Minimum wage and potential unintended consequences

One of the biggest risks with changes promised by the incoming Government is the rapid increase of the minimum wage, from the current 15.75 per hour to $20 by 2021.

There’s no argument that many workers struggle on low wages, so increasing them is a laudable aim, but there is real potential for unintended consequences, and it won’t be known what impact they might have until they happen.

Increasing wage costs for businesses means those costs of goods and services will need to be passed on to customers. It is also likely to result in lower employment to try to reduce costs where recovery of the costs isn’t possible.

The biggest problem may come the pressure on all wages to rise. Those currently earning $3-5 above the minimum wage will still want to be paid more.

And there are signs of this pressure already – NZH: Minimum wage threatens economy: Employers and Manufacturers Association

Campbell said businesses would be worried by what the cost increases would mean for them.

His comments are starkly contrasted by those of First Union, whose general secretary Robert Reid said in a statement the incoming Government acknowledged the huge economic pressure working people – especially low paid workers – had been facing for the last decade.

“Today marks a sea change. We now have a Government showing respect for working people.”

The union was especially pleased to see the minimum wage will move to $20 per hour by 2021.

“Business leaders often say the main thing they need is certainty. This announcement gives them that certainty and now they need to start factoring in significant wage increases for all their workers over the next three years.”

Reid added that the era of 2 per cent a year wage offers was over and employers would need to be looking at annual increases of about 8 per cent to stay at or ahead of minimum wage rises.

It was obvious this would happen – but an increase of all wages by 8%, well ahead inflation, will push up inflation, and possibly increase unemployment.

There is no way of knowing how much bumping up the minimum wage will have, but unintended consequences are certain, it’s just unknown to what degree they will impact on employment and the economy.

84 Comments

  1. alloytoo

     /  27th October 2017

    Why not simply reduce taxation, more money in people’s pockets without having to imagine up some silly subsidy scheme for small business.

    Shouldn’t be too hard to cost and implement……oh wait……

    • PDB

       /  27th October 2017

      To be fair are you not talking two different things? The private sector taking a financial hit against the govt taking a financial hit?

      Of course long term if businesses are put under undue pressure the govt will take a hit if unemployment rises and businesses pay less tax.

      • Corky

         /  27th October 2017

        Interesting that economists are split on this issue. I believe, apart from supply and demand, economics is quack science. Once supply and demand is distorted by regulation you are basically predicating expected trends on economic distortions, and not a free supply and demand market.

        • Gezza

           /  27th October 2017

          Why would anyone pay any attention to you on this though, Corks?

          You didn’t even vote. For the stupidist reason anyone here has ever heard.

          Even someone who was just too lazy to get off their arse has a reason for not voting that makes a thousand times more sense than yours, bro.

      • alloytoo

         /  27th October 2017

        There’s always a cost to this sort of regulation, aside from the fact that it leads to behaviour which is a distortion of the market.

  2. PDB

     /  27th October 2017

    PG: “The biggest problem may come the pressure on all wages to rise. Those currently earning $3-5 above the minimum wage will still want to be paid more.”

    That is the main issue, the knock-on effect on other people wanting more money and other things like an increase in superannuation costs.

    Youth workers and those with poor work histories are likely to suffer from the increase with either reduced hours and/or no opportunities to work.

    “Reid added that the era of 2 per cent a year wage offers was over and employers would need to be looking at annual increases of about 8 per cent to stay at or ahead of minimum wage rises.”

    This is impossible without the economy falling over & shows how out of touch the unions are. Would the workers also take an 8% drop in wages per annum if the economy goes into recession & businesses struggle?

    • David

       /  27th October 2017

      “Youth workers and those with poor work histories are likely to suffer from the increase with either reduced hours and/or no opportunities to work.”

      Exactly. The higher the minimum wage, the less opportunities there are for people at the bottom.

      • Blazer

         /  27th October 2017

        Someone will be required to do the work.Most business’ just increase the cost of goods.

        • David

           /  27th October 2017

          “Someone will be required to do the work.Most business’ just increase the cost of goods.”

          This is not true. Many businesses do not control the price of their products. They will either turn to automation, or cease operations. It also reduces the rate businesses expand at too.

