Minimum wage increases not as simple as they seem
With further opening of borders brought forward from October and immigration policy brushed off and announced with the main purpose to attract skilled workers, we will soon find out what kind of employee market we are as a country.
No doubt New Zealand will be competing globally to attract people to bring their skills here and to retain the ones that we have.
All these people willing to jump countries for better opportunities will see which country best appeals to them or in other words is the best “employee market” — the market that offers not only a job but the opportunity to work harder and fulfil their aspirations to do better.
With the recent increase in the minimum wage, we are now in the top OECD countries for minimum wage, along with Australia. One would imagine this to be a great reason for us to become an employee market that people all around the world would be looking for and put us on par if not better than Australia.
A big reason behind the “Great Resignation” is employees seeking the feeling of being valued and that the value that they add is being rewarded proportionately. This feeling is often comparative — both to their own work standards and also to their colleagues.
One cannot keep employees feeling rewarded by keeping their earnings close to someone who has just entered the workforce and is on the minimum wage or, as it would be negotiated under the new industrial law that the Government is about to introduce, the Fair Pay Agreement system.
This will allow only 10 per cent of workers to determine the minimum wage for their specific sector, forcing employers to pay that minority imposed “special” minimum wage, effectively making the statutory minimum wage irrelevant for that specific sector.
To retain employees and keep them feeling valued, employers would often offer pay higher than such imposed minimum wage levels. But this can happen only if the employer is able to afford it.
The biggest issue with minimum wage increases enforced by Government is that it does not make us a better performing and wage affording economy. If the opposite was true, we would at least be seeing the median wage increase too, to the same degree as the minimum wage.
A great measure for this would be our Kaitz index — in simple terms the ratio of the minimum wage to the median wage. Median wage is used in this measure as it does not change like the average wage with increases in minimum wage or any extreme changes to wages at the higher end.
As per the OECD data for 2020, New Zealand’s Kaitz index is much higher — 65 per cent compared to Australia’s 53 per cent. This is because the gap between the minimum and median wages in Australia is higher than here. We have had two more steep increases in minimum wage after 2020 making us head over 70 per cent and towards high-ranking countries for this measure, like Chile, Colombia and Costa Rica — not the countries we would like to be grouped with.
The Kaitz Index is not just a simple ratio but an important indicator of future opportunities that people who start on minimum wage can aspire to. The higher the ranking on the Kaitz index, the lower such opportunities will be. As per OECD’s data, New Zealand’s Kaitz Index changed from 59 per cent to 60 per cent from 2008 to 2017 and then just in three years until 2020 it increased from 60 per cent to 65 per cent; Australia’s Kaitz index was 54 per cent in 2007 and 53 per cent in 2020.
Our Government seems to be falling into the trap of thinking a high minimum wage is a key factor for employee retention when, in reality, it helps retain workers at the lower end of the wage scale and causes us to lose those in the middle, our experienced and skilled ones.
The outcomes of public policy like minimum wage increases are not as simple as they appear. There are several intercalated consequences and one of those would be the kind of employee market New Zealand is becoming.
It is not having a high minimum wage that will make us a better-performing economy, but the capacity and affordability of our economy to pay more than the minimum wage in a sustainable manner.
We want to attract and retain experienced and skilled workers. We can’t do this with the current trend of closing the gap between the minimum wage and the median wage. This will only make us an employee market of better minimum wage seekers.