Friday, September 2, 2011

Makin' Minimum Wage

As the election draws nearer, one of the typical cards is being debated - minimum wage. Not a topic we're not use to seeing, but in an election where the focus is on growing and improving our economy, it's interesting to see what the arguments for against minimum wage changes are.

The left (Labour, Greens, NZF) says:
"That's not enough money for them to live on, we've got to give them a living wage." Phil Goff (Labour)

The right (National, ACT) says:
"If you mandate a minimum of $9 an hour, that guy has to go back home and watch TV at $4.50 an hour [on a benefit]. You've got to ask yourself if that is a sensible thing to do." Dr Don Brash (ACT) 

A minimum wage is the lowest price a person can legally buy and sell labor for. Minimum wage is a concept subjected to heavy debates amongst economists over its efficiency and practicality, while politicians take an opinion that favors their party line from whichever economist works in their favor. Much of the economic debate is placed on convention and circumstance of minimum wage cases, so to see what the politicians think they're doing, I'll break down the systems.

Situation of NZ Economy

The left says:
The Government's "tax swindle" had widened the take home pay gap between someone on $30,000 and someone on $150,000 by "a massive $135 a week" without stimulating the economy. Helen Kelly
"If you want stimulation, give the money to the people who don't have enough to spend, rather than giving it to people at the top who will put it aside and won't be out there spending it and generating demand for goods and services." Phil Goff

The right says:
The youth unemployment rate - 27.6 per cent for those aged 15 to 19 - is a "scandal". Dr Don Brash 
"I don't want to see an underclass of any colour. I don't want to see any children of any race living below the poverty line. " Dr Don Brash

The common goals are a stronger and more dynamic economy with people that are earning enough to live comfortably without the need for government assistance. Fantastic, I simply couldn't agree more! But like everything in politics, we might have similar goals, but the war begins when we try to figure out how to get there. The right, taking classical liberal economic theory would argue the textbook answer that every economist knows - that a minimum wage creates unemployment as the demand for labor decreases and the supply of labor increases on top of that. This theory in its intrinsic form is agreed upon by 90% of economists (ref American Economic Review,1978)  and would be clearly ridiculous and naïve to implement. 

The socialist camps on the left cling to the theory that it gives the lowest income earners better, and some economists show this does have some merits, such as forcing people to work harder for their wage and gives low income earners more to spend which boosts consumption. Green Party leader Metiria Turei has the most convincing argument for the $15 minimum wage, pointing out that "It would bring us more in line with Australia, where the minimum wage is A$15, just over $20, and actually advance the Government's abandoned goal of `catching up with Australia'," and that (assuming employers will create more jobs paying this much) it will reduce the number of people on welfare. 

The other side of the coin that most parties are offering is training, which I personally think is crucial. The argument that the minimum wage is not a living wage is ridiculous. Of course it's not, it's not really supposed to be! Someone washing dishes on minimum wage and expected to feed a family of four is in a different economic circumstance called underemployment. Washing dishes is a totally unskilled casual job for people wanting peanuts for wages. The fact that this is occurring points to another economic problem, which is where training becomes important, helping people create a career path that leads to better jobs. So is there any way to get all the benefits without the negatives? Economics is still debating this, and it does depend on case.

How I See It Happening:

Minimum wage system sets new price at $15 (Labour, Greens)
To be honest, my gut feeling is that a whole bunch of people won't become jobless in one hit, what I would expect to see is the currently unemployed finding it extremely hard to find jobs, while the present workforce is slowly whittled down as employers demand increased productivity to justify paying teams of people more. Unemployment on the whole would go up slowly for 12-18 months before economic growth may justify hiring some more people, assuming we can support the swelling unemployed population on the current welfare system. Tax take would be reasonably level under Labour's tax-free bracket and spending would increase due to higher pay of minimum wage earners, but this does not increase savings and would be only temporary until inflation catches up to the extra money.

Minimum wage system dismantled (Classical economists, far-right economists)
As much as I favor dropping the minimum wage and loathe being thought of as far right, the scheme in New Zealand probably won't work in our favor. Unemployment would plummet like a brick as new jobs are created by businesses taking advantage of the opportunity to buy up labor at low costs, youth unemployment especially. The jobs being created would be far more informal and have less responsibility but wouldn't pay for families to cover costs, leaving these jobs to be snapped up by those who do not need the employment, ensuring families stay on the benefit while teenagers living with their well-off parents get jobs.

Status quo (National)
While I am well aware that the National party's re-election campaign is to leave the situation unabated, the minimum wage scheme basically will be. Instead they want to focus on training and direct support, which is an idea that sounds good to me, but won't get everyone in work and certainly not fast enough. Unemployment is created when there aren't enough jobs available to employ the whole population, thus, it does nothing to create jobs to put people in. Training is great in that it ensures people do not simply upgrade their status from 'unemployed' to 'on minimum wage,' and begins people on a career path that will see the above minimum wage after some time. 

Minimum wages kept steady, with younger people on new minimum wage (ACT, National)
Don Brash is supporting Sir Roger Douglas' bill in Parliament to reintroduce 'youth rates' for younger members of the workforce, to 'ensure a foot on the ladder,' in other words, give young people the jobs they can work in and let them climb the wage ladder naturally. Of course this is appealing to a libertarian thinker like myself, only that it presents the problem of discriminating older and younger workers. Technically this means a 17 year old and a 25 year old can work the same jobs for two different rates, even if both are equally capable and productive. This will drop the youth unemployment rate dramatically but will slightly increase the adult unemployment rate, leaving those who need work the most without it, and employing people who should really be in education of some sort.

