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Minimum wage crunch time

Written By: - Date published: 11:37 pm, January 25th, 2011 - 56 comments
Categories: john key, wages - Tags:

John Key says that he can’t increase the minimum wage by a decent amount. The excuse this time round is that a decent increase will destroy jobs. Well, let’s check that out a little bit. Is it really true that lifting the minimum wages destroys jobs? If it is, do the benefits outweigh the gains? And what about the cost of letting wages fall?

First off, lifting the minimum wage to offset inflation (which requires an increase to $13.25) cannot logically destroy jobs. The minimum wage workers’ labour hasn’t become any more expensive in real terms, it has stayed at the same level. So, there’s no added cost, which the righties (who are really just looking for an excuse) say forces employers to fire people. (the Department of Labour advice backs this up).

The Department of Labour produces advice each year on the options for the minimum wage and includes what it believes the employment impact would be of various changes. The 2007 one said the increase to $12 an hour would cost 300-1400 jobs. Did it? Who knows. That kind of change doesn’t appear in the statistics, it’s too small.

But let’s say it did destroy 1,400 jobs. That’s 0.05% of the workforce. In return, 4% of the workforce were getting a direct pay rise and another 16% or so on near to minimum wages were getting bumped up too. It seems like a reasonable trade-off and it’s one that Labour took.

Key says that the advice this time around is a lift in the minimum wage could cost 6,000 jobs. Again, there’s no real evidence and it could never be proven either way. But a lift to $15 an hour would affect 100,000 people on the minimum wage and a further 400,000 close to it. Half a million people, 25% of working Kiwis would get pay rises on the order of 17% (far more than they get from poxy tax cuts). If – big if – that were to cost 0.25% of jobs wouldn’t that be a price worth paying?

Even if job losses are caused, and there’s no direct evidence they are, they’re probably offset by all those workers with larger pay packets to spend, whose spending would create new jobs.

We know from Ruthansia that cutting the incomes of low-income Kiwis can have a devastating multiplier effect that causes more unemployment and poverty. We have nothing to prove and no reason to that that lifting low income Kiwis wages does the same.

Two last points to consider: we’ll never catch Australian wages if the government baulks at every wage increase and the route to being a wealthy country isn’t cheap labour, it’s more expensive labour that encourages employers to invest in capital and use their workforce more efficiently.

Come on John. Make the right call for hardworking Kiwis on low incomes, and for the rest of us.

Btw. The Minimum Wage Act 1983 requires that any minimum wage rates must be reviewed yearly by 31 December*. So why, for the third time running. Is National making this decision in the new year? Too lazy?

Update: Just found this old post from Tane about minimum wages and unemployment. Interesting graph:

56 comments on “Minimum wage crunch time”

  1. Colonial Viper 1

    Just more ammo to go into election year with.

    MPs got a decent wage rise and they all still seem to be there.

  2. millsy 2

    Of course the last time the National Party was in power, I recall there was no increase in the the minimum wage. For 9 whole years, so perhaps you should at least be greatful there is going to be an increase, for the 3rd year running even.

    I am quite suprised that the Johnnie boy is even considering an increase at all, seeing as its world cup year and the hospitality barons will be breathing down his neck (mind you they might do a Peter Jackson and turn all hospo workers into independent contractors..).

    • Vicky32 2.1

      “seeing as its world cup year and the hospitality barons will be breathing down his neck (mind you they might do a Peter Jackson and turn all hospo workers into independent contractors..).”
      Oh, I hadn’t thought of that… and let’s hope they don’t!

    • Marty G 2.2

      that’s right. last time they didn’t move enough even to match inflation until Winston made it part of his coalition deal. see page 7: http://www.nacew.govt.nz/publications/files/paper-low-waged-work.pdf

      Fortunately, Key has shown himself to be more responsive to pressure and the left has managed to maintain the real value of the minimum wage this time – so far.

  3. BLiP 3

    Given that John Key can’t be taken at his word on *anything*, is his “advice” in relation to this available anywhere?

  4. Irascible 4

    Key has always declared that NZ wages must fall, even though he claimed it was a “mis-speak” and the journalist had it in for him.
    The declaration that wages must fall has been the only real policy promise he has kept.

  5. vto 5

    Instead of making tax a proportion of income, we should make income a proportion of tax.

  6. Afewknowthetruth 7

    The entire economic system is fundamentally flawed:

    1) it is based on creation of money out of thin air via fractional reserve banking, but the money for interest payments is not created, so has to be siphoned off via perpatual devaluation of the money already in the system.

