Commentary

Have your business benefit from the higher minimum wage

February 28 2018  |  4 min read


At its heart economics is about the allocation of scarce resources such as land, labour and capital, and how the benefits of economic activities are distributed. In modern Western economies such as ours the private sector dominates activity, the rule of law overrides everything with independence of the courts from influence, and the government sets the rules in a tone determined by voter choices every three years.

That tone has shifted. After relatively good growth in our economy since 2010 and exceptionally strong growth over the past three years of 11% (assisted by 6% population growth), voters have decided that there needs to be some rebalancing. In essence there has developed a concern that perhaps some people are being left behind as the economy advances, and some non-market measures are needed to better spread the benefits of growth.

Increasing the minimum wage from $15.75 an hour to $20 an hour by 2021 is one of those redistributive measures which reflects not the relative strengths of the bargaining parties – employers versus staff – but rule setting by the new government.

Productivity

In that regard it is no use businesses arguing the clear logic that higher wages will cause some businesses to close down and some people to lose their jobs. Both of these things will happen because the increase in minimum wages and rise in payment rates for people earning just above minimum pay is not being driven by increasing productivity.

But there is more to it than that. Were the labour market merely a simple ongoing exchange of labour for income, the higher wages would come about naturally anyway. Why? Because New Zealand has a worsening labour shortage. This “should” be leading to accelerating wages growth but it isn’t. Why?

That is a question being asked worldwide as jobs growth is almost everywhere failing to boost the pace of wages growth. Some dynamics have changed since the Global Financial Crisis and we are not exactly sure why. But the outcome is that apart from actually having a job, the benefits of strong growth are not being spread nearly as widely this cycle as has tended to happen in the past – perhaps in the old days with the assistance of strong union movements.

This time around many low skilled people seem reluctant to change jobs. Perhaps they are scared of being last on and therefore first off should a new global crisis come along.

So the government has stepped in and those businesses who have been gaining from the change in how the labour market functions will now have to pay a price.

Shift employer

So is this bad for the economy? Actually no. It is good. Here is why. There are thousands of businesses who want staff but cannot find them in a world where people are reluctant to change jobs. Now some staff will be reluctantly forced to shift employer. Most will end up not just earning more but being more productive and that is the secret to success in an economy and the core of economics – resources need to be efficiently allocated and higher minimum wages are needed to assist this process when labour is in short supply.

What can affected businesses do apart from shrink, close down, or pay more? Raising prices is out of the question for most in this new world of online competition and consumer resistance to price rises. Instead businesses will need to accelerate the pace of their adoption of labour saving technologies like machines, better software systems, better locations, better distribution methods.

Some will do best in a world of constrained labour supply to produce less by restricting output to the highest yielding customers, or focussing solely on the highest margin products. And the best way to get into the correct frame of mind for examining these sort of options is to view the coming higher wages as not being driven by legislation but reflecting an economy where growth is no longer constrained by a shortage of customers but a worsening shortage of labour made more intense by the aging population and limits seeming to have been reached on society’s tolerance for ever rising numbers of imported workers.

This article was written by Tony Alexander, Chief Economist at the Bank of New Zealand. The views expressed are his own and do not purport to represent the views of BNZ.

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