Minimum wage rise could leave households worse-off

Tuesday, 9 October 2018

A 'perfect storm' of minimum wage rises, a weak dollar and higher fuel costs are predicted to combine to hike prices.

Prime Minister Jacinda Ardern has come under heat this week over record fuel prices. But economists warn there may be more pain on the horizon.

Cameron Bagrie said the current situation could be described as 'grumpflation'.

'Things are slowing, it's not a downturn but they're easing up. Then there's a hell of a lot of pressure on costs. Everything is going up - rents, rates, fuel… there's a fair bit of pressure going to go on disposable incomes.'

**READ MORE:

* Fuel price rise of 3 cents per litre sweeps across the country

* Rising fuel prices are not the only thing making life in New Zealand more expensive

* Fact-checking National's claim the Government is to blame for rising living costs**

He said household savings rates were still negative and most Kiwis did not have a financial buffer to absorb cost shocks.

Imports are becoming more expensive because of a weaker New Zealand dollar and taxes are boosting already-high fuel prices. Now, another government policy, increasing the minimum wage, is predicted to soon play a part.

It will rise from $16.50 this year to $20 an hour in 2021.

Economist Gareth Kiernan, of Infometrics, said consumers could expect to pay more in sectors where workers were earning at or near the minimum wage.  Hospitality was an industry likely to see some of the biggest effects, he said.

'Firms have been able to withstand the margin squeeze over the last few years by increasing their sales volumes - less profit on each unit sold, but selling a greater number of units instead - but with population and economic growth now slowing, that strategy doesn't look to be viable or sustainable going forward.

'I would say there is increasing pressure on firms to raise prices – although some businesses, particularly in the retail sector, will find that hard to do given the competitive pressure from overseas and/or online retailing.'

Analyst Shamubeel Eaqub said about 75,000 people in New Zealand were on the minimum wage. 'This is probably going to be the highest median wage we have seen relative to the median and it will add to costs.'

There would be a flow-on effect, he said, in low-paying sectors were all workers expected to get a pay bump as the minimum rose.

'Some industries might face upward pressure and a cascading effect as everyone says relative to that my wages should go up as well. That's a pretty big increase in the pipeline… in those areas we are more like to see pressure on wages, which affects the cost of doing business and potentially leads to increases in prices.'

Bagrie said rising wages would normally be a good thing, but productivity needed to increase, too.

'At the moment the productivity story is poor but wage demands are escalating and that puts pressure on firms' profitability. They are either going to take the margin cut, cut bak on investing and stop hiring or they'll pass those increase on. Next year will be really interesting…. unless you have the economy firing on all cylinders people are reluctant to pay high prices.'

Kiernan said it could create headaches for the government.

'There is/was always a risk that any increase in the minimum wage leads to higher inflation and therefore undermines the attempt by the government to lift the real purchasing power of lower-income earners.

'Unfortunately for the government, the boost to households' purchasing power risks being further undermined by other factors that are more or less beyond the government's control – petrol prices and the dollar.

'However, even with the substantial rise in petrol prices that we've seen over the last few months, the rise might have taken away about 20 per cent of the pay increase for a minimum wage earner working 40 hours per week. At this stage, they're still better off – just not as much better off as the government would have liked.'

Kiernan said inflation would not necessarily be bad for New Zealand, although it might hurt individual budgets.

It could allow the Reserve Bank to return interest rates to more 'normal' levels, giving it room to cut again in future, should more stimulus be required.

That means, of course, higher interest rates on your mortgage, too.