What impact will minimum wage hike have on inflation?

The minimum wage will rise by $1.50 to $22.70 from April 1. Photo / NZME

The Government is hiking the minimum wage by 7.1 per cent to a level that’s 28.2 per cent higher than it was four years ago.

The minimum wage will rise by $1.50 to $22.70 from April 1, meanwhile the starting out and training minimum wage rates will be maintained at 80 per cent of the adult minimum ($18.16).

The decision comes as the tight labour market is already driving up wages, contributing towards worryingly high inflation.

It also comes as the Reserve Bank forecasts its aggressive interest rates hikes will cause a recession and see the unemployment rate rise from very low levels (3.4 per cent in the December quarter) to 5.7 per cent by early-2025.

Nonetheless, Prime Minister Chris Hipkins said that in “tough times, it’s critical to support those who struggle the most to make ends meet”.

“Those on low incomes make impossible trade-offs between food and medical care, dry homes and a pair of shoes. These families need our support now more than ever and an inflation-adjusted lift in the minimum wage will means thousands of New Zealanders do not go backwards,” Hipkins said.

“We’ve tried to find the right balance. Analysis from the Ministry of Business, Innovation and Employment (MBIE) that fed into our decision suggests this increase is unlikely to have a significant impact on unemployment, because it is broadly in line with existing average wage growth across the economy.”

Hipkins also said MBIE’s analysis suggested a 7 per cent minimum wage hike would only increase the wages portion of gross domestic product (GDP) by 0.1 per cent.

Similarly, ANZ chief economist Sharon Zollner believed the wage hike would put upward pressure on prices, but wasn’t convinced the impact would be large.

“Private and public sector ordinary time hourly earnings are running at 7.2 per cent year-on-year anyway,” Zollner said.

“It’s running well above that in sectors most exposed to the minimum wage, like accommodation and food services (9.6 per cent). So, it’s not clear the minimum wage hike is going to give a lot of fresh impetus to wages.”

As for whether the cost pressures would see businesses make staff redundant, Zollner believed the tightness of the labour market meant the impact of the wage hike would be “more muted than usual”.

“There’s unmet labour demand to be worked through before the economic slowdown starts to cut into the muscle of actual employment. How big that buffer is, is quite uncertain. Job ads are easing but remain very solid,” she said.

Kiwibank chief economist Jarrod Kerr made the point, a higher minimum wage pushes up the wages of people on higher wages too. This can have an inflationary impact.

BusinessNZ chief executive Kirk Hope raised this as an issue too.

“Without productivity, that contributes towards inflation,” he said.

Hope worried the wage hike came on top of decent hikes of around 6 per cent in recent years, and existing cost pressures and disruptions to businesses.

“I think it’s a little tone deaf, to be honest,” Hope said of the Government’s decision.

Put to him that many large businesses in particular have performed strongly in recent years, despite significant minimum wage hikes, Hope said the worry was that their smaller competition was being removed from the market.

“I think there is a real problem here. It will continue to be difficult for small-to-medium sized businesses that are struggling, where there is no margin left,” he said.

E tū union assistant national secretary Annie Newman said the minimum wage hike would “take the sting out of rising costs across the economy”.

“Increasing the minimum wage by anything less than inflation would have seen minimum wage workers effectively have their pay cut in real terms,” Newman said.

“While this is an adequate increase, we do know that workers really need the Living Wage if they are to live a decent life.”