          • Blazer

             /  27th October 2017

            what are these viable business’ that are price takers…a few examples please.

            • David

               /  27th October 2017

              How about every single farmer in NZ for a starter.

            • Blazer

               /  27th October 2017

              ‘How about every single farmer in NZ for a starter.’..they do have some options .A2 Milk for example is going gangbusters,and payouts vary as to it would appear the added value component of product regarding standard milk.I see Tatua still beat Fonterra in payouts to their co-op.Mozarella cheese is another growth area oft mentioned by Steven Joyce.Farmers choose ,who they go with and the inherent conditions.

            • David

               /  28th October 2017

              You seem to have completely missed my point. Of course there are options for farmers to get better returns, but my point remains; the do not set the price!

            • David

               /  28th October 2017

              Just to add, how do you think a sheep farmer is going to increase the wool price to pay for higher wages?

            • Blazer

               /  28th October 2017

              @David..the sheep farmer could consider changing the breed of his sheep…or maybe milking sheep.Farmers can set prices via futures-put and call options and longer term supply contracts.

            • David

               /  28th October 2017

              Farmers cannot, in any shape or form, set prices.

              The wool price is 1/3 today what it was 30 years ago. Do you think farmers control this?

            • Blazer

               /  28th October 2017

              @David,the discussion ‘price takers’..against???You imply buyers are always price setters…supply and demand.Try the NZX buy-sell ,offers.

            • Blazer

               /  28th October 2017

              @David..’do you think a sheep farmer is going to increase the wool price to pay for higher wages?’He has options,like produce more through efficiencies i.e cut costs..diversify.If the price of wool has dropped 66% ,has it been offset by a huge increase in what he receives for ..meat?Yes=sell more meat,less wool.

            • David

               /  28th October 2017

              “Yes=sell more meat,less wool.”

              You really don’t know anything about farming do you?

              “He has options,like produce more through efficiencies i.e cut costs..diversify.”

              He can cut costs by firing workers.

            • Blazer

               /  28th October 2017

              @David.’You really don’t know anything about farming do you?’..I’ll have you know I often watch Country Calendar,and worked on a Dairy Farm in the hols,when I was a kid.Have some farmers got meatless..sheep?

        • alloytoo

           /  27th October 2017

          That’s called inflation, and it simply destroys the newly created buying power of those whose wage has been increased. Zero sum game.

  3. Blazer

     /  27th October 2017

    Workers wanting to be paid more is most unfair.Expecting a liveable wage is unrealistic.You have to look at the meagre salaries captains of industry recieve.The head of Fonterra has to get by on only $8 million a year,and look at how hard he works.Then you have the likes of Directors and Chairmen who really slog their guts out attending meetings every few months,for an average of only 80-100k each..Not forgetting all those enmployed by councils.Only around 2,300 recieve over $100K p.an,at the Super City.Imagine how much they’ve saved ,thanks to National amalgamating all those inefficient local councils.Giving increases to the lower paid is an impost on profits,especially when you know ,they will only…spend it.

    • PDB

       /  27th October 2017

      Leaving out your moaning about payments at the other end of the spectrum (not that I totally disagree with you) the statistics clearly show that the main workers being paid minimum wage in NZ are inexperienced youth, most of which have just joined the workforce and have no family to support. Paying them close to a ‘living wage’ is nonsense and can only mean less work opportunities for them once the minimum wage hits $20.00.

      NZ is a land of small businesses working within a very competitive environment, many of which struggle to provide an income for their owners without further increasing costs that far larger businesses can either absorb or pass onto their customers. Many businesses already struggle with heavy (and costly) H&S compliance requirements and the like.

      • Blazer

         /  27th October 2017

        I would love to see those statistics.I recall a few years ago the Council said they could not raise the wages of their lowest paid(cleaners and the like)because it would cost $23 mil a year.

        • Gezza

           /  27th October 2017

          A brother & sister own & run the local NW. I chat away to the sister quite freqently as well as the staff. She basically is staff AND management. I said to her recently I admired people who had the guts to take on the borrowing risk, & start a business that employs 10’s of people. I said I know from other business owner acquaintances the returns in salary might be high but the responsibility & the late nite fretting over the accounts & profit or loss for the month often are too, especially when your own & others’ livelihoods depend on it.

