Minimum Wage To $16.25? Yeah Nah

One of Labour’s proposed policies, in the unlikely event they are able to form a government after the election, is to raise the minimum wage by $2 an hour to $16.25 an hour.

  1. The literature on the minimum wage is all over the place. It’s not as simple as a supply and demand story. A major reason is things like working for families. But there are many people who would lose jobs or shifts.
  2. There are long term social mobility implications – poor kids will have a higher opportunity cost of obtaining higher qualifications if they can find a job at that rate. So the very people you want to gain higher qualifications have to have very high future-time orientation to turn down $16.25 an hour for a student allowance.
  3. Hours actually worked matter – not all minimum wage earners work 40 hours a week. So the impact on “Hard Working Small Business Owners” is a lot less than some would have you believe. In fact, if a modest rise in the minimum wage affects your bottom line so badly, you should probably give up.
  4. The minimum wage is already in excess of 50% of the 2013 median hourly wage of $21.58 – making the minimum wage 75% of median hourly earnings is very high indeed. At $14.25 the minimum wage is already above 50% of the median hourly earnings at 66% so it’s likely there are already negative employment effects at play.

Just some quick thoughts. To achieve the objectives minimum wage / living wage proponents want to achieve – raising the incomes of the bottom quintile – could be far better achieved through a basic income or expansion of the independent earner tax credit.

If you’re looking for a more detailed overview of minimum wage literature including a lot of stuff on the youth minimum wage, check out the minimum wages tag at Eric Crampton’s blog.

Edit: clarified that minimum wage is already over 50% of median hourly wage of $21.58 in 2013

Labour Market Adjustment Speed

Interesting Treasury working paper – “New Zealand Labour Market Dynamics: Pre- and Post-global Financial Crisis” – talks about the major structural changes in the New Zealand labour market since the 1980’s reforms.

It looks at what the “natural rate of unemployment” is and how quickly the labour market adjusts to structural changes.

They estimate the average natural rate of unemployment from 1992-2012 to be 4.6% – lower than the average unemployment rate of 6.2%.

This is interesting:

We may accept the stylized fact that the labour market adjustment has been incomplete over the past two decades, which is consistent with search theory (Pissarides, 2000). Our estimated speed of adjustment is a low of 0.10. The smoothed state-space estimate of the speed of adjustment noticeably increases after recessions. It increased during the recession in the aftermath of the Asian financial crisis, and increased by much more during the recent recession in the aftermath of the global financial crisis. These stylized facts are consistent with the Schumpeterian creative-destructive theory, and with New Zealand empirical evidence reported in Carroll et al. (2002), Mills and Timmins (2004), and McMillan (2004).

We have to remember that a lot of people still work for central and local government where they’re shielded from a lot of the changes that have occurred to employment relations in the private sector.

This paper does not look at under-employment to the extent it should – you can’t be thinking about unemployment and labour market structural changes in 2014 without substantial discussion of the part-time and casual employment arrangements which help keep that employment rate at an average 6.2%.

If there really has been slow labour market adjustment, you could tell a story about how higher qualifications are closer to a lottery ticket for many people who could benefit the most from the slight premium earned by degree holders for example.

Interesting Insight Programme On “Skills Mismatch” – Maybe Stepping On Dreams Is Necessary

I don’t think there is nearly enough focus on the harsh truth of the New Normal: forget about your hopes and dreams and focus on identifying a marketable skillset you’ll be able to develop at comparatively lower cost than people you’ll be competing against for jobs.

Use that labour market income to bankroll your “passion”, if you have one, and stop falling for the nonsensical idea that we should all work on our “passions”. I recently read Cal Newport’s new book “So Good They Can’t Ignore You” and have been converted to the idea that doing hard work and developing valuable skills – building career capital – is a far more rewarding pathway to success than focusing on “what you love” or “where your passion lies”.

There is not nearly enough information for students with non-traditional backgrounds going into tertiary study to make informed decisions that lead to the sort of outcome they are looking for – a decent job at the end of the degree. There is a wage premium for tertiary graduates, but there isn’t nearly enough explanation of what sorts of “soft skills” and “hard skills” are required to get from undergraduate to gainfully employed worker.

It is deeply troubling how many people “double down” on an undergraduate degree that failed to lead to full-time employment by pursuing further study. The signalling rat race is a waste of resources in my opinion because there is a major gap between what employers need and what universities produce.

Higher Wages Are Not A Bad Thing

If there is still a shortage in skilled workers for Christchurch, then firms will have to:

  1. Offer higher wages
  2. Offer training programs that rapidly upskill workers keen for an opportunity

There is no such thing as a shortage, just the reality that you are living in a fantasy world if you aren’t willing to pay a market clearing higher wage.

Immigration is not the answer unless you think that every single unemployed or underemployed person in New Zealand should be written off as “not capable of improving their lot in life”.

But when you consider the commercial illiteracy of many in the construction sector, it is more likely that a lot of whinging and moaning will occur. I mean, a non-trivial percentage of the sector doesn’t even send invoices electronically and offer multiple payment options so they aren’t constantly chasing overdue invoices!

Some even take weeks to respond to quote request emails, so they deserve everything they get if their SME life is a struggle and they don’t want to upskill their own management and technology skills.

The government clearly has no intention of putting apprenticeships and industry training on an equal footing with tertiary study anytime soon. The amount of money that goes into trade training is a rounding error compared to how much goes on “society and culture” or “sports management” degrees.

This means that building a skilled workforce can only happen through the efforts of firms that are willing to take the risk and reap the rewards of making New Zealand a relatively attractive option for skilled blue collar workers.

US Fast Food Workers And Minimum Wage Rises

Bloomberg Business week has an interesting article that explores what US$15/hr jobs there are and fast food workers not happy with their current hourly wage rate.

Some fast food workers want $15/hr which according to Bureau of Labour Statistics data would place them on the same compensation level as medical secretaries, slot machine supervisors and animal control workers.

This is interesting:

…raising the hourly wage to $15—about two-thirds more than what the average employee earns now—would likely wipe out profits at these company-owned stores. “If wages are the majority of labor [costs], and it doubled to more than 50 percent of revenue, restaurant operating income would clearly be a loss, assuming static menu prices,” explains Sharon Zackfia, an analyst at William Blair & Co. Assuming all wages double and other expenses don’t decrease, menu prices at McDonald’s would have to go up about 25 percent, which means an extra $1 for a Big Mac and a “Dollar Twenty-Five Menu” in place of the Dollar Menu.

Fast food chains would pass on higher labour costs in the form of higher prices. The $1.25 menu replacing the $1 menu would be fascinating to watch to see how elastic demand is for such cheap fast food with a 25% price rise.

In terms of wage setting and price setting – this is straightforward stuff. If the fast food workers are able to negotiate a $15/hr wage, their employers will raise prices and there could be enough of a negative response to $1.25 cheeseburgers that some fast food workers will lose their jobs.