Government ignores MBIE's advice to delay and reduce minimum wage hike

Willie Jackson, the Government's holiday period Duty Minister, (pictured here with Finance Minister Grant Robertson, left) defended the minimum wage decision. Photo / Mark Mitchell

The Government's decision to push ahead with a large minimum wage hike in April flouts bureaucrats' advice to both delay and severely temper the increase.

The Ministry of Business Innovation and Employment (MBIE) provided the Government with a review, dated December 2020, which advised delaying the 2021 minimum wage increase until October, and prescribed only a very modest rise of 25 cents, or 1.3 per cent.

However, in a decision of the Cabinet Business Committee of December 9, ministers agreed that, despite the contrary advice from MBIE, they would not deviate from a Labour Party election promise to push the minimum wage up on April 1 by $1.10, or 5.8 per cent, from its current $18.90. The "starting-out and training" minimum wage, set at 80 per cent of the adult minimum wage, will rise from $15.12 to $16.

On December 17, Michael Wood, Minister for Workplace Relations and Safety, made the decision public, though he did not mention MBIE's preferred course.

The decision has been contentious because it follows a series of steep annual rises in the minimum wage and comes as GDP remains considerably lower than before the Covid-19 pandemic and unemployment is rising.

MBIE's more moderate, suggested minimum wage increase would have been commensurate with the current rate of inflation. A larger increase, the ministry warned, risks harming people on low wages, through the likes of reduced work hours and unemployment; the very people the policy is intended to help.

"The economic situation, consumer caution and future uncertainty around trading conditions mean that employers may not be able to recover increased wage costs through normal responses such as reducing profit margins or increasing prices. The end result could be that the workers who would benefit the most from a minimum wage increase are the ones most likely to experience the negative effects of an increased minimum wage (such as reduced work hours or the substitution of some groups of workers for others)," MBIE's review said.

The review estimated that the large rise in the minimum wage would restrain net employment growth by some 9000 jobs (it estimated restraint of 1000 jobs or less for MBIE's favoured increase of 25 cents).

This restraint is expected to be layered on top of rising unemployment this year. In the September 2020 quarter (the last period for which Stats NZ released figures) unemployment rose a record-breaking 1.3 per cent. It sits at 5.3 per cent and the Treasury expects it to continue to rise through 2021. Treasury predicts a peak of 6.9 per cent at the end of the year, which is not so severe as previously feared, but would still mark the deepest unemployment in over two decades.

Willie Jackson, the Government's holiday period Duty Minister, defended the minimum wage decision. "MBIE's analysis was based off economic data that is now out of date. Because we went hard and early on our response to Covid, the economy has bounced back," he said.

Economists, however, are more reluctant to declare victory while the possibility for lockdowns in New Zealand remains, and the Treasury expects no loosening of border restrictions until July, while its forecasts assume continued travel curtailment until early 2022.

Independent economist Cameron Bagrie said Covid-19 will continue to throw up considerable challenges this year.

By way of example, he said that the hospitality sector has been somewhat shielded by seasonality to date. "We won't really know how bad things are until February and March [typically the industry's busiest months]. It's an environment where I'd be very cautious about timing a minimum wage increase. I'd be inclined to push it out a bit."

Economist Cameron Bagrie. Photo / Mike Scott

Another issue, he said, is the rate at which the minimum wage has risen in recent years (including the April rise the rate will have climbed 25 per cent in just 3 years).

"What do people say businesses do when the minimum wage goes up? They say businesses don't hire people, they cut hours, all of that. I don't think a rise in just one year would have much effect. But this isn't just one year. This is cumulative and I think we might well have reached a tipping point. I think there's going to be a fair bit of cost cutting in 2021 ... a lot of businesses are rethinking their business models after Covid," Bagrie said.

Jackson, however, said the Government wants to ensure that rising wages are part of the country's recovery and effort at rebuilding. The change will lift the incomes of 175,500 workers, Jackson emphasised, "$44 more each week before tax for Kiwis working 40 hours a week on minimum wage."

MBIE notes that a full-time employee (40 hours per week) on minimum wage receiving no tax credits or other income support will take home an extra $35.69 a week once the wage hike comes in.

However employees with government benefits will receive less because of diminished state help because of the wage boost. For example, according to MBIE's tables, an Auckland-based single parent, earning minimum wage, working full-time with two dependent children, receiving Working for Families and Accommodation Supplement, would receive only an additional $24.68 per week.

Bagrie noted that runaway housing costs, rents in particular, may also cost low income earners more than the wage hike will add.

MBIE conducted an expanded review of the 2021 minimum wage proposal, including wide consultation, because of the extraordinary economic context.

Still, Todd Krieble, deputy chief executive at the NZ Institute of Economic Research, said the ministry is too focused on the immediate negative effects of a minimum wage rise.

"We need to focus on the medium term. If someone is more expensive to hire then business has more incentive to invest in that person's training and skills. On the other side, if an employee is earning more money they feel more attached to their work and more committed to that business. There is an upward spiral ... that leads to greater productivity."

Low productivity remains an entrenched feature of the New Zealand economy and with it, low wages generally. The country's median wage sits at just $27 an hour, a benchmark that is likely to be less than 30 per cent higher than the minimum as of April, and is poor by OECD comparisons.

Solving this larger low wage, low productivity problem is a much more complex puzzle than simply lifting the legislated minimum.