Dialogue: The high cost of higher pay

Increases in the minimum and youth wage will rebound on the low-skilled, writes COLIN LYNCH*.

The recently announced increase in the minimum wage will come at a high cost for the least-skilled.

It will force them to compete with those with more skills for the same pay, making it harder for them to retain their jobs or find new ones.

An increase in the minimum wage does little to help low-income families, and its benefits come at the expense of the least-experienced, least-productive and poorest workers.

The Government has announced a 3.9 per cent rise in the adult minimum wage, to $8 an hour - making a total 14.3 per cent rise over the last two years.

The youth minimum will go up 18.5 per cent, on top of a 28.6 per cent increase since the start of 2000.

Most significantly, the minimum hourly wage for 18- and 19-year-olds has almost doubled from $4.20 in 2000 to $8.

These increases exceed average wage growth, are unrelated to any improvement in productivity and ignore the fact that wages have fallen in some industries.

Undoubtedly these rises will benefit the 5500 adults on the minimum wage and the 6900 16- and 17-year-olds on the youth minimum wage. But they will reduce employment and training opportunities for the 20,700 unemployed 15- to 19-year-olds, and many of the 109,000 domestic purpose beneficiaries trying to re-enter the workforce, not to mention the 10,000 students who leave school every year without any formal qualifications.

The economics of minimum wages are well-understood and, despite some academic quibbles about the magnitude of their impact, the basic premise remains that legislated increases in wages price some low-skilled workers out of the market.

Some will lose their jobs, while others are denied future employment or training opportunities.

Governments cannot transfer more money to some people without imposing costs on others.

If the minimum wage were truly costless then it would be a simple matter to eliminate poverty by legislating higher wages for all.

The costs of increasing the minimum wage arise from the impact on employers' and employees' behaviour.

Faced with higher wage costs, employers will seek cheaper alternatives. Employers can simply reduce the number of employees, they can substitute machines, or they can hire more productive workers in place of their now more expensive low-skilled workers.

A higher minimum wage makes work more attractive and leads more individuals to compete for these jobs.

The increased labour supply combined with wages that cannot fall result in the jobs going to those with the best skills.

Those with the least skills, usually teenagers without qualifications, are displaced from the job market.

As a result of the increase in the minimum wage, the low-skilled - whether in employment or seeking employment, will have fewer employment and training choices.

They will find it harder to retain their jobs, or find new jobs, resulting in longer spells without work.

They will be unable to gain valuable on-the-job experience and skills that might make them employable at higher wages.

If there was no minimum wage the low-skilled could offer to work for a lower price until they had gained the training, experience and skills they need to command higher wages.

The effects of the large increases in the youth minimum wage have been compounded by the removal of the exemption for those undergoing some types of training.

This increases the cost of training for employers and will reduce the amount of formal on-the-job training available to the low-skilled.

Contrary to conventional wisdom, a higher minimum wage does little to assist low-income families.

Many of those on the minimum wage are not members of low-income families, but rather students and teenagers living at home and second-income earners from middle-income households.

Statistics from the United States show that 76 per cent of all minimum wage earners are not heads of households.

American data also shows that the beneficiaries of an increase in the minimum wage are evenly distributed across all income groups.

A rise in the minimum wage benefits a quarter of households in the lowest income quintile and a quarter of all households in the highest income quintile.

Yet the cost of the minimum wage rise is disproportionately borne by those with few skills and low incomes.

In the end no one benefits from a minimum wage increase, least of all the low-skilled.

The rise in the adult minimum wage and the large increases in the youth minimum wage are making it more difficult for the least-skilled to secure a foothold in the workforce.

* Colin Lynch is a Wellington economist.