Opinion: How NZ's high minimum wage imposes costs on businesses, consumers and the unemployed

Posted in News December 15, 2009 - 10:21am, infometrics

By Infometrics economist Nigel Pinkerton Like the 30,000 members of the facebook group "bring back Georgie Pie", I have fond memories of the franchise. Some would swear by the taste, but the biggest attraction for many was that the pies were cheap. Georgie Pie's $1, $2, $3, $4 menu became legendary in fact, but therein lies the problem. The economic and regulatory environment has evolved since the 1990s, and the costs of doing business for an outfit like Georgie Pie have increased substantially. If McDonald's were to resurrect the brand, they may be able to milk some extra revenue and free publicity out of it. But the cost of a pie would likely come as a shock to many people. The Georgie Pie experience would never be the same. The average item that cost $1 in 1996 would cost more than $1.35 today because of inflation. The $1.35, $2.70, $4.05, $5.40 menu wouldn't sell itself in quite the same way the original menu did. But Georgie Pie's problems would run deeper than this. Georgie Pie's costs would have increased much faster than inflation, had the franchise not been shut down.

Georgie Pie had a reputation for paying its mostly youth workforce relatively poorly. When I was growing up a job at McDonald's paid up to $3 an hour more than a job at Georgie Pie, where a 15 year old at started on about $5/hr. The minimum youth wage has been increased several times since the late 1990s, when it was set at $4.20/hr (the equivalent of $5.60 in today's dollars). This rate originally applied to 16-19 year olds, but from 2001 the adult minimum wage was extended to cover 18 and 19 year olds. Following this change, the youth minimum wage was practically abolished in 2008. Arriving at the present day, all employees over 15 years old must be paid $12.50/hr (although some under 18 year olds can be paid a training wage of $10/hr for up to three months after hiring). For the record, I am in favour of having some form of minimum wage. But this is largely a value judgement. An informed debate about minimum wages has to acknowledge that there are costs. A minimum wage is not money for nothing, and like many other government policies it imposes costs on one group of people for the benefit of another. In the case of minimum wages, the beneficiaries are employed low-skilled workers. The costs of having a minimum wage are borne by different groups within society, including unemployed low-skilled workers, and consumers "“ such as fast food eaters. The fast food industry has a high proportion of low-paid workers and increases in the minimum wage can directly affect the price of fast food. For those of us who have fond memories of really cheap fast food, the kind Georgie Pie was famous for, this loss is one price we pay for New Zealand's choice to have a higher minimum wage. In theory, if it costs more to employ a particular group of people (e.g. youth) then fewer of them will be employed. Those lucky enough to have a job earn more but it becomes tougher for the unemployed to find work. The negative effects on employment increase the higher a minimum wage is set, relative to the market wage for low-skilled labour. Anyone who wants to hire people on less than the minimum wage, such as a people with disabilities, has to get the employees individually assessed by a suitably qualified professional. Many advocates for people with disabilities find this process overly bureaucratic and restrictive. A minimum wage not only restricts employers rights to set pay levels, but restricts the rights of the unemployed (whether disabled or not) to drop their asking wage to a level where they might get a job. A further drawback of setting the minimum wage too high is that it can discourage up-skilling, by lowering the returns to training. If an unskilled youth is lucky enough to get a job, the current minimum wage means they will be paid quite well. When I was 17 and earning about $7/hr part-time in today's dollars, all I could think about was gaining the experience and qualification that would increase my earning potential. Had I been earning $12.50/hr, leaving school at 17 would have been a reasonably attractive option. Minimum wages benefit the low-paid who are already in work, but a high minimum wage imposes costs on businesses, consumers and the unemployed. New Zealand's relatively high minimum wage makes it difficult to sell cheap fast food, for example. Recently there have been ignorant claims that we can raise living standards by simply raising the minimum wage. Next time someone makes this claim and it sounds sensible, just remember Georgie Pie. ________________ * Infometrics is an economic information and forecasting company based in Wellington. To find out more, see its website here. This piece first appeared in the Dominion Post.

22 Comments

by Duggie | 15 Dec 09, 10:36am

What a ridicualous piece of

What a ridicualous piece of rightist drivel

It is only since NZ started to beleive these lies that our standard of living has dropped.

