KEY POINTS:
The government will soon have to decide whether or not to increase the minimum wage. It is a decision that will have a direct impact on the living standards of hundreds of thousands of New Zealanders.
While being cognisant of the more constrained financial position of many businesses this year, the Government must also consider the economic and moral case for an increase.
The economic case is a strong one. While organisations like Business New Zealand argue that an increase in the current economic environment is unaffordable, this line of thinking misses the lessons of history and is inconsistent with other action being taken across the economy to deal with the crisis.
One of the key problems facing our economy is a lack of purchasing power.
Consumers, lacking confidence and facing the squeeze are closing their wallets.
This contraction in spending worsens the recession as businesses reliant on cash flow face a further downturn in sales.
As these businesses close, unemployment increases and the cycle repeats.
This is why governments and central banks the world over are doing everything they can to increase the purchasing power of consumers - witness historically low interest rates and the willingness of even conservative governments to take on huge debt to fund infrastructure projects.
The very same arguments apply to general wage rates, and in particular the minimum wage. Economic recovery will only occur when workers have the confidence to open their wallets again, and one important part of restoring that confidence is wage increases.
Remember - workers are shoppers too.
This argument applies particularly for workers at the bottom end of the labour market. The evidence is overwhelming that low-income workers spend a proportionately bigger share of their income as opposed to higher-income workers who have a greater capacity to save.
Therefore an increase in the wages of low-income workers offers us the best opportunity to increase purchasing power in our economy which will be a crucial driver of recovery.
Importantly, the minimum wage is the best lever we have to increase the wages of the lowest-income workers. People working at or just above the minimum wage tend to have little bargaining power with their employers for several reasons.
Firstly, these workers tend to lack skills that are in short supply meaning that they cannot act as "traders" in the labour market.
Secondly, for the most part low-income workers are not organised into collective agreements, meaning that they cannot regularly and effectively bargain for terms and conditions.
Finally, low-income workers usually lack salary progression arrangements like many other workers that allow wages to increase over time due to service, skill attainment or performance.
Whereas workers with these arrangements can ride out small percentage increases in lean times, minimum wage workers are generally solely reliant on the annual increase.
For the 120,000 or so workers on the minimum wage, and the three to 400,000 just above it, a reasonable increase in the minimum wage each year is the only way that their household purchasing power can be increased.
If we keep the minimum wages static we will reduce the capacity of our domestic economy to recover from the recession, and also risk entrenching a low-wage labour market that will prove problematic after an economic recovery as workers see better opportunities overseas.
But considering the issue from a moral standpoint is important as decisions of this nature directly impact upon the welfare of hundreds of thousands of people.
This point is acknowledged in the Government's own framework for their annual consideration of this issue which states that "fairness" is a key factor.
The touchstone for a government must be the impact on income inequality.
Low-income workers have little bargaining power (particularly in a recession).
So the Government must lay down clear guidelines about the fair treatment of low-income workers, including the need for a reasonable minimum wage.
Remember too that a "freeze" in the minimum wage is actually a real decrease.
The Government says it wishes to shake off the legacy of the 1990s when a virtually frozen minimum wage and associated policies led to a big growth in inequality in our country.
Tax cuts are not the answer to this issue as they will disproportionately benefit the well off, perversely increasing inequality.
Rather, the Government must act with some courage, shrug off the limited thinking of some of its business allies, and accept the economic and moral case for a reasonable increase to the minimum wage.
* Michael Wood is an Auckland-based union negotiator and father of one.
