Job market warning as minimum wage rises
An economics think-tank points out that only two other OECD nations have a higher minimum wage relative to the median wage, writes Susan Edmunds.
Minimum wage workers earn $20 an hour as of this week, but the increase is likely to reduce the number of people hired in new jobs, economists say.
The Government has increased the wage year by year since 2017, on a path to $20 by 2021. It has not altered that plan despite calls to rethink because of the Covid-19 pandemic.
The Ministry of Business, Innovation and Employment recommended in December that the increase take effect on October 1, rather than April 1, because it was expecting the labour market to be recovering from October.
It also suggested instead a $19.15 minimum wage this year, which it said would have a restraint on employment of 1000 jobs or fewer. The $20 rate would have a restraint of about 9000, it said.
A restraint on employment does not indicate a number of jobs that will be lost but estimates how many fewer roles there could be compared to a scenario in which the rate did not change.
MBIE said that although the labour market had been less affected by Covid-19 as a whole than initially expected, unemployment had risen and some employers had reduced hours of work.
‘‘The hospitality, tourism, retail, transport, manufacturing and construction industries have been affected the most by the pandemic,’’ the ministry said in its report.
‘‘These are sectors that employ a high proportion of minimum wage workers and would be affected by the increase in the minimum wage rate. Many employers in these sectors are also small businesses that have tight operating margins, are sensitive to cost increases and may be particularly vulnerable and on a long road to recovery.’’
Eric Crampton, chief economist of the NZ Initiative, said the timing was not right for the increase.
‘‘Minimum wage increases that continue to outstrip overall wage increases, in near-recession pandemic conditions, when employers face strong uncertainty about when and how the border might reopen, are really not a good idea,’’ he said.
The OECD’s latest figures, from 2019, showed only Colombia and Turkey had a higher minimum wage relative to the median wage, Crampton said.
MBIE said increasing the rate would help to lift the incomes of the lowest-paid workers.
‘‘However, expected income gains from minimum wage increases must be balanced against any potential negative impacts on employers, such as increased labour costs, inflation pressure, and for workers, reduced hours or unemployment.
‘‘The size of these impacts depends on the size of the minimum wage increase, the economic and labour market context in which it occurs, the Government’s actions to address adverse labour market conditions and how employers, employees, unions, and customers respond to these changes.
‘‘Minimum wage increases are most likely to apply to and benefit certain demographic groups such as young people, Ma¯ ori, Pacific peoples, informal, part-time and/or low-skilled workers, who are more likely to be on low wages. These groups are also more likely to be the first to experience negative employment effects resulting from minimum wage increases, such as reduced hours or job loss.’’
Crampton said the move would raise costs for employers at a difficult time while doing little to help workers who most needed assistance.
‘‘And MBIE warned that while employment effects in prior years could be absorbed by broader employment growth, this time, that buffer does not exist. The Government has chosen a very risky path.’’
Infometrics economist Brad Olsen said data this week showed a
‘‘broadly flat to softer’’ jobs market, and there was a feeling it would move around as different industries adjusted.
‘‘Some firms are doing better and hiring more workers, particularly in the health, construction, and public service sectors. But tourism-based activity is still much lower than normal, with 20,000 fewer filled jobs across the transport, food and
accommodation, and arts and recreation sectors in February 2021.
‘‘Today’s minimum wage increase will be welcomed by those currently in minimum wage roles, and will boost incomes for those on the lowest earnings. But we also expect the minimum wage increase will restrain additional hiring in some industries where margins are being squeezed and business
earnings are already considerably lower,’’ Olsen said.
Job numbers would not necessarily fall but the extra cost for businesses would affect additional hiring.
It was also important to remember that workers earning less tended to spend most, if not all, of their income, relative to other groups, which could help to support current economic activity.