          She said, & I believe her, the Bank gets most of the profit, we actually still take home less than some of our staff, we work 16 hours a day 7 days a week because we’re often working at home too, & I have to work especially hard on the shop floor when I’m here because I can’t ask the staff to if I don’t.

          • Blazer

             /  27th October 2017

            hard to believe..ask the owners of the Welly Train station NW!

            • Gezza

               /  27th October 2017

              Yeah they’re on to a hot site there, but yuk what a labyrinthe it is. It’s claustrophobic, that one. And imagine the cost of all stock they’d have to keep ordering to keep up with demand & not out-price supermarkets closer to home. That replaced a kiosk & does the same job, plus a bit.

              I don’t bother going in to Welly much these days & if I do it’s for a particular reason – in & straight back out again.

              What did they tell you when you asked them?

            • Gezza

               /  27th October 2017

              Also, you don’t know my local supermarket, nor the owners, & I do.

              So tell me, WHY is what she said hard for YOU to believe?

            • Blazer

               /  27th October 2017

              AFAIK,they don’t work there everyday.But I shopped there twice a day many times,and the sheer traffic volume and the stellar prices on some goods, leads me to believe that they are..creaming it.I guess you are aware that a NW supermarket is a chosen investment for many high profile sports people,because of the high returns and the management template supplied by ..Foodstuffs.So saying there are probably too many NW in the lower and central Nth Is.Very few business owners will tell you they are making a small fortune..its bad for…business.

            • Gezza

               /  27th October 2017

              The banks like to. But thanks, you are saying you only ASSUME these two NW owners are lying & are filthy rich based on what you THINK the situation is with the owners of NW at the Wellington railway station & because some Sports Stars have shares in the Parent Company which reports high profits. Also that you don’t like business owners who make money because you resent them making money. Because presumsbly it should just appear in the pockets of everyone when they need it?

            • Gezza, when my stepfather began his business, he often took home less than the workers.They all had better cars than he did,

              He ended up rich while they stayed workers because he took the risk.

            • Gezza

               /  27th October 2017

              Yep. That’s what business owners & employers I know all say. I got sick of working for someone else. I decided to take risk & start my own business. I had to go into debt to do it, & it gave me plenty of sleepless nights, sometimes we made a loss, we had to do jobs for next to nothing to build up our customer base & get a good reputation in the community. It was hard. Mortgaged the house.

              But it was an investment in my and my family’s future & eventually it paid off, & I’ve had a great living from it, looking back. Not many regrets. Maybe wish I’d been able to spend more time with my kids when they were little.

              That sort of thing.

        • Blazer

           /  27th October 2017

          don’t try and put words in my mouth.You can believe whatever you choose to.

  4. David

     /  27th October 2017

    “Minimum wage and potential unintended consequences”

    We understand very well what the consequences of setting an excessively too high minimum wage are, that is many people will be excluded from the workforce and loose the chance to get entry level jobs.

    This is not in any way an unintended consequence, anyone who enacts this policy specifically wants this outcome.

    • Blazer

       /  27th October 2017

      Anyone who issues over 200,000 work permits for workers to do monotonous ,low paid jobs will keep the wage bill down.’This is not in any way an unintended consequence, anyone who enacts this policy specifically wants this outcome.’

  5. Gerrit

     /  27th October 2017

    Small correction for Blazer, the M$8 for the head of Fonterra was a bonus not his salary. At least he was taking Fonterra profitability (and dividend stream that the farmers pay tax on) upwards.

    Compare that with KiwiRail CEO. Running losses of M$214 yet still gets an K$80 increase on his K$800 salary.

    “KiwiRail’s annual report shows the struggling state-owned rail company’s chief executive received between $890,000-$900,000 pay in the year to June, up from $810,000-$820,000 the year before. Mr Quinn was replaced by Peter Reidy in February this year.”

    http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11350908

    Difference between a bonus for increasing profitability (and resultant tax take for the state) versus increase salary for wasting M$214 of that state tax take.