Who has the highest standard of living globally - scandinavians - and I dont see them reducing their minimum wage to starvation levels

All that reducing minimum wage does is reduce the incentive for firms to do things smarter and more efficiently - and keeps the bulk of the population in a poverty trap

Increase the minimum wage to a decent level, force firms to upskill their workers to survive, and THEN watch the unemployed upskill themselves to get into the workforce.

BTW at the same time - DONT increase dole etc - so that incentive to retrain and get into work force as skilled worker is high

I have a son who would rather sit around and accept menial tasks at minimum wage than get trained to earn more. - If minmum wage was so high as to force employers to only hire skilled workers and do work more intelligently, then he would be motivated to study and upskill

Low minimum wage encourages looser mentality and traps economy and people in low wage trap.

Get out of it - and force business to become intelligent to compete - not just cut staff costs to compete

by shaun | 15 Dec 09, 11:09am

So, why don't we drop

So, why don't we drop min. wage to say $3/hour, that would be boost for our economy, everyone would be happy, and full of junk food

by Mike | 15 Dec 09, 11:10am

Changing the minimum wage does

Changing the minimum wage does not change the amount of capital companies have available for employing labour. Therefore, either companies employ fewer people at higher wages (higher minimum wage), or they employ more people at lower wages.

A very high minimum wage is clearly unacceptable. Take it to the extreme and see what you get. Only a handful of people employed, super-bankers, and the rest of us on the dole from their taxes.

What about a very low minimum wage. Take that to the extreme (zero) and what do you get? Everyone that wanted to work would be able to find work at some price. That price might not be acceptable; However, the worker gets to choose to give the potential employer the finger and walk on.

The minimum wage is, thus, nothing more than the government stepping in and setting a lower boundary on wage negotiations. And maybe that helps people who aren't good negotiators. But it also hurts people who can't get work at all.

I don't have a problem with lowering or even scrapping the minimum wage. Scrapping the minimum wage entirely doesn't force workers to work for peanuts. It just makes the opportunity available. If both parties are happy with an opportunity, than the existence of the opportunity has value. If one isn't, the opportunity is not taken and no damage is done. Thus the net value of the change can only be positive (presuming rational self-interested actors, which isn't quite the case).

Now I'm fully aware that to the ears of the average common sense Kiwi, a lower minimum wage SOUNDS LIKE companies screwing over the little guy. Unfortunately most people still don't know how to think properly. "Common sense is the collection of prejudices acquired by age eighteen." I doubt a lower minimum wage would ever be acceptable to the dumb masses. So let's find some other solutions that are acceptable.

by David Cook | 15 Dec 09, 11:14am

@Duggie Try again, raising the

@Duggie

Try again, raising the minimum wage just moves jobs offshore to China and India.

As to your typical left wing curve ball "But the Scandinavian countries have a wonderful lifestyle". I'd like to see a Scandinavian country in the same geographically position as New Zealand. Those scandinavian countries have access to europe something New Zealand doesn't.

by Rob | 15 Dec 09, 11:21am

You pay peanuts, people act

You pay peanuts, people act like monkeys.
@Mike: " . . . aren't good negotiators" - with a large pool of unemployed there is no negotiation. Go back to your right-wing fantasy land Mike and play with your Roger Douglas doll.

by Wally | 15 Dec 09, 11:39am

Hey Duggie...check out the reports

Hey Duggie...check out the reports from the states that research indicates the Min wage causes more harm than good. It's being run on cnn. Seems even Obama is getting a helping of this research on his turkey for xmas.

by roelof | 15 Dec 09, 11:44am

if anything... this article shows

if anything... this article shows some of the failings and weaknesses of Economics.
In a mechanical sense... of course Nigel is correct in what he says... But ,surely, there is far more too it than just who it imposes a cost on.
That logic can be applied to almost every law we have... ?????? (A cost is imposed on someone.)

To take this kind of logic further... If there was no minimum wage...It would only take one or two fast food operators, paying really low wages, to force competitors to follow suit... in order to compete.

Human nature being what it is... it makes sense to have a minimum wage.
Especially since the playing field is not really level in terms of supply/demand for labour... ( ie. entrenched levels of unemployment).

How much that minimum wage should be is the big question.... ( I don't like Don Brashes idea of reducing it to $9 per hour. He was supposed to be offering ideas on raising our level of prosperity..)

