers and obligations, to their CEO? And who is to say that she didn’t review it, anyway: “Hey Bob, what’s the minimum wage these days?” may well be enough.

    I note that the RIS you refer to wasn’t about jobs lost (i.e. that some people would be fired/made redundant/not be replaced etc.) but about constrained growth in jobs … some jobs that might have been created won’t be.

  2. Greg 2

    You miss the point Steve. The problem is raising the minimum wage hurts the very people your trying to help. Take the example of raising the minimum wage to $13.50. According to DoL that would restrain job growth by 0.4%. Ie 0.4% more of the workforce would have a job if it wasn’t raised. BUT this 0.4% is not spread over the whole workforce – it is the minimum wage workers who get laid off, lose hours, or struggle to find a job – so unemployment among these workers balloons up to a much higher figure.

    Check out Public Address’s analysis on the issue. Unlike me they come from the left, but they reach very similar conclusions. http://www.publicaddress.net/default,5654.sm#post5654

  3. Felix 3

    If you’re in the business of providing goods or services in exchange for money, you should be very concerned about the govt cutting (in real terms) the spending power of your customers.

    Less money in consumers pockets = less income for businesses = less money to pay staff. The argument cuts both ways.

  4. So if you increase it to $15 dollars an hour, you lose 2500 jobs, not great if your one of those 2500 people and wont employers then hire illegal workers if they have to pay $15 dollars an hour.

    Surly no government in the world would increase the minimum wage by that large of a percentage?

    Maybe an increase to $13.50 from $12 dollars would make better sense.

  5. brett. I’ld be happy with 13.50

    graeme. we know the review hasn’t been completed because there’s no decision. and constraint on job growth clearly includes loss of existing jobs – each job lost requires another to be create to tread water, no job lost and that new job would count towards job growth.

    greg. unfortunately, no decision is cost-free, but consider the alternative – declining quality of living, and consumer demand for hundreds of thousands of kiwis.

  6. The latest Quarterly Employment Survey shows a massive decline (11%) of overtime hours, and the beginings of a decline in total paid hours, part-time staff and total staff.

    Raising the minimum wage makes sense when unemployment is low and business is good. Why on earth would it make sense to push for it now?

  7. gingercrush 7

    How about 1/2 ear increases in the minimum wage. That way increases can be smaller without affecting inflation too much and lessening the impact for small businesses.

  8. keith, at least, they should keep it up with inflation. there’s no affect on employment in that scenario. and, remember, for larger increases you’ve got to balance a small number of possible job losses with a decent wage for hundreds of thousands

  9. toad 9

    Guess we could OIA her to see if she actually did review it before 31 December, or if she was too busy ramming the Fire At Will Bill through Parliament and forgot about it.

    And interesting to see Mallard coming out now talking about $15. No mention of a figure from Labour before the election though!

    Large increases in the minimum wage do have an impact on employment – mainly in small businesses and especially by those just starting out in business. But the big payers of low wages (read Progressive Enterprises, Foodstuffs, McDonalds, Restaurant Brands etc) can well afford to pay $15 a hour.

    So why not increase the minimum wage to $15 and hour and transition it with a targeted subsidy to struggling small business to ensure they are not adversely impacted by it. Keeping it low really just subsidises Progressive Enterprises etc, as Government has to top up their workers’ wages, as well as those of small business, through WFF and Work & Income assistance.

  10. SBlount 10

    I own in a business in the QSR industry and a $15 minimum wage would put me out of business.

    Whenever a big minimum wage increase comes through it means the skilled staff have their pay rises cancelled.

    I find good staff tend to dislike hikes in the minimum wage because they do the work and the rewards go elsewhere.

  11. Felix 11

    gc, sounds sensible to me too.

  12. Steve, the 2007 was based on economic data from 2007, and on survey data from 2006. The “no effect” conclusion is not necessarily true anymore, as the sensitivity of businesses has increased drastically because of declining confidence and real decline in retail sales, exports, etc. In fact, few of the assumptions or trends in that review is still valid today, and I don’t think it’s reasonable to consider the 2007 review as any kind of real indication of where we’re at now.

    The December CPI shows a 3.5% increase over the previous year. Which would mean a 42c pre-tax increase, or $16.8 for a 40-hour week (about $13.5 after tax, disregarding any rebates, WFF calculations). Adjusting it by the CPI would be mostly a token gesture ($12/hr is not a “decent wage”, but $12.42/hr is?), but what happens if we get deflation? CPI fell by 0.5% in the last quarter. If the trend continues (it probably won’t), should minimum wage fall, too?

  13. Billy 13

    I recommend against a futile and expensive legal challenge. A review does not require an increase. The Minister can review and decide not to change it.

  14. toad 14

    Keith Ng, I would be interested to see your response to my suggestion here.