    2) it is predicated on perpetual growth. Growth was possible when there were forests to cut down, land to convert to productive farming, oceans to stip of fish, and an increasing supply of energy and resources.: none of those now apply.

    3) it is based on the conversion of coal, oil and natural gas into waste (while ignoring the effects of that waste).

    There are other fundamental flaws I will not go into here.

    We at the point of discontinuity. Most resources are past peak, coal is largely gone, we are past peak oil and natural gas will peak soon.

    What it all amounts to is a complete breakdown of present economic arrangements over the coming years.

    Those in privileged positions, i.e. the elites represented by John Key, will ensure they are affected last by the collapse by ensuring those at the bottom are driven off the cliff before they are.

    Being sociopaths, they will continue with their loot-the-till and blame-the-victim policies, transferring as much wealth upwards as the general populace will stand without revolting. There is nothing new about that aspect. It has been that way from the beginning of civilisation. The new aspect is the complee collapse that is coming, which will lead to most people becoming severely impoverished.

    Until the truth -that we are governed by sociopaths and that the system is in terminal falure mode- is generally accepted ‘we’ will just keep on rearranging the deck chairs on the Titanic.

  7. millsy 8

    I wonder if burt, fisiani, big bruv, Bob Stanford, tsmithfield, et al will come on in and denounce their Great and Glorious Leader for giving more money to the loser worm on M.W?

  8. Monty 9

    I know you guys love graphs – please put one up showing the relationship between the minimum wage and youth unemployment. I understand that you are all deniers when it comes to stats that do not suit your socialists cause.

    Reality is that a high minimum wage will lead to people being priced out of the market. Studies show the much publicised policy of the left for $15 per hour will lead to 8000 people losing their jobs as the economic benefit does not warrant employing people at that rate.

    remember this – no person will be employed in a business if there is not a profit in it. Just a fact of life.

    • Blighty 9.1

      “Reality is that a high minimum wage will lead to people being priced out of the market. Studies show the much publicised policy of the left for $15 per hour will lead to 8000 people losing their jobs as the economic benefit does not warrant employing people at that rate.”

      The post addresses exactly this point – you’re talking at worst very small job losses to make a hell of a lot more people a lot better off. And there’s no proof that the job losses actually happen. They didn’t when Labour increased the minimum wage every year it was in power.

      How do you respond?

      • KJT 9.1.1

        That is rubbish. Anyone who has owned a small business in Northland knows that decreases in minimum wages and benefits cuts the amount of money being spent locally and closes down businesses and jobs.
        Increasing the wages of the low paid, which are normally spent straight back into the local economy, increases jobs.

        Look at all the empty shops in Kaitia during Ruthanasia.

    • The Voice of Reason 9.2

      “Studies show the much publicised policy of the left for $15 per hour will lead to 8000 people losing their jobs as the economic benefit does not warrant employing people at that rate.”

      Citation, please, Monty. And hearing John Key make the figure up off the cuff on the radio yesterday does not count as empirical evidence.

    • Bright Red 9.3

      Which studies?

    • Colonial Viper 9.4

      NZ business ‘leaders’ need to get their shit together and start generating enterprise which can pay kiwis decently, before we all frak off to Australia.

      Australian businesses seem to know the value of kiwi workers better than most so-called NZ business ‘leaders’.

      Monty if a business can’t afford to pay a worker $15/hr it should quit the market place and make room for a better and more competitive enterprise which can.

      • Rusty Shackleford 9.4.1

        Don’t you think there could be more going on here? Why aren’t businesses generating enterprise? Because they are all lazy? Because they are greedy?

        • Pascal's bookie 9.4.1.1

          Because there isn’t enough demand in the economy? Minimum wage settings could help with that.

          • Rusty Shackleford 9.4.1.1.1

            How? Demand doesn’t equal prosperity. You need to be actually producing something in order to be prosperous. Simply shuffling money around the economy won’t do this. Check the Murphy:Krugman debate for more on this.
            http://mises.org/daily/4993
            http://krugman.blogs.nytimes.com/2011/01/19/great-leaps-backward/

            The the edifice of aggregate demand economics is crumbling.

            • Colonial Viper 9.4.1.1.1.1

              You need to be actually producing something in order to be prosperous. Simply shuffling money around the economy won’t do this.

              Shuffling the same money around the economy works really well actually. As long as the point of the game is to get useful things done and live life (e.g. build a house, put food in the pantry, get an accountant’s advice, rent a DVD for the night).

