Treasury: don’t ditch youth rate

Young workers with low skills are particularly hard hit.

Treasury warning on minimumwage policy

Treasury is urging the Government to ditch its plan to abolish the youth rate, warning that minimum wage pledges will hit the prospects of younger, unskilled workers if the economy cools.

Advice from Treasury officials released under the Official Information Act shows Treasury expressing concerns that a commitment to a substantial increase in the minimum wage could harm the prospects of the very people the rate was meant to protect.

While Treasury explicitly said it supported hiking the minimum wage by 75 cents an hour to $16.50 in April, as the economy and labour market would see little impact, officials warned the threeyear plan to get the minimum wage to $20 could have a series of unintended consequences.

These ranged from hurting the local economy in already slowgrowth regions, the risk that once New Zealand’s minimum wage was on a par with Australia’s, fewer young, low-skilled worker would cross the Tasman for work and that higher minimum wages had been shown to attract young people to leave education to enter the workforce.

But the advice provided a key policy challenge for the Labour-led Government, warning that should the economy turn, a world-leading minimum wage would harm young people, so the youth rate, also known as the starting-out rate, should be maintained.

Treasury said that in economic downturns, employers tended to keep existing workers on without cutting wages, but cut costs by not hiring and employing new staff on lower pay rates.

‘‘This concentrates the minimum wage impact on the groups entering the labour force, like young workers, and those with low skills. The higher proportion of young people on the minimum wage in New Zealand will exacerbate this effect and magnify its impact on youth unemployment.’’

‘‘Young workers with low skills are particularly hard hit, and this could impact on those ethnic groups with many young people with low qualifications like Maori and Pacific,’’ Treasury warned, noting that even during the current buoyant job market, unemployment for young people generally, and especially young Maori and Pacific people, was far higher than for the general population.

Set at 80 per cent of the minimum wage, the youth rate can be paid to workers aged 16-19 in certain conditions including when they first enter the workforce, are coming off a benefit or are in industry training.

Treasury urged the Government to consider maintaining the system, saying it provided ‘‘a safety valve in weak economic conditions’’.

‘‘We are aware that the startingout rate is currently not widely used by employers (so currently the consequences on young people of keeping it are low) but it provides a safety-valve of enabling increasing use in an economic downturn.’’

While Labour has consistently promised that it would abolish the youth rate within 12 months of being elected, on Saturday Workplace Relations Minister Iain LeesGalloway was non-committal.

‘‘It’s something that we will include in our policy development and we will work with our Government partners on.’’

A spokesman latter added that Lees-Galloway committed to ‘‘taking this to Cabinet within the first 12 months’’.

Treasury also urged the Government to ‘‘maintain the messaging’’ that any increases in the minimum wage will be determined by economic conditions at the time.

‘‘Do not provide any more future specificity about future increases than the general condition of $20 by 2021 at this point.’’

Labour has followed that advice.

Treasury’s overarching message was that in a strong economy minimum wage increases, if relatively small and frequent, would have little impact. For the Government to hit its commitment, the increase would have to accelerate to average around $1.16 a year for three consecutive years.