    • Blazer

       /  27th October 2017

      how much did the head of Fonterra lose in total remunerationwhen profitability went down?Kiwi Rail has been hamstrung by the National Govt,as most accept.Solid Energy’s Don Elder was on over $1mil…look what happened there…need to pay the market rate for…talent!

      • Gerrit

         /  27th October 2017

        Am sure you could provide same figures to back up your assertions? Or making stuff up?

        The last time Fonterra did not pay a tax bearing dividend was in 2001.

        https://www.interest.co.nz/rural-data/dairy-industry-payout-history

        • Blazer

           /  27th October 2017

          Do you contend that Fonterras profitability has been an unbroken trend up, year on year since Spiering took over?

          • Gerrit

             /  27th October 2017

            No, why the question? There is not an ever increasing market for Dairy products thus to maintain profitability with fluctuating sales volumes and product changes is what the privately owned coop board (I would say) paid the bonus out on. You do understand the difference between product sales and profitability?

            If we look at Apple their sales volume is trending down but their profitability is up. That is why the CEO’s get the big bucks. The return to shareholders the dividends due to their investment. Though Apple has a problem with ALL the cash reserves sitting outside the USA but its shareholders are inside the USA. Uncle Sam quite rightly want to tax these dividends but Apple does not want to.

            • Blazer

               /  27th October 2017

              ‘At the present moment there is and has been for years past and to come,actually-‘ There is not an ever increasing market for Dairy products ‘.So you are obviously not from that sector,or shouldn’t be.

          • Gerrit

             /  27th October 2017

            Actually the graph showed a maintenance of dividends so technical since 2001 there has been an unbroken run of profitability by Fonterra. I read your question back to front due to my dyslexic impairment.

            • Blazer

               /  27th October 2017

              I will simplify things…I year the Coy makes $10 profit,the next $12,so the chief earns a bonus,the following year the profit is $8..does the chief recieve a non performing cut to his entitlements,or is it a ..one way street.?

            • Blazer

               /  27th October 2017

              read it again..’unbroken UP trend ,year on year.

  6. Gerrit

     /  27th October 2017

    An unintended consequence of lifting the minimum wage will be that the market will decide what business will be able to absorb or pass on the increased wages for ALL their staff and those (especially SME’s) for whom the risk versus reward is getting to small. They will downsize or get out of the market. Any new entrant into the market will be weighing up this risk versus reward factor and may not invest. The government in their haste to “look good” have neglected to take into consideration the needs of the 95% of enterprises employing labour. Should they not have looked at streamlining compliance costs for SME’s such as getting rid of the initiative killing provisional tax (with its punitive fees if you get it wrong)?

    National were bringing in a PAYE system for SME’s, surely with the increased minimum wage and as an act of reciprocity, the government could have bought forward the new tax payment method to suit SME’s?

    • Blazer

       /  27th October 2017

      This Govt will develop initiatives to help SME’s.It won’t take…9 years.The previous admin was only interested in Corporations…they donate..the most.

      • Gerrit

         /  27th October 2017

        Naturally the measure of business confidence will back you up in due course.

        However the fact that the wages bill will rise for SME’s but no signal of what the reduction in compliance cost will be or when they will be introduced will be weighed by SME owners in risk versus reward.

      • I run a small business. I don’t want “help”. I want to be left alone.

        • Gerrit

           /  27th October 2017

          Help comes in many forms. I would gladly take up a government initiative to streamline how we pay our taxes plus a small stipend reward for collecting their GST.

  7. Gerrit

     /  27th October 2017

    Blazer, the reply button is not working under your second the last posting. You are judging a bonus to be purely sales and profit driven. In my experience this is hardly ever the case. Parameters will be set by the board that consider market conditions, a change in product mix (higher valued but lesser volume products), reduction in fixed overheads through streamlining production, an large capital expenditure approval that is amortised over a number of years profit (new factory) etc.,etc.,etc. There are many factors that go into setting a reward system such as a CEO bonus. That bonus might run over a five year period. Say the board decides that potential sales volumes for butter in India is worthwhile investing in but the measure of that success will be three to four years away. The board will need to approve expenses to establish that market (out of profitability) and might even approve a capex for a new butter factory in year five. The CEO bonus is dependent upon meeting the sales targets, expenditure control, building a new factory under budget etc., etc.

