Minimum Wage up 10%

December 19th, 2006 at 10:30 am by David Farrar

The Government has put the minimum wage up 9.8% from $10.25 to $11.25.

Some people paint increases in the minimum wage as universally good or universally bad. To me it depends on a number of conditions.

First of all it is beyond dispute that the more one increases the minimum wage, the more likely it is to increase unemployment. For example if the minimum wage was doubled to $20.50 per hour, you would have many businesses closing or at least laying off staff. And if all one had to do to increase wages was increase the minimum wage you’d make it $50 an hour so everyone earns over $100,000 a year.

Now small increases in the minimum wage may not affect unemployment negatively. It depends how much it increases the wages bill for how many businesses, and how small or large those businesses are, and what industries they are in.

There can be significant inflationary effects also. The way to raise wages without raising inflation is to have productivity gains. And inflation steals from everyone. My concern with the desire to raise the minimum wage to $12 by 2008, is that it may have a significant flow on effect to other wages. Let’s say you were paying $13 an hour to your staff for basic retail work and the minimum wage is $9. Now if the minimum wage is now $12, you as an employer may also have to increase wages to say $16 an hour, and that will mean you have to put your prices up to compensate. And inflation is already running above the target band.

It will be interesting to see what happens with unemployment and inflation after 1 April.

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