    Seems to me that having the taxpayer subsidise all low wages Iincluding thos paid by the big players such as Progressive Enterprises and Foodstuffs, who have only each other as competition anyway) through Working for Families and Work & Income assistance is a much poorer option than raising the minimum wage significantly and directly subsidising through targeted assistance, as a transitional measure, those small businesses whose viability would be genuinely threatened by such an increase and who may have to lay off workers or close down as a consequence.

  15. djp 15

    toad even if one agreed with the spirit of your suggestion it would be a nightmare to oversee..

    how on earth would a third party be able to (speedily) judge whether a business would meet the criteria of “employers whose viability would be genuinely adversely impacted by such an increase”

  16. Bill 16

    Most small employers I come across tend to pay above the legal min.

    As Toad pointed out, there are some very large employers who pay crap for no reason other than that they can. ( And get government subsidies for doing so.)

    So, in the interests of protecting those small employers that some on the right claim to bat for, why not have the min wage increased for employers employing over, say 20 employees and delay the increase for the others.

    Might even aid the small employers who are competing against economies of scale…sort of level the playing field a touch. To reiterate, small employers tend to be more liable to look after staff and pay above min wage as they (except for the really stupid ones) value loyalty and try to secure it by one means or another.

  17. toad 17

    djp said: toad even if one agreed with the spirit of your suggestion it would be a nightmare to oversee.. how on earth would a third party be able to (speedily) judge whether a business would meet the criteria of “employers whose viability would be genuinely adversely impacted by such an increase’

    Well, MED do it already with a whole range of subsidies to business, so it can’t be that difficult to administer. Although I do acknowledge that businesses get pissed off with the bureaucracy involved..

    And how is it any more bureaucratic than MSD and IRD having to assess employees’ entitlements to welfare and tax credit assistance?

    I no longer have any dependent children, but when I did and was establishing my own company, I orchestrated my business and personal affairs to ensure I could maximise the state support I received personally.

    All perfectly legal, because the paperwork was all in order, but in reality a sham. I wish there had been the opportunity to get a direct subsidy to help me start my business, which would have been much more transparent. But there was not, so I played the game to pay myself as little as possible and personally claim the maximum state assistance I was legally entitled to receive.

  18. Quoth the Raven 18

    SP – This is off-topic, but I was reading this article that I thought would be very interesting to you, covering topics you discuss often. I found it a brilliant read. Industrial Policy: New Wine in Old Bottles.
    Just thought I had to recommend it.

  19. Con 19

    Keith Ng:

    Raising the minimum wage makes sense when unemployment is low and business is good. Why on earth would it make sense to push for it now?

    Um … because this is when workers need it most?

    In an economic downturn, wages are under a downward pressure. If you lower the minimum wage (or allow inflation to lower it) then it wasn’t really a minimum, was it? Why bother with a minimum wage at all?

    Frankly I’m not impressed by the argument about how the minimum wage hurts the poor – it reminds me powerfully of the argument that equal pay for women hurts women.

  20. Con 20

    SBlount:

    I own in a business in the QSR industry and a $15 minimum wage would put me out of business.

    Perhaps your fast food outlet should go out of business?

    Seriously, if your business isn’t profitable, then maybe your capital, and your workers’ energies, are better employed elsewhere? Perhaps those workers should be furthering their education in fact.

  21. Con:

    Um because this is when workers need it most? In an economic downturn, wages are under a downward pressure.

    This is not true. The average hourly earnings in the Dec 08 quarter *rose* by 5.5% over the previous year. That’s to say, they’re getting paid more per hour of work. This is a really, really important point: People who are working are no worse off than they were a year ago. As I wrote on Public Address, it’s the people who are having their hours cut back and people who are at risk of losing their jobs altogether who are really in trouble. Raising the minimum wage will increase the likelihood that these people get hours cut back or lose their jobs. Hence – bad.

  22. Chris G 22

    Why oh why don’t they raise it at the very least for inflation every year?

    Bet your bottom dollar bosses pay rises every year for inflation. and then some.

  23. Con 23

    Um because this is when workers need it most? In an economic downturn, wages are under a downward pressure.

    This is not true.

    No I think it is true; it’s just that there’s a lag. As the economy sinks into recession and unemployment grows, increased competition for scarce jobs will drive wages lower, particularly at the bottom end.

    At the bottom end of the market, that will force real minimum wages below their current (“minimum”) level. This is what you are urging be allowed to happen.

    The average hourly earnings in the Dec 08 quarter *rose* by 5.5% over the previous year. That’s to say, they’re getting paid more per hour of work. This is a really, really important point: People who are working are no worse off than they were a year ago.

    On average. Remember we are considering here particularly the people who are on the minimum wage. They are, by definition, not earning the average wage.

    As I wrote on Public Address, it’s the people who are having their hours cut back and people who are at risk of losing their jobs altogether who are really in trouble.

    Reducing the real minimum wage will also hurt those people.

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