              In other words, shuffling money around lets the activity of commerce happen and lets people lead their lives, economically.

              Shuffling money around the economy does not work for capitalists who have the aim of collecting piles of the stuff, however. I am supposing this is what you mean by “prosperity”.

              But for all other purposes, its pretty cool.

              The the edifice of aggregate demand economics is crumbling.

              If aggregate demand is down every business’ will have fewer orders on their order books, and shops will be selling less stuff. That’s usually bad for employment.

              • Rusty Shackleford

                What I mean by prosperity is plentiful goods and services for all people, all of which have falling prices in the long run. Isn’t that what we all want?

                “If aggregate demand is down every business’ will have fewer orders on their order books, and shops will be selling less stuff. That’s usually bad for employment.”
                But the govt “stimulating” demand doesn’t work. Mr. Murphy points this out well. There are underlying reasons for the lack of AG. Not simply AG is low because AG is low.

                As others have said, all this is moot when debt, fractional reserve and fiat money are added to the equation. It really is bickering over nickles and dimes when these things are the root cause of low prosperity. And allow a few to prosper at the expense of the rest. As you point out.

                • Colonial Viper

                  Look, IMO Murphy points out shit of use.

                  And all he can say about aggregate demand is that its not the be all and end all of economic growth because someone needs to have done prior work to meet that demand and that’s based on capital allocation and interest rates. So? He hasn’t taken into account that lot of that prior capital allocation has been done over the last 200 years of industrialisation, and not since the last basis rate change from the Reserve Bank.

                  It doesn’t need his fancy Austrian School theories for us to know that when the Government builds a new school, building firms and contractors get work, and when the Government build a new software programme, IT firms and consultants get work.

                  That is aggregate demand and it fills the order books of the private sector. it gives them work. So what exactly about that “doesn’t work”? Don’t all those people get actual employment based on Government demand for schools and software? I mean it seems to me like they do.

                  What I mean by prosperity is plentiful goods and services for all people, all of which have falling prices in the long run. Isn’t that what we all want?

                  Why do they need to have falling prices for a country to be considered prosperous? If they all have falling prices, don’t you have to consume more and more just to do the same value of business? Is that what this kind of prosperity is all about?

                  • Rusty Shackleford

                    What caused the low AD?

                    “don’t you have to consume more and more just to do the same value of business?”
                    No because the inputs are cheaper too. Prices are only relative.

                    Money is only a construct. It is worth what you can buy with it. As you know, it has no intrinsic value of its own.

                    • Colonial Viper

                      What caused the low AD?

                      Its split into two parts
                      – loss of demand from the public sector
                      – loss of demand from the private sector

                      Public sector reduction in demand is due to debt problems and reduced tax take requiring ‘austerity’ measures as governments today cannot bear to bring themselves to raise taxes.

                      Loss of private sector demand – both individuals and companies are not spending money. They either have no money to spend, or in some cases they have decided to simply sit on their warchests and wait.

                      No because the inputs are cheaper too. Prices are only relative.

                      But this doesn’t happen in the real world: when was the last time you saw NZ register a -ve annual CPI or a -ve annual inflation rate?

                    • Rusty Shackleford

                      Your explanation has zero descriptive power. All you have said is “AD has dropped because AD has dropped.”

                      “No because the inputs are cheaper too. Prices are only relative.”
                      “But this doesn’t happen in the real world: when was the last time you saw NZ register a -ve annual CPI or a -ve annual inflation rate?”

                      Never. Because we have little true prosperity. Much of the rise in living standards we have seen has been illusory. Based on a debt based boom. Also inflation is caused by increasing the money supply. When has the money supply ever diminished?

                      You can see my idea at work in many individual goods, however. Especially in computers. The price of data storage is basically zero compared with a decade ago.

        • lprent 9.4.1.2

          Usually because they are short of capital to startup or expand in my experience. Wages make bugger all difference in the cost structures of anything apart from enterprises that are wasting valuable capital because they’re busy failing. Typically quite unproductive ones.

          • Rusty Shackleford 9.4.1.2.1

            Regulations and taxes play no role?

            • lprent 9.4.1.2.1.1

              Not much. Remember you were talking about new business or expansion.

              Startups or new business usually don’t make a profit for a while (which is why you need capital). If you don’t make a profit then you don’t pay much in taxes on profit. GST does get paid but you recover most of that if you’re selling anything. The nett effect is usually close to zero.

