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Dr Muriel Newman

Reviewing the Minimum Wage

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The Government has announced that it will hold an employment summit at the end of February to gather ideas to help New Zealand cope with the global economic crisis. In announcing the summit, the Prime Minister said, I don’t want the employment summit to be a talk fest, I want it to be a do fest. He went on to say, If initiatives raised at the summit make sense and are affordable, the Government is not going to be afraid of adopting some of them.[1]

With such bold sentiments, it will be interesting to see whether John Key will have the courage to consider an initiative that would do more to increase employment in New Zealand than almost anything else – and at virtually no cost to the taxpayer: lower the minimum wage.

While high minimum wage laws are usually touted by politicians and unions as being good for disadvantaged workers, this is simply not true. High minimum wage laws are bad for disadvantaged workers – in particular young people without work experience, women returning to the workforce, the unemployed, and those with a questionable work history like former prisoners – because they lock them out of the workforce.

Nobel Prize winning economist Milton Friedman railed against minimum wage laws: “Minimum wage laws are defended as a way to help low-income people. In fact they hurt low income people”. He regarded the minimum wage laws as one of the most – if not the most – racially discriminatory laws on the statute books, severely disadvantaging black teenagers by ensuring their unemployment rate is significantly higher than that of others. In his words, “The high rate of unemployment among teenagers, and especially black teenagers is both a scandal and a serious source of social unrest. Yet it is largely the result of minimum wage laws. The government first provides schools in which so many young people, disproportionately black, are educated so poorly that they do not have the skills that would enable them to get good wages. It then penalises them a second time by preventing them from offering to work for low wages as a means of inducing employers to give them on-the-job training.” [2]

And that is the core of the problem – minimum wage laws force employers to discriminate against those with low skills. They cannot offer an unskilled and inexperienced worker a job unless they are prepared to pay them $12 an hour (or $9.60 if they are trainees or a 16 or 17 year old new entrant). That means the minimum wage laws prohibit employers, who have jobs available that are not worth $12 an hour, from offering them to the unemployed. In other words, under the present minimum wage laws, the government would rather leave someone unemployed and on the scrap heap than allow them to work in a job that pays less than $12 an hour.

There will be literally tens of thousands of people who are presently unemployed who would jump at the chance to work for a lower hourly rate than the minimum wage, knowing that having any job is better than having no job, and that basic jobs can grow into good jobs if you work hard. Equally, there will be tens of thousands of small businesses who desperately need another pair of helping hands, but simply can’t afford to pay $12 an hour.

Given the dire state of the economy and the bleak future outlook, shouldn’t we be changing the situation so that people who want to work for lower wages can do so? Isn’t it better that someone who is willing can be employed for say $9 an hour, rather than relegating them to unemployment and dependence on state benefits? After all there are a range of social support mechanisms available to help boost household incomes of working families, including In-Work Tax Credits, Minimum Family Tax Credits, Parental Tax Credits, Temporary Additional Support, and the Accommodation Supplement. These can be worth many hundreds of dollars a week to low paid workers.

These are all issues that we would expect the new government to have thoroughly canvassed ahead of the annual minimum wage review, to be announced on Monday. Their decision will demonstrate just how strong their commitment to jobs really is. With New Zealand’s recession deepening, unemployment rapidly rising and many small businesses in a parlous state, bold measures are surely called for.

Some would say that in light of the grim economic outlook the government should go further, back to first principles to challenge the theory of why a minimum wage is needed at all. First introduced by Premier Richard Seddon in 1894, minimum wage laws have been supported by well-intentioned governments convinced that they were needed to combat the evils of low wages and discriminatory employers. The relevance of that assumption nowadays however, needs to be challenged, given the rights of workers to enter into individual wage bargaining, the mobility of the work force, and the various rights of redress against what could be considered to be unfair practice.

When Labour became the government in 1999, the minimum wage was $7 an hour. This was just under 40 percent of the average hourly wage. Now, at $12 an hour, the minimum wage has risen to 49 percent of the average hourly wage. This compares with the situation in Britain where the minimum wage in 2007 was at 41 percent of the average hourly wage and in the US where it was at 33 percent.[3] To match the situation in Britain, New Zealand’s minimum wage would have to be set at $10 and to match the situation in the US at $8.

In a free market economy, wages rise in line with increases in productivity: the more productive the worker, the higher their pay as the more goods and services they help to create for consumers. But over the term of the Labour Government it has been taxpayer funded public sector wages, rather than increases in productivity that have been the driving force, with government wage growth outpacing wage rises in the private sector. This has pushed the minimum wage to an artificially high level that no longer reflects productive output. In fact, since 1999, the minimum wage has risen by 71 percent while general wages have increased by only 40 percent.

In their 2007 minimum wage review briefing papers the Department of Labour recommended increasing the minimum wage to $12 from $11.25 in spite of concerns that doing so may constrain employment growth, increase inflation, cause the cost of goods and services to rise, and impose additional compliance costs on business which may force them to cut back on hours worked or even close their doors. Treasury also noted that “economic impacts are likely to be more significant if current buoyant economic and labour market conditions soften”.In other words, what seemed like a good idea last year can now be seen to be disadvantaging the very people it was purported to help.

But it isn’t just the adult minimum wage that is a problem. This week’s NZCPR Guest Commentator is Phil O’Reilly, Chief Executive of Business NZ, who, in his article The cruel dark side of the minimum wage explains:

“Another recent change is the virtual disappearance of the youth rate, its application limited to those in training and to roughly the first 3 months of a 16 or 17-year old new entrant’s employment. Getting rid of (most) youth rates – while retaining the minimum wage overall – makes it comparatively harder for young people to get their first job. This is borne out by OECD research that indicates a 10% increase in the minimum wage leads to a 3% increase in youth unemployment. This should be a concern for us, as youth unemployment in New Zealand is around four times higher than overall unemployment. And removing youth rates for most, while retaining them for trainees, is a disincentive for young people to undergo training.

“People don’t stay on youth rates for long. The evidence is that as they pick up skills, they move quickly into normal pay bands. Youth rates are therefore similar to a probationary period at the beginning of employment – they are useful in allowing an employer and employee to try each other out with not too much risk to either party, potentially providing a basis for a strong future employment relationship”.

While we don’t know how long or how deep the recession we are in will be, what we do know is that the business sector is in for a massive shake-up. It will be a painful process during which many of today’s businesses will be replaced by the emerging industries of tomorrow. Harsh as it may be, it is also a time of opportunity for new businesses to fill the void and refresh industry practice.

In this rapidly changing environment it is vital that businesses and workers alike have the flexibility to take full advantage of new opportunities. Relaxing minimum wage laws would not mean across the board pay cuts, as vested interest groups like the unions would claim, but they will help to create a stronger and more dynamic businesses sector with many more chances for people who have lost their jobs to find work and get off the dole.

1.ODT, Key announces employment summit 
2.Milton Friedman, Free to Choose
3.Department of Labour, Minimum Wage Review 2007