Are there any benefits for having a minimum wage..???
I think so...

Minimum wages benefit more than the low paid.
With the " velocity of Money", I would guess that a minimum wage might help to give a certain level of "robustness" to an economy..... just as our social welfare system is a buffer against another 1930s' style deflationary spiral.

To get an idea of just how much our standard of living has slid over the last 30 yrs... watch this video.. I found it very interesting.

http://www.youtube.com/watch?v=akVL7QY0S8A

by steven | 15 Dec 09, 12:20pm

@David Cook: The wages in

@David Cook: The wages in china are so much less that dropping the minimum wage has no effect.

Lets look at this in (several) context(s),

1) Good employers and bad employers have a level playing field in terms of minimum wages, so a bad employer cant force out a good one by exploiting the dis-advantaged.

2) NZ needs to be a country of high value goods, using Georgie Pie is a classic mis-example of what we dont want....we cant compete with China on low cost...

3) Health issues of eating that crap....based on that alone I'd double the minimum wage.

4) Goods are either worth it or not...either ppl are prepared to pay for an item or if its too expensive they wont be, supply and demand curve...

5) over the last decade the right wing retards have, via Roger Dodgy Douglas proven that their economic model and ideology is faulty....look at NZ, OZ and Sweden for examples of how this has just not worked.

6) Youth un-employment, I fail to see the value of McDonalds employment as opposed to doing skilled training in a trade like plumbing...

7) If the wage is so low then its highly likely that such a worker would get Govn Benefits anyway? (not sure, but that's the case in the UK). So the costs are there anyway.

eight) PK has a comment on wages and recovery...

http://krugman.blogs.nytimes.com/2009/12/09/wages-and-recovery/

"argues that wage flexibility wouldn't be much help in fighting unemployment."

So the kicker is, indeed G. Pie's might be cheaper and you might sell more but the workers who now earn less cant buy as much, so some business owners (of Georgie Pie) are better off, retail consumers of Georgie Pie are supposedly better off, but the GP workers have less $, they are worse off and they money they would have spent at say Pak-n-Save isnt, so the owners of Pak-n-Save are worse off. So Im sure there is some mix of this model and the original posters model, but the net benefit of lowering the minimum wage is at best questionable at worst political clap trap....

"Next time someone makes this claim and it sounds sensible, just remember Georgie Pie."

Puke.....I will...cheap, poor quality ingredients, unhealthy pastry, badly cooked, ...so like the right wing ideology.....crap....

regards

by steven | 15 Dec 09, 12:50pm

@Roelf: A good piece....indeed its

@Roelf: A good piece....indeed its quite clear 1% of the population are doing better at an ever increasing pace....the top 5% are doing fairly well....the rest, the middle class have at best broken even....there are more than enough stats on this. Now in-arguably to my mind if the last 20~30 years to Reagan/Thatchernomics were so good for the middle class etc, there should be clear stats to support this, instead its the opposite, therefore its nuts to continue with this failed experiment...the dis-advantage is discounting National as the poster boy of this failure is a move to Labour...which isnt any better...

Slippage in living standard can be attributed to many things.....for NZ I think 30 years ago NZ had an un-realistic life style, living beyond our means, then we had to pay it back....I think we are there again, hopefully we wont see the likes of rogernomics to "fix things" this time around....

regards

thing

by David | 15 Dec 09, 1:20pm

No wonder we're in such

No wonder we're in such a mess if this superficial claptrap is the best an infometrics economist can produce.

Good points Steven.

A low or non existent minimum wage lowers living standards.
It's all to do with allocation of capital. Take an extreme example; we could lower the wage to the point that it is cheaper to dig our fields by hand, no tractors. Marvelous say the round table, full employment and everyone productive but we can barely afford to eat.