              Regulations? Usually not a major hassle.

              Setting up a company is trivial at the regulation level. The biggest cost is actually paying lawyers to protect investors against each other.

              Setting up for tax and employees is pretty straight forward unless you’re trying to do something odd. The typical question for a startup is giving employees a stake in the company. In that case you spend money on lawyers again. But it has nothing to do with regulations.

              Usually startups or expansions use leased or rented properties because they’re not sure that they are going to be viable. So it is unusual to have anything to do with virtually any regulation unless you’re modifying the property – like a cafe. Usually that isn’t a problem if businesses don’t try to violate the building and dumping regulations. But if those regulations weren’t there then you’d be running straight into questions on the law on equity – ie more lawyers.

              There are all of the questions about getting access to services like international couriers and shipping (getting harder all of the time). But there you’re looking at regulations in the target markets rather than local.

              I’ve been in a lot of startups. Taxes and regulations here are trivial questions compared to getting capital and skilled employees. This isn’t the case when you’re setting up in other markets. Incorporating in the US for instance is a bit of a nightmare and drags on for quite some time.

    • lprent 9.5

      Try this. When I was looking at the youth unemployment rates worldwide, I also had a look at the available data on minimum wages (in a link).

      I can’t see a correlation. So I think that oft-repeated claim of the idiots who don’t research is just simple bullshit. But hey – don’t let the facts get in the way of you putting in fact-free comments. Of course you could dig out a link to attempt to prove your contention. But so far no-one has found one that is actually based on facts rather than moronic theories.

      • Rusty Shackleford 9.5.1

        Comparing minimum wage to unemployment is completely worthless. All economies are different therefore they can sustain varying mandated wage levels. Comparing the min wage of Lithuania and Australia is a waste of time.

        • Marty G 9.5.1.1

          and, yet, you’re not managing to provide any argument against increasing the minimum wage by a decent amount.

        • lprent 9.5.1.2

          Can’t you read? Try it, it does tend to make your contribution to the discussion more relevant. It wasn’t a discussion on unemployment – it was on youth unemployment.

          It was monty’s argument referring to youth unemployment that..

          Reality is that a high minimum wage will lead to people being priced out of the market. Studies show the much publicised policy of the left for $15 per hour will lead to 8000 people losing their jobs as the economic benefit does not warrant employing people at that rate.

          When you look at where minimum wages are mandated worldwide you can’t see any correlation with either youth unemployment or unemployment levels. It really doesn’t matter if you look at it using the McDonalds index as a proxy for buying power or in dollar terms – you can’t find a correlation. Try it.

          I think that the ‘study’ he was trying to cite (but didn’t link) is theoretical of no merit beyond the theoretical. It made some wide ranging assumptions that have no empirical backing. It implied that even the existence of a minimum wage should show a causal relationship in both unemployment rates and youth unemployment rates. That means such a strong causal relationship should show a correlation somewhere amongst the many countries in the world

          I can’t see any and I’m unaware of anything beyond wishful theory in existence. I’d expect that such a strong causation would show a correlation at the current levels of minimum wage somewhere (and it’d show up first in youth unemployment). The reason that it doesn’t show is likely to be that minimum wages are too low everywhere to demonstrate that causal relationship from happening if it does happen.

          Quite simply the argument he was running of a causation between youth unemployment and minimum wages has to be considered to be theoretical bullshit.

          • mcflock 9.5.1.2.1

            it’s getting on a bit, but this is an interesting study on the subject.

            • lprent 9.5.1.2.1.1

              I read that a while ago (good to get a link to it). It is one of the studies looking at actual evidential data, and like most of those that I’ve seen there is no clear correlation or causation outside of the uncertainty bounds.

              The economics stuff I’ve looked at seems to start from the assumption that there is an impact of raising minimum wages (without any evidence once you dig through the backing papers)and then they pyramid a theoretical job ‘loss’ rate on top of it – that never seems to happen.

              I tend to view economists as being quite religious people in the way that they hold on to the faith in face of evidence. It’d be nice if they actually checked for the effects that they’re assuming. But that is a story for another time. 😈

  9. big bruv 10

    Another unaffordable burden on business, look for more business closures on the back of a rise in the minimum wage.

    Meanwhile…..nearly 20% of our youth are unemployed and still nothing is done about a return to youth rates.

    • grumpy 10.1

      Hate to argue with you BB, but a hike in minimum wage will do more for the country than making the first $5000 tax free. This sort of thing and Working For Families is just the taxpayer subsidising business and drives down real wages. NZ needs to become a high wage country with real industries providing real growth.