Minimum Wage & I

My own experience with work began at 16, not because that was when the minimum wage kicked in, but because that was the age I felt ready to start working and earning pocket money, noting that I was still in school at the time. I started out on a couple of minimum wage shit kitchen jobs in the community, working for about $12 at the time. Every few months there would be a news story where someone demanded the minimum wage increased again, only for me to think that it wasn't going to make much difference really. Over one summer, I got an office job at a local law firm doing some office hand stuff, like sorting files, which was basically full time over the holidays and paid above minimum wage. I have to admit, being kept in an air-conditioned office sorting  paper while everyone else was on holiday in 32ºC weather would've been really demoralizing without the nice pay, which let me save enough to make repairs on my drum kit and upgrade my guitar, even a new MP3 player. After that, I got another job which was on minimum wage, but I really enjoyed it. At this point, the government put the minimum wage up to $13 and I thought "right, this is getting to the point where they won't be able to afford to keep me here." With minimum wage laws, it is illegal to sign a contract agreeing to less than minimum wage, even if I did want to keep my job. 

My Turn

While I would eventually (idealistically) see the death of minimum wage itself. The solution I propose is an interim 'first step' from the current situation that I think will get New Zealand sorted. 
  • No immediate change to the minimum wage price, but will be available to change upon another review in the near future.
  • Large focus on training, helping young unemployed into training or education (which there is plenty available for young people if they choose to seek it), while helping older unemployed people up skill to make them more competitive in the job market.
  • Increase the age of eligibility to 18, the age of majority. This allows young people seeking pocket money to do 'bugger all' work for 'bugger all money.' This gives young people an easy an accessible entry into the workforce, and covers the idea that young people want to 'muck around on the job.' Obviously this is means that young people working hard can be paid more for their work as they become more valuable to their employers. The eligibility for adult minimum wage would take effect when a new contract for work is signed at the age of 18, meaning a contract from an earlier age can stay in force until it is renegotiated. This system also ensures that teenagers and adults are not competing for the same work, as the level of responsibility is justified with level of pay, as this will create a large swathe of low-paying low-vaue jobs that employers can create for convenience, while creating work for teenagers seeking extra money.
  • Adopting Labour's idea of an income tax-free bracket for the first few thousand of one's income, such as $15000, which would see many low income workers fall below this threshold and be completely free of income tax. A flat tax system would occur after this level. Both features encourage hard work and create incentive to work more, be it harder or for longer, as they would generate consistently more money rather than marginally less as they work marginally more.

The effects would be small productivity increases, a large creation of jobs for young people, training and up skilling of the unemployed to give them better jobs in the future, minimum wage changes in response to economic - rather than political - conditions, decreases underemployment by finding real jobs for those needing real incomes and equips people with the skills they need for moving up the career ladder. The focus of the government after that point would be the creation of high-value high-skilled jobs for people to move into, decreasing the number of people on low-incomes and addressing the issue of underemployment.

There is no one answer in this as to which political party to vote for in terms of changing the minimum wage, so far I am not entirely convinced on anyone's minimum wage policies so the question, of course, comes back to you. The point is that no party will promise everything they think they would, the solution is actually a mix of a few things, plus a some no one has proposed because it seems the major parties have missed a few factors. Unemployment and underemployment are different problems requiring different solutions. Fix both and watch the economy take off like a Concorde. 



  1. So what always annoys me about economic arguments is that there is often very little evidence presented. Don't get me wrong, your argument is coherent enough that I've had to find something else to jab at, but I only wish our government would do a little more research into our history and, even better, comparative international history to see which policies have actually worked in other countries. Who says we can't learn from others'mistakes? Then politics inevitably shoves its rhetoric in and it ends up with all sides saying that their ideas work and I just end up frustrated at everyone. That's probably about the most unpartisan thing I've ever felt to be honest.

    To be honest, I actually don't give a stuff about what policy is taken in the end. As long as youth get employed and the adults get the living wage they need, I don't care which sector enacts the change. On a side note, I figured from what you wrote that you agree with the intention behind living wage, although I'm heavily inclined to think that you disagree with the concept itself.

    But no really, don't you dare use Wikipedia in your Public Policy essay. I was all goods with what you wrote until I saw the resources page. Then I half laughed and half grimaced.

  2. Tom; I personally would love to fill this blog with tables and figures, but the numbers are difficult to obtain without a big budget and the aim of this blog is more to make the information more accessible without scary numbers, hence why Wikipedia is listed as a 'source,' hoping people will go on to further reading.

    Youth employment is achievable and adult living wages are earn-able, it just takes the right economic conditions and the right attitude!

  3. Oh I didn't question any of that before! Although my bitching was pinpointed at government methods in general, as they definitely have the resources, apologies that you picked up on the heavy implication of getting more numbers in your own blog. Maybe when we're both rich bastards, then we can do a bit of money well spent.
    But to be honest, I thought that considering the length and quality of the arguments you typically put in, a few numbers would be the norm. Don't get me wrong though, wikipedia is always good stuff. Don't quote me on that.

    Shit man, this is all stuff I have to read up on anyway. Seriously, I went into the general library to find books on public policy from our assigned reading.. Came out with 5 policy books unassigned and another 5 books on politics taken from the nearby section of hallelujah. Only thing getting in the way of reading them all? Harry Potter.


Thanks for commenting and joining the discussion! Remember to keep the language classy, and I'm a stickler for grammar :P