Big minimum wage boost would give NZ economy chance to reset: Helen Clark Foundation

Monday, 23 November 2020

Infometrics economists talk about the labour market.

New Zealand should increase the minimum wage to the level of the living wage, as part of a rethink of the way it boosts productivity and inclusion, a new report says.

The report from the Helen Clark Foundation and the New Zealand Institute of Economic Research highlights growing inequality, exacerbated by the pandemic.

But NZIER deputy chief executive Todd Krieble said Covid-19 also created the opportunity for a system-wide reset.

He said the focus should shift to “predistribution” – backing people from the outset with good wages and investment in them, rather than the current benefit system of redistribution to those who fell behind.

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“With border controls to prevent importing Covid-19 limiting the inflow of migrants, labour will become relatively scarce and costly. Capital has never been cheaper.

Job losses have been felt most heavily in the retail sector.

“This is an unheard of combination of factors and should allow for a more equitable economic model. The recovery gives us an opportunity to build a more inclusive economy that shares the gains.

“The idea that minimum wage increases cause unemployment in advanced countries is not well supported by the evidence. In any case, it is a very short-term view if we want a fairer society.”

When the minimum wage increased to $18.90 it was estimated that it would create a restraint on employment of 6500 jobs.

But many of the job losses that could be expected with a big increase in minimum wage now had already happened, Krieble said.

“These annual minimum wage reviews… miss the long-term impact of restructuring to a high-wage, high-productive economy. The short-term costs of a minimum wage boost appear significant, but are minor in the context of a $20 billion reduction in GDP following the March-April 2020 lockdown and a 12 per cent [in the June quarter] GDP reduction for 2020.”

He said the economy would be expected to adjust.

New Zealand’s current tax and transfer policies reduced inequality in the working age population by 25 per cent, the paper said, similar to Australia but well below Denmark, France and Austria’s 33 per cent to 36 per cent.

The Government is on track to increase the minimum wage to $20 an hour from next year. Krieble said it should go further. The living wage should be a guide, he said. That is currently $22.10.

“With Aotearoa New Zealand’s relatively low rates of productivity increase, an increase in the minimum wage can help increase productivity. That could begin immediately as limited migration forces the dedication of the highest skilled workers to a focus on their specific talents.

“Firms become more productive, and/new firms provide high-wage roles by replacing less-productive firms over time. While there may be adverse company-level impacts, the overall economy and workforce is better off.”

Krieble said employers who had to pay staff more would be more likely to invest in them and the work they did. With the cost of capital so low, it was a good time to do that. People who were paid more were more likely to be engaged with their work.

“If employers pay living wages, there is less need for the state to redistribute through taxes and transfers after employment income. This helps to promote a sense of social and economic inclusion, belonging and participation.”

He said the Covid-19 shock was not being felt equally. Those who were most affected by jobs losses were the people who were already facing the most disadvantage – Maori and Pacific, young people, people with disabilities and women. Job losses had been felt heavily in sectors such as retail, hospitality and tourism.

Kathy Errington, executive director of the Helen Clark Foundation, said New Zealand needed to become a country where the incomes of low-income people grew more quickly than the better-off.

“Lockdown brought home to many of us that the essential workers who keep us alive are not paid at a level which recognises their value to society. Cleaners, supermarket workers and other essential workers need more than applause at 7pm – many of them urgently need more money.”

The paper also said the barrier to skills development for people “stuck” in low-wage jobs needed to be identified and removed. There should also be social support such as childcare and accessible transport. The report also called for child and youth impact assessments for major policy proposals.