    • Blazer

       /  27th October 2017

      Shareholders demand profits not platitudes and excuses…you-‘At least he was taking Fonterra profitability (and dividend stream that the farmers pay tax on) upwards.

      Compare that with KiwiRail CEO. Running losses of M$214 yet still gets an K$80 increase on his K$800 salary.
      ‘The CEO bonus is dependent upon meeting the sales targets, expenditure control, building a new factory under budget etc., etc.’…he delegates responsibility down the chain,and has plenty of fall guys…yes!Brilliant in a good year and helpless to externalities in a …bad year.A charade.

      • Gerrit

         /  27th October 2017

        Sorry Blazer, you musings dont make sense. Do you have any idea how a management structure works? Responsibility flows upwards not downwards, especially when large bonuses are at stake (unless you work for a SOE when losses incur, a 10% pay rise is given). I guess having spent some 2 score year in senior management I see life without the rose tinted glasses of envy.

        If the CEO cant get the “underlings” to perform and meet his targeted KPI’s he not only looses his bonuses but probably his job as well.

        • Blazer

           /  27th October 2017

          Really..take a look at Fletcher Building and their managements performance over decades.Run a virtual monopoly and continually screw things up.They do say sorry,now and again.A cushy sinecure for some now and forever.

          • Gerrit

             /  27th October 2017

            Fletcher Buildings CEO got fired. What is your point? Cushy sinecure? Like a unionised teacher I guess.

            • Blazer

               /  27th October 2017

              The latest downgrade is since Adamson’s departure.The point is that numerous highly paid failures screw things up at Fletchers time and time again.The so called market rates for talent are not delivering competent officers,time and time again.His description of them as ‘old farts’ was accurate.A virtual history of mismanagement in a monopoly situation.Have a look at when they bought Laminex..and many other clusterfucks.

        • Blazer

           /  27th October 2017

          Any idea ,what this means…’the buck stops..here’?

          • Gerrit

             /  27th October 2017

            Yep you get fired if you muck it up on your watch.

            • Blazer

               /  27th October 2017

              well it actually is a quote from Harry Truman POTUS,and it of course means the man at the top SHOULD take responsibility.

            • PDB

               /  27th October 2017

              The term originally comes from the game of poker being based upon ‘pass the buck’ & was on a sign given to Truman – The phrase didn’t come from Truman himself though he made it more mainstream.

        • Blazer

           /  27th October 2017

          ‘ I guess having spent some 2 score year in senior management I see life without the rose tinted glasses of envy.’…senior management are well overpaid,thats a fact.It does not reflect their performance in public companies anyway.As for the Council and some Govt departments an old boy network,gravy train.Reality and disgust,not envy.

          • Gerrit

             /  27th October 2017

            Your class envy is on show, hidden behind a facade of ……………. nonfactual assumptions. But whatever supports your viewpoint cannot be expunged by the reality of the commercial situation we find ourselves. Been nice interacting with you, but I feel we are not ever going to overcome a glass half full attitude.

            Tot ziens. .

            • No, Gerrit, Blazer’s glass is not half full.

              Think 1/10 full and you might be right.

            • Blazer

               /  27th October 2017

              I do wonder exactly what class envy I am supposed to have.What class are you..anyway..the priveleged,silver spoon class.?..sounds like..it.

  8. adamsmith1922

     /  27th October 2017

    Minimum wage rise is not the answer, A strong growing economy is, where peo;e have jobs rather than benefits. So a good economy will solve much of this when tempered with a safety net, based on hands-up not dependency. However, we are in Jacindaland so sound boites not reality.

    • Blazer

       /  27th October 2017

      So ,how come we have had years of a ‘Rockstar Economy’ but wages have lagged well behind the C.O.L.

      • Gerrit

         /  27th October 2017

        Those who took on a trade, learned new skills, started new enterprises and became more productive, got higher pay in the rock star economy. Those that sat on their behinds waiting for the largess to descent where sadly disappointed. They will continue to be sadly disappointed if they don’t up skill, and become more productive.

        • Blazer

           /  27th October 2017

          I think you mean those who were involved in the FIRE economy,the non tradeable sector and specialised in speculation reaped the rewards from the huge increase in immigration and property prices.