    • Colonial Viper 10.2

      Businesses who can’t get a decent business model together to pay a $15/hr minimum wage should frak off out of the market and make room for ones which can.

      Australian business leaders recognise the value of Kiwi workers more than NZ business leaders do. Shame. But that’s why 530,000 NZ born kiwis live there now.

      • grumpy 10.2.1

        This is a bad day CV, first I have to disagree with BB and now I am agreeing with you.

        “Businesses who can’t get a decent business model together to pay a $15/hr minimum wage should frak off out of the market and make room for ones which can.”

        Couldn’t have said it better myself. Of course all this mucking around with taxpayer subsidies to business, whether WFF or $5k tax free just allows our low wage economy to continue.

        • Colonial Viper 10.2.1.1

          Thanks, I know mate its rough times 🙂

          I was talking to an avid National supporter this week and we found a lot of common ground on what needs to be done to get this country moving and working again. Interestingly.

          A strong grass roots economy with (preferably not debt based) money being freely spent in small businesses quickly means that the Govt will be able to afford generous tax cuts for all, without slash and burn programmes.

          • grumpy 10.2.1.1.1

            Worked for Singapore….

            • Colonial Viper 10.2.1.1.1.1

              The only thing to watch out for Singapore is that they also rely on a large number of very low paid foreign workers e.g. from Phillipines, Indonesia to keep the basic machinery of their society running. Jobs that educated Singaporeans would not touch with a barge pole.

              • grumpy

                That’s a cultural thing and common through all of Asia and Middle East. At least Singaporeans can afford to hire them and the workers send what is high earnings home to their impoverished countries.

                if NZ keeps on with this low wage death spiral, soon our school leavers will be queueing up for nannying and housekeeping jobs in Singapore and the like.

    • KJT 10.3

      Youth rates do not make jobs they simply shift unemployment to slightly older people.

      See my post above.

  10. Krispy 11

    Increasing the minimum wage to $15 will just increase inflation, hence interest rates will increase, thus prices will rise and congratulations no one is better off. The country cannot afford to raise the minimum wage hugely. If the minimum wage is increased too much anyone who owns a business may aswell pack up and leave.

    • grumpy 11.1

      Bullshit! If a business is only viable through exploiting low paid workers or through taxpayer subsidies such as WFF or Tax rebates, then it should not be in business.

      I speak as a business owner of 4 seperate business from farming to importing and I have NEVER and will NEVER pay the minimum wage. Nobody in this country is worth less than $15 per hour!

  11. Fisiani 12

    National have announced that they will raise the minimum wage. (Good News) They have said that 73 % of workers will pay only 17.5% income tax. (Good News)
    They are switching the economy from property speculation to saving and exporting. (Good News)
    They are producing a more effective efficient public service. (Good News)
    Employment is set to grow throughout 2011. (Good News)
    The good times are a coming.

    • Colonial Viper 12.1

      Its telling that your news is so obscure and falsely optimistic that you have to label it as “Good” before people will buy it.

      Nah, global economy is set for a second downturn now, the currency wars are starting and Bill and John have left us in a vulnerable deficit ridden position with their poor economic management.

      20% youth unemployment Fisi.

      • Afewknowthetruth 12.1.1

        There never was a recovery, just a period of fakery based on bailouts that were conjured out of thin air.

        Yes, the next downturn is underway, led by Europe and the US.

        Optimism founded on ignorance [of all the fundamentals] is now the only thing keeping the system going. Ignorance is bliss, but only for the moment. Raise the minimum wage, leave it as it is, it will make no difference: nothing within the system of redundant paradigms will stop what’s coming.

    • Craig Glen Eden 12.3

      ” Employment is set to grow throughout 2011. (Good News)
      The good times are a coming.”

      Ha, we have finally found the pixie who lives at the bottom of John Keys garden. That or Fisi had one vee or coffee to many.

  12. randal 13

    new zealand is still an “area of recent settlement” and the politicians still carry out their business as sojourners and the best way of maximising their return is to flog the wage earner especailly when a conservative government like national is in power.
    by promoting the idea that we are in control of our own destiny then it is easy for governments to ignore the fact that they rely on world markets to provide prosperity and that indvidual aspiration has nothing to do with it.
    when nasser wanted war in 1955 he had to mortgage the cotton crop for five years to pay for the guns.
    here we just pander to the ignorati by giving them cars and motorbikes.
    go figure.

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