The minimum wage

January 25th, 2013 at 2:00 pm by David Farrar

wrote in the NZ Herald:

I read with astonishment the contribution on Friday from Julie Fairey who seemed unaware of the facts of increases and their dire, unintended consequences.

There is little doubt that we desire higher wages and higher standards of living for our society but this cannot be done through legislation.

The effects of a minimum wage increase, despite their good intentions, have led to those whom it is intended to help being unemployed or finding it more difficult to find jobs and learn skills as the incentive to hire gets legislated away.

American Samoa had a terrible case of this when the federal Government increased minimum wage up to US$7.25 an hour, in some cases an increase of $4 an hour.

This is good isn’t it? High incomes and more economic demand as Julie Fairey “argues”. Well no, what happened was a mass exodus of jobs, one fishing and canning company slashing thousands of jobs on the island nation, sending them to the US state of Georgia.

Those earning around US$4 an hour now had nothing and American Samoa lost enormous job-creating investment that now headed to a small town in southern America where more skilled labour can justify the higher costs.

There is only one sustainable way to lift wages – productivity.

You could increase the wage to $100 per hour, surely even a diehard socialist could see the damage it would do. But the principle is the same at every level. The ripple effect of these job losses caused by such intervention in the market can be devastating.

The damage tends to depend on where the minimum wage is set, in relation to the median wage.

Although many who study minimum wage come up with differing opinions about the amount of job losses due to minimum wage increase, the most devastating is surely what is unseen.

What we don’t see is the entry level jobs that could have been created if legislation did not distort the market, jobs that would have allowed those unskilled, maybe currently on the dole, to earn an income and provide them with hope for the future.

Have you ever wondered where those ushers went from movie cinemas? Or window washers at service stations? Bag packers at supermarkets?

There is no point in the employer hiring if the cost is greater than the value produced. This is a law that tells employers to discriminate against the young and unskilled.

It is no coincidence that youth and minority unemployment is much higher than the national average. And indeed no coincidence that it was not always like this.

Absolutely not. There was a strong correlation between youth and adult unemployment for around 25 years up until the abolition of the youth minimum wage in 2007.

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17 Responses to “The minimum wage”

  1. ross69 (3,652 comments) says:

    Nonsense. Productivity gains can and often do outstrip wage growth. However, we have also seen CEOs get rewarded for poor performance with large pay increases.

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  2. Ryan Sproull (7,060 comments) says:

    Can you really have minimum wage without a maximum salary?

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  3. hamnidaV2 (247 comments) says:

    I must admit Bill English provided a good laugh on this topic when he suggested we close the income gap with Australia by lowering wages.

    And the Don Brash idea – abolish the minimum wage to increase productivity and close the wage gap with Australia.

    Real bright ideas chaps.

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  4. Scott (1,736 comments) says:

    I agree with DPF about the minimum wage and especially I would argue again for the need to bring back youth rates. Youth unemployment is over 25 %! Something needs to be done to get our young people working. We need to bring back youth rates so employers can afford to hire them and our kids can get a job.

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  5. Parlyguy (22 comments) says:

    But not only the lack of employment opportunities, but the inflationary effect as well.

    When an employer is forced to pay more re minimum wage, where does that cost come from? Usually from the cost of product/service provided. So those suppposedly helped by a minimum wage increase are then hit with increased prices of everything! Ironically, those employers most likely to be paying minimum wage produce services/goods generally consumed by minimum wage employees (yes I know its a generalisation, but none the less valid).

    Also there is scant appreciation by politicians for the knock on effect. Every increase in the minimum wage means those that are more skilled and/or experienced and justifiably earning more see a decrease in relativity and therefore demand a pay increase as well, putting further pressure on the employer to increase prices or reduce the labour bill by shedding staff.

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  6. Rex Widerstrom (5,330 comments) says:

    We’re still talking about an inadequate pool of jobs, so we’re debating who gets what’s available at the expense of another group, not about reducing overall unemployment.

    Make young people more affordable by making it legal to pay them less (and there’s nothing wrong with letting market forces do this per se) and when the next job becomes available they might get it… at the expense of an older worker.

    There’s already a great deal of age dsicrimination in the job market against older employees, to the extent that the Australian government offers a cash bonus to employers who’ll hire someone over a certain age (I forget what… 50 I think, or perhaps 55).

    The unseen effect of lower youth wages is older employees offering to illegally work for the same rate so as to have any work at all. Sure you don’t see many grey hairs behind the fast food counter but I’ve spotted a few trolley “boys” lately who look like they should be riding a motorised scooter not pushing a deadweight of trolleys.

    I agree it’s pointless, even counter-productive, to lift the minimum wage without productivity gains. But it’s also pretty pointless to lower it and simply shift the high percentage of unemployment from one group to another.

