'No-brainer' to delay minimum wage increase - or is it?

At the end of this month, New Zealand's minimum wage-earners are meant to get an increase in their pay, from $17.70 an hour to $18.90.

It is expected that up to 242,400 workers who currently earn $17.70 to $18.90 an hour will receive an increase in their wages as a result.

But, some economists say, in a time when the economy is grappling with coronavirus-related disruption, and the Government is planning a support package for affected businesses, holding off on that increase might be the best course of action.

The Ministry of Business, Innovation and Employment has predicted it will lead to 6500 fewer individuals in employment than there would be if the wage had not increased.

Sharon Zollner, chief economist at ANZ, said it seemed that scrapping the minimum wage rise due on April 1 was a "no-brainer".

"During hard times for businesses, it's particularly important that Government creates an environment where businesses are incentivised - and able - to maintain staffing levels. And that means putting minimum wage rises on hold for the time being.

"In tougher times, households quite rightly become relatively more concerned about keeping their job than wage rises. The legislated minimum wage increases were always explicitly subject to prevailing economic conditions, and current conditions do not support a lift in minimum wages this year.

"Yes, the labour market has been tight, but the labour market generally lags economic activity, and activity is poised to slow markedly. Higher wage bills could exacerbate the slowdown and lead to more business failing, or at least cutting staff. In this environment, a lift in the minimum wage is more likely to result in higher unemployment than lead to better social outcomes."

Economist Shamubeel Eaqub agreed. "I think they should delay it. It will add a significant increase to wage costs for hospitality businesses that will be reeling from the tourism fallout and potential recession.

"When the minimum wage is low compared to median, I would worry less. But given increases in the minimum wages in recent years it will start to affect a broad array of jobs. The benefit would be much higher if we had lower or no taxes for very low incomes."

Eric Crampton, chief economist at the New Zealand Initiative, said locking in large increases to the minimum wage was a mistake.

"New Zealand's minimum wage has been among the highest in the developed world, relative to the median wage.

"When minimum wages affect a larger number of workers, as happens as the minimum wage gets closer to the median, it has larger negative effects on employment - and especially in a downturn. New Zealand's minimum wage is rising relative to the median, and the pandemic-induced downturn now seems imminent."

But he said it would be hard to reverse the decision now.

"Workers on the minimum wage will be banking on that increase and will have based financial planning on it. Unwinding it could be difficult.

"But not unwinding it will make it harder for employers to keep on staff during the downturn as tourists and locals stay home and foreign demand dries up; few would have been banking on a pandemic-induced recession and likely job losses. If the Government cannot reverse the minimum wage increase, it will have to factor the effects of it into its planning around other support packages."

Independent economist Tony Alexander said delaying the increase would not be the right move. He said it would affect businesses across the economy, including those feeling little effect from coronavirus.

"It would not be a targeted response, and asking that the people on the lowest levels of earned income sacrifice some improvement in their wages when they would be already fearful for some of their jobs would accentuate the overall cutback in personal spending they are likely to consider."

He said the Government had substantial resources at its disposal and targeted help was required.

"There are those who are or will suffer a temporary interruption to production because of either the temporary closure of China's ports or the temporary absence – yet to much be felt – of some inputs imported from China. Measures aimed at keeping staff are needed along with working with banks to ensure cash flow deficiencies are comfortably handled.

"Second are businesses affected by the collapse in inward tourist flows which will last a lot longer – probably all this year. For some of these businesses closure will be the only option. For others survival will mean slimming staff numbers right down, slashing other expenses, and working with banks and creditors to buy an extended period of time before the tourists return – hopefully sometime in 2021."

Asked on Monday whether she would consider delaying the increase, Prime Minister Jacinda Ardern rejected the suggestion.

Original article from NZ Herald.