Labour’s Wage Hike: Minimum Opportunity, Maximum Folly

Labour promises a $2 increase to minimum wage despite strong evidence of its ineffectiveness as a tool for decreasing poverty


A $2 increase to the minimum wage, along with the removal of the 90-day work trial, and a Commission of Inquiry to set industry standards are part of the Labour Party’s work and wages policy introduced last week.

Labour leader David Cunliffe said within the first 100 days of taking office he will implement the Living Wage for core public servant workers and raise the minimum wage to $15 an hour – and then to $16.25 in early 2015.

Cunliffe emphasised that this increase would provide minimum wage earners with an extra $4000 a year in income.

“That will make a huge difference to their families; make a major contribution to reducing child poverty, and strengthening incentives for people to get into work.”

Mr. Cunliffe said 46 per cent of all wage earners had no pay increases last year, despite the economy growing by about 3 per cent.

“It is a travesty that 40 per cent of children growing up in poverty are living in working households.”

Problems with increasing the minimum wage

Before any critique toward those opposed to raising the minimum wage is set in motion, one must conduct a sober assessment of the following legitimate economic concerns of such a policy.

Can all businesses afford to bridge the gap between the current minimum wage rate ($14.25) and the new proposed rate ($16.25) and not have to lay off some employees?

Will higher-skilled employees in the same company demand a raise in proportion to what the minimum wage earner has received? Will this raise labor costs for the employer across the spectrum for all of his/her employees?

Will businesses raise prices to accommodate for the increase in labor costs and will this fuel wide-spread price increases for goods and services? Will this not disproportionately affect the poor?

Will low-skilled and inexperienced workers find it more difficult to gain employment if previously unemployed? And will this not fuel the poverty it was meant to alleviate?

Will businesses, especially corporations, substitute human labor for technology in the face of higher labor costs? Will this lead to technological unemployment?

Will some full-time workers be moved onto part-time contracts in lieu of higher labor costs for the employer? And thus be stuck with similar overall wages?

Are there not better ways to alleviate poverty and increase wages in society? For example: should we not be focusing on improving education and hence the future productivity of the citizenry?

Is the real minimum wage rate zero in the New Zealand economy that consistently boasts unemployment above 5 percent?

Which households primarily benefit from the minimum wage rate increase? Is it the teenager in a wealthy household or is it the household in poverty?

Although the rise in minimum wage may indeed help some people it will, by design, diminish opportunity and jobs for others and will lead to an increase in the prices of goods and services.

The unintended negative consequences of a raise of $2 will most likely outweigh the proposed benefits. Most economists agree with this analysis.

When asked about the cost to businesses, Cunliffe said it was an increase that the economy could afford.

“When low-wage workers have more money in their pockets, they spend every dollar they earn. That ends up in the corner dairy, the panel-beater shop, the business down the road. In the end, it’s win-win for business as well as workers.”

But Cunliffe is assuming that the increase will not have any negative consequences – hence with a philosophy like that why stop at $16.25 an hour, why not $30?

That way everyone has even more money to spend in the dairy corner, in the panel-beater shop and the business down the road.

There is an intelligent argument to be made for a higher minimum wage, but it certainly can’t be based on the economic misconceptions expressed by Cunliffe.

The case for opportunity

Increasing the minimum wage forever assumes that the labor market is full of educated, high skilled workers whose productivity will automatically justify the minimum wage rate.

However, at any given time – due to many factors including poor education, lack of work experience, cyclical poverty – there are many low-skill workers in society.

Now, how do we best help these low-skill workers and alleviate them from poverty?

The most effective tool is a decent education.

The reason why New Zealand has a greater living standard than Bangladesh is primarily due to our education. Quality education leads to a more economically productive and higher-skilled citizenry.

However, today many New Zealanders receive lackluster education through public schools.

One way to counter the real-world disadvantages of this poor education would be to provide a range of economic opportunities for those affected by inferior education.

A reduction in the minimum wage rate, or by simply not increasing it, better enables the ill-educated and low-skilled people of New Zealand to gain employment.

The primary advantage of this is not the initial small monetary reimbursement they receive for their work but the on-the-job-training they receive that improves their skill set and future bargaining power.

Hence they were unfortunate enough to receive mediocre education but were given another chance to further their skills through on-the-job-training and economic opportunity.

A glance at the youth unemployment rate exhibits the problem of a high minimum wage and reinforces the notion discussed above.

New Zealand’s youth unemployment rate in the year to March 2013 was 17.1 per cent. Which is almost triple the overall unemployment rate.

It’s no accident that the youth unemployment rate is so high.

Young people are by definition the least skilled and most inexperienced workers in society. And we see that they are consistently unemployed on a higher basis than any other age bracket.

A high minimum wage rate contributes significantly to this phenomenon.

There are many creative strategies that government, businesses and civil society institutions could utilise in order to help alleviate poverty in New Zealand.

However, none of these strategies ought to include reducing economic opportunity for those less fortunate.



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About the author

Cameron is a Freelance Columnist who works for a non-profit surgical company in the heart of London. A recent political science graduate, Cameron has a strong writing background in all things political, economic and foreign affairs. His writing style is a blend of the cold hard facts with a dash of opinion and personality. Cameron writes weekly political columns for the New Zealand Times and is intending to broaden his writing repertoire to include topics such as travel, sport and food & drink.

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