Fact is that our failure to raise productivity is a result, in large measure, of our low wages.
We've got the flexible labour market, destroyed the unions, followed the recipe from the IMF and labours share of the economy continues to shrink and productivity stagnates. Seems to me the whole theory was flawed from the get go.

by dogma | 15 Dec 09, 1:28pm

nicely said steven. we can't

nicely said steven. we can't compete with china on price.

by ak | 15 Dec 09, 1:31pm

The startling aspect of posts/comments

The startling aspect of posts/comments like this is their very existence: at the very time that the poor of the world churn in the misery created by these smug, ice-hearted economic geniuses, they have the utter gall to peer down from their gilt-lined eyries and offer yet more of the same ideological poison.
Such staggering, chilling arrogance is redolent of the collapse of the Roman Empire - and a portent of massive imminent global change.

by roelof | 15 Dec 09, 1:37pm

Thing Yes... One of the

Thing

Yes... One of the most disturbing trends in the Western world is the concentration of wealth in fewer and fewer hands...

I suppose the ulimate symbol of our kind of Capitalism is Goldman Sachs.

It doesn't take much to realize that there is something wrong and that our form of Capitalism is simply something that has evolved by special interest groups persuing their own self interest, and using economics as the rationale to get acceptance for their own agendas, which generally have to do with Profit.

I don't think our current highjacked form of Capitalism serves us very well.
I think we could come up with a much better form of Capitalism.

by David Cook | 15 Dec 09, 1:40pm

@steven What high value goods

@steven

What high value goods does New Zealand produce????

China on the other hand produces all sorts of high value goods, computers, TV's etc.
Also China's workforce is probably far more skilled than NZ's. What exactly is left for New Zealand to create. Since we can't compete with china on low cost we most certainly also can't compete with china on the high cost. This leaves NZ unable to produce anything of any value. Add to the fact we are so far away from all our markets our choices become very limited.

At least in your second post you alluded to NZ's problem, of course I fail to see how you can come up with logic that you wont see rogernomics again. Steven NZ has over-consumed it has created an unstainable state apperatus that will have to be dismantled either the NZ people do it themselves or the IMF will do it for you.

Unlike the US you can't export inflation to the rest of the world as the rest of the world doesn't give a stuff about little old backwards NZ.

by David Cook | 15 Dec 09, 1:42pm

Judging by the posters in

Judging by the posters in this thread I think It should be very clear that it will be the IMF deciding NZ policy in the near future.

by Ray | 15 Dec 09, 2:19pm

"I have a son who

"I have a son who would rather sit around and accept menial tasks at minimum wage than get trained to earn more. "“ If minmum wage was so high as to force employers to only hire skilled workers and do work more intelligently, then he would be motivated to study and upskill"

The dumbest thing ive heard anyone say on these forums for a long time.

by Wally | 15 Dec 09, 2:43pm

Interesting.....I wonder how many teens

Interesting.....I wonder how many teens plan on earning just a minimum wage..plan on not borrowing thousands to pay to get skilled...and why!

by Hamish | 15 Dec 09, 3:09pm

I actually thought the small

I actually thought the small pie was $0.75 as was the small chips?

by Tigger | 15 Dec 09, 5:21pm

"but restricts the rights of

"but restricts the rights of the unemployed to drop their asking wage to a level where they might get a job"

What a one sided, stupid, be grateful you have a job, article.

Could you not explore the positive aspects of increasing the minimum wage, and wages overall, such as the incentive to invest and improve quality, instead of just taking cost out.

If a company or industry or sector needs to take this approach in order to make a profit or survive then it shouldn't. There are wider economic impacts of a minimum wage such as benefits to family health and resulting in less transfers from the community via the tax system to provide that health. This offers a greater return that and keeping a Meatless pie in business.

Not a good Article!

by Iain Parker | 16 Dec 09, 4:21am

Pinkerton, if Hide, Brash, Kerr

Pinkerton, if Hide, Brash, Kerr and your ilk want overt slavery for the commoners, why dont you piss off to one of those lovely stable, peaceful nations that have already got it.

by Hamish | 16 Dec 09, 9:05am

Here's a good example of

Here's a good example of how quality can beat low cost labour.
http://www.stuff.co.nz/taranaki-daily-news/business/3132546/Clean-air-bl...

by Iain Parker | 16 Dec 09, 9:53pm

Ray, I think I might

Ray,
I think I might be able to equal your "dumbest thing Ive heard in a while" on Richard Lowe's - On The Feild - farming radio show, Radiolive 5.30am, had a chap from PGC Wrightsons finance on there, predicting goodthings for Horticulture and Agriculture, which they have heavily financed, because it has reached a stage where there is not enough fertile land to provide the increased need for food into the future, thus the price of food must go up and give farmers better returns?

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