    At the risk of upsetting the market purists again, the government needs to have a strategy to create jobs, not focus on trying to stuff more beneficiaries in the “employed” bus than there are seats on that bus. And that means getting creative and incentivising, just like they did with The Hobbit. Or is attention only paid to the needs of employers when there’s a Hollywood premiere and a photo-op for the PM involved?

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  7. Tharg (15 comments) says:

    But the ‘productivity growth is the only way to lift wages’ argument doesn’t really stand in the real world does it? E.g. http://rwer.wordpress.com/2010/11/20/graph-of-the-week-usa-productivity-and-real-hourly-wages-1964-2008/
    Thanks to technology, globalisation, dismantling of unions and flexible labour laws, more efficient work has simply translated into bigger profits rather than higher wages.

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  8. Kea (11,878 comments) says:

    If a business can not afford (at least) the minimum wage, the business is not viable and is a waste of time and money. Although I am generally against the government interfering, I have no sympathy at all for those who would pay people less than the minimum wage.

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  9. Paul Walker (50 comments) says:

    “But the ‘productivity growth is the only way to lift wages’ argument doesn’t really stand in the real world does it?”

    For a belief discussion of the relationship between productivity and wages see here. As Paul Krugman has said,

    “Economic history offers no example of a country that experienced long-term productivity growth without a roughly equal rise in real wages. In the 1950s, when European productivity was typically less than half of U.S. productivity, so were European wages; today average compensation measured in dollars is about the same. As Japan climbed the productivity ladder over the past 30 years, its wages also rose, from 10% to 110% of the U.S. level. South Korea’s wages have also risen dramatically over time”. (“Does Third World Growth Hurt First World Prosperity?” Harvard Business Review 72 n4, July-August 1994: 113-21.)

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  10. hamnidaV2 (247 comments) says:

    I think there was some dodgy rest home in Lower Hutt that was avoiding the minimum wage by deducting the employer Kiwisaver component from their workers’ wages.

    Can you Neolibs imagine that? Battling away in a rest home for less than the minimum wage. Maybe the owner was trying to close the wage gap with Australia.

    http://www.stuff.co.nz/dominion-post/news/8031177/KiwiSaver-ruling-could-raise-wages

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  11. wreck1080 (3,809 comments) says:

    In future it will also be more important to have a good education too. Factories will be run by a fraction of the staff needed today. But those staff who do remain will be highly qualified.

    The minimum wage will become less of an issue as the uneducated will be lucky to get work at all.

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  12. Ryan Sproull (7,060 comments) says:

    In future it will also be more important to have a good education too. Factories will be run by a fraction of the staff needed today. But those staff who do remain will be highly qualified.

    Our whole society could function quite nicely with a fraction of the human labour currently put to work, with automation and productivity-enhancing technology. Unfortunately, we’re working in a system where people aren’t told “robots do your job now, so relax” – they’re told “robots do your job now, so find a new job”.

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  13. swan (659 comments) says:

    @Rex Widerstrom:

    “We’re still talking about an inadequate pool of jobs, so we’re debating who gets what’s available at the expense of another group, not about reducing overall unemployment.”

    Google “lump of labour fallacy”, have a read then get back to us.

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  14. dime (9,666 comments) says:

    “If a business can not afford (at least) the minimum wage, the business is not viable and is a waste of time and money”

    the sort of business that is never going to make money. people buying a job rather than a business. there are plenty of them. im thinking the local dairy for a start.

    its sad that the left wing ideology gets in the way of young kids getting a start or some experience. its always coupled with their jealousy or dudes who do well. its just not fair wah wah wah

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  15. Rex Widerstrom (5,330 comments) says:

    @swan:

    Yes, so the amount of work available in a market is variable. I knew that. However in New Zealand, in the real world, right now, and not in some model in a Treasury wank’s wonk’s computer, the amount of available labour exceeds the amount of jobs available, hence: unemployment + underemployment.

    Obviously, as I’ve said above, since the market can expand the amount of work available as per the model to which you refer, it just needs good governance to enable it to do so with maximum efficiency.

    Talk to any small business owner drowning in regulation and tax demands and I think you might find it is not. Mind you, that’d mean observing reality rather than quoting theory.

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  16. Dave Stringer (186 comments) says:

    RE:
    “Factories will be run by a fraction of the staff needed today. But those staff who do remain will be highly qualified.”

    Indeed, the factory of the future will need one man and a dog to run efficiently. The man to ensure that no fuse is tripped, the dog to stop the man from touching anything but blown fuses.

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  17. mattyman1010 (35 comments) says:

    “But the ‘productivity growth is the only way to lift wages’ argument doesn’t really stand in the real world does it? E.g. http://rwer.wordpress.com/2010/11/20/graph-of-the-week-usa-productivity-and-real-hourly-wages-1964-2008/

    Tharg, your statistics is bad. Your comparing wages when you should be comparing real total compensation.

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