A higher minimum wage is good economics

How will the increase in the minimum wage impact your business? Ashley Balls has done the research.

When the increase in the minimum wage was announced the initial reaction from the ‘great and the good’ was a cacophony of criticism redolent of ‘Chicken Little’ and the sky falling in.

Was this a reasonable reaction and was it based on fact?

The starting point in New Zealand is that this month (April) the minimum wage goes up by $1.20 to $17.70.

What does this increase mean in terms of wages keeping up with inflation? This has been addressed over time but despite regular increases in minimum and ordinary wages the growth in the New Zealand economy has continued to outpace both. This supports the argument that ordinary wage earners have been paying for the growth in the total economy. For those wanting detailed information on this see below[1]. The data clearly shows that the real value of all wages is falling, relative to inflation and overall economic growth.

This information is widely available, yet it hasn’t stopped the mewling of organisations and commentators that should know better.

In the past two weeks I have travelled the length of the North Island, from Auckland to Wellington and back, and have been disappointed to hear a great many people tell me the increase in minimum wage will damage their business and reduce employment growth prospects. Yet many of those people also complained they were unable to recruit. This was particularly so in the hospitality and the aged-care sectors – both notorious for their strong adherence to paying the bulk of their personnel the minimum possible.

Having set up and run a service business which started with three personnel and had 68 when I left I fully understand the temptation to keep the largest budgetary cost centre (wages/salaries) under strict control. But it is a false economy if your workers cannot thrive on what you pay them.

Low wages result in high staff turnover, difficulty in recruitment, higher training costs and lower productivity – the latter occurs as existing, experienced staff, spend an increased proportion of their time training new recruits.

There is no doubt that if the minimum wage went straight to, say, $20 it could have caused some real hardship. However, it will be at that level in two more years so we had all better plan for it and start asking some basic economic questions – like what happens to the money from pay increases forced upon employers?

Two things – the tax take goes up, which gives government some headroom to look at spending more generously (we all want better schools and healthcare). The second is that lower paid people spend their pay increase in the domestic economy – it doesn’t go on German cars and overseas holidays – it ends up in grocery stores, cafes, and those sectors of the economy where lower paid people work. That is, it increases business.

It was a similar story when smoking in bars and restaurants was stopped. The hospitality sector bleated that it would kill their businesses, whereas it delivered new customers – mainly families who appreciated the environmental improvements. The sky didn’t fall in.

Is there any further evidence to support the view that higher minimum wages are good economics? Thankfully, there is. Of all places the US census has a 20 year time series dataset that sees a positive outcome from increased minimum wages. A straightforward report on the data can be found here[2].

Even ‘Granny Herald’ shares my view, though the article is from November 2017[3]. There are some contra-indications – though to be fair not many and those that have been published cannot make a strong causal link between slower employment growth and increases in minimum wage. Other factors can also play a significant part, like increases in labour productivity through the application of investment in technology. In the interest of showing both sides of this coin, below is a link to an article suggesting that some minimum wage increases have not been all good[4].

Other metrics

When looking at business costs, wages are almost always the largest factor and in a typical service business account for about a third of revenue. Keeping control of wages is a meaningful and realistic business objective but they (wages) should not be measured in isolation from other costs and metrics. Property costs are rising much faster than inflation and GDP growth for no other reason than greed in a good many cases. Rent reviews are always ‘upward only’ and never tied to other measures – like CPI.

Businesses have little opportunity to fight this but they can look at other metrics – like measuring the real cost of production. In my experience too few do this routinely – whether looking at the cost of producing a cheese sandwich or installing a bathroom.

If your cost of production is going up, declining productivity may be the reason, but that’s a whole other article.

Ashley Balls is senior partner of LegalBestPractice. Email [email protected]