          • Sorry, you’re very wrong. We’ve been extraordinarily productive. Just look to our schedule of exports and the flourishing wine, hort sectors for one. One needs to produce to do as well as we have. It’s not sitting on your PC chatting on forums and lamenting a trickle down fail that generates money in this society.

            • Blazer

               /  27th October 2017

              why is productivity flat for the last 5 years..then?

            • Alan Wilkinson

               /  28th October 2017

              I have never seen any account of productivity statistics that shares the slightest clarity or insight on anything. I conclude that the enormous effort involved in computing them reduces national productivity significantly.

              Happy to read anything that proves otherwise.

  9. David

     /  27th October 2017

    Seattle,s increase in the minimum wage actually saw the lowestvpaid earn less as their hours were cut back. I would like to see a starter wage introduced in conjunction with any lift, I worry that the marginal hire will miss out if they are too expensive and these are the last people who need any barriers.

    • Thank you for that about Seattle.

      I could imagine a sinking lid policy being used. Let’s say that a company can afford $1000 a week for wages and has 10 staff (yes, Blazer, I know that this figure is not accurate-the principle is, though) who each earn $100 a week. Suddenly the company has to pay each of them $125 a week. The answer is simple; 8 staff will now be doing the job of 10.

  10. barryglik

     /  27th October 2017

    Minimum wage or whatever life especially for the younger generation is as good as it has ever been. The ’80 to ’97 years were difficult transitional years in New Zealand. Those years took their toll on me. Now those many political, economic and social issues have been resolved providing much better education, health, housing, protection for women and minority groups. Gen Y and now even more so for Gen Z life is sweet. Gen Z is our very own who our own Emperors and Empresses generation for whom nothing is to too much. Lucky so and so’s for whom there is now an agency to fix any real or imaginary difficulty. However for those of us caught in the tougher Lange/Bolger transitional years we can but hope that our retirement years will be good enough compensation. Be just my luck that as I close in on the magic number the age of eligibility rises every 2 years from now on 🙂

  11. Revel

     /  27th October 2017

    The teachers want 14.5% as well as allowances in expensive housing areas! They have warned of strikes as well.

    https://www.stuff.co.nz/national/97552295/teachers-unions-warn-strikes-over-pay-likely-in-2018

    If they get it wait for that to reverberate through the public service.

    • Joe Bloggs

       /  27th October 2017

      Here let me correct that for you: Teachers want up to 14.5% to restore top teachers to the same relative wage they earned in 2002

      and a telling comment from the Naenae college principal: “This is the price we are paying for letting teachers’ pay equity drop against the average wage.”

    • Blazer

       /  27th October 2017

      a recent interesting fact…in the 70’s early 80’s a teacher earned as much as a backbench M.P..today the M.P earns 3x ..more than the..teacher.

      • Gerrit

         /  27th October 2017

        Means the backbencher is over paid. God teachers should be paid K$150, bad and new teachers K$45. Pay increases to be decided by a democratic vote from the kids parents.

        Better teachers get more votes and higher salaries, bad teachers the basic wage. The basic wage where all new teachers start and can increase their pay scale by increasing their abilities as teachers. Effectiveness of each teacher judged by their customers (kids parents).

        Somehow this democratic selection of teachers pay scales would go against teacher unions. Unions that protect rubbish teachers and hold back the good ones.

        • Gerrit

           /  27th October 2017

          edit —— Good teachers, dont think we have any god teachers, mmmmmmmmmmm maybe clerics?

    • Geeat argument for private and vouchers

  12. Gezza

     /  27th October 2017

    The biggest problem may come the pressure on all wages to rise. Those currently earning $3-5 above the minimum wage will still want to be paid more.

    “Fk off. If you don’t like it you can always go & work for someone else mate” worked well for 5 years in MY department after the Employment Contracts Act came into effect.

  13. Dez

     /  24th November 2017

    Business won’t get hurt it’s a matter of How They can manage there staff and tryen a better solution that won’t compromise to much but ease the problem

  1. Minimum wage and potential unintended consequences — Your NZ – NZ Conservative Coalition