Ordinarily it would be a bit odd to find out in December about the extra cash you’ll receive on April Fools Day but because it is the Labour-led Government, that makes perfect sense. Workplace Relations and Safety Minister Ian Lees-Galloway has had a bit of a tough year, so I guess he is as keen as anybody to finish 2019 on a good news announcement.
The minimum wage already increased this year by 7.3% to $17.70 an hour, so the next increase in 2020 will be 6.8% to $18.90 per hour; by far the highest minimum wage in the OECD. This will affect 250,000 New Zealand workers, excluding the 8000 made unemployed by the last two minimum wage increases, based on figures from the Ministry of Business, Innovation and Employment.
This graph may bore you but I hope you’ll persevere. The usual economic rule of thumb when applied to artificial increases in the cost of purchasing goods and services is that it will result in a reduction in demand as well as an increase in supply. The point indicated by W1/Q1 on this graph is the market equilibrium, representing a meeting of supply (S) and demand (D) for labour at the highest point both can meet. When this price is artificially increased via a higher minimum wage, demand on the (D) line reduces to the point represented by Q2, while supply of labour on the (S) line increases to the point indicated by Q3. The red New Minimum Wage (NMW) line meeting the newly reduced demand and increased supply points, forming a triangle shape above the previous market equilibrium, represents the increased but unwanted supply of workers called the Real Wage Unemployed.
This is as basic as economics gets in regards to supply and demand, and ignores every other possible economic event which may be occuring at the same time. However, it’s interesting that two very significant minimum wage increases over an 18 month period would have an impact as small as 8000 fewer jobs, according to MBIE. For much of the time under the previous National government, increases in the minimum wage were (rightly, in my opinion) a virtual non-event. Each year the increase was just 25 or 50 cents. It wasn’t until April 1 2018 that a 75 cent increase kicked in (possibly a hangover of the previous government), followed by a 7.3% increase of $1.20 to $17.70.
I don’t recall exactly, but I think I can reliably guess that I would have predicted economic doom and catastrophe at the time, though since then I haven’t had too much to say. It wasn’t a convenient silence to minimise my personal embarrassment; rather I forgot in the same way putting on the same pair of shoes each day loses some significance when they never wear out.
It wasn’t until the Fair Pay Agreement proposals released by Jim Bolger’s Working Group in December 2018 and forgotten by just about everyone except Labour’s trade union donors, became newsworthy in August this year. Labour’s trade union donors were getting impatient and noisy, making stupid claims about cleaning companies and supermarkets competing against each other by “slashing wages in a race to the bottom”. It was then, while rubbishing such lazy bullshit, I reviewed the food price index against the recent 7.3% minimum wage increases and noted it had increased only 0.5% overall, dropping 8.8% for produce, 0.8% for non-alcoholic beverages and increased just 2.5% for meat and poultry. That refutes any nonsense about slashing wages to compete, however it also raises questions about economic orthodoxy relating to significant minimum wage increases.
Perhaps I’m impatient (yes) and need to wait longer, especially to see the impact of a second significant increase within 12 months. The unemployment rate at the last four quarters has been 4.2% 11/2019, 3.9% 8/2019, 4.2% 4/2019 (as the minimum wage increased 6.8%) and 4.3% 2/2019. Very low, quite constant and little relationship to the minimum wage change.
Youth, older persons, Maori, Pasifika and low-skilled workers are represented in greater numbers in unemployment statistics, so this is a logical demographic to compare next. Youth (aged 15-24) unemployment levels have dropped significantly over the last four quarters from 14% in February to 13%, 10.3% and 10.6% last month. Not only have those levels dropped significantly in a short time period, but they are also the lowest levels in New Zealand since 2007. How?
The Labour Force Participation Rate, defined as those of working age who are employed or looking for work out of the total number of working age people can often shed a bit of light on the health of an economy, and as the unemployment rate refuses to behave like it is meant to, it may be more informative. From 2005 to 2014, it has hovered around 68%. It spiked and fell from 69 to 68 until 2016 before shooting over the 70% level and continues to hover until now. Higher than the US where it has bounced around 63% since 2013 and higher than every other OECD nation bar three (Sweden, Switzerland, Iceland). Does that make us the Scandanavian Socialist Miracle of the South? There isn’t a socialist miracle in the north, so let’s not get foolishly excited.
There are statistics elsewhere in the economy that I believe are early warning signs of disaster to come. Net migration levels remain relatively normal at this stage; hovering around the 55,000 level for the previous couple of years. More stringent rules making it harder for those on student and work visas to renew have probably minimised any impact on unemployment figures from 2019’s minimum wage. Obviously wages at the lower end of the scale impact lower skilled workers. In my personal experience, that unskilled overseas labour is not being replaced with New Zealnders. Anecdotal evidence isn’t proof but it makes me more comfortable predicting increased low skilled labour shortages over the next twelve months.
The number of people receiving some form of the Jobseeker or Increased Support benefit has skyrocketed under this Government’s watch. It is possible to receive these benefits up to a low threshold of employment income. Those on the Jobseeker benefit increased 10.1% from September 2018 to September 2019. Emergency housing assistance has also skyrocketed over this term. September 2017-2018 saw 53% more families receiving emergency housing assistance; September 2018-19 that increased 109% on the 2018 figure.
I believe the orthodox expectation to significant minimum wage increases will show themselves in the orthodox places but the Ministry of Social Development has inadvertently softened and slowed that effect. While slower than previous years, 2.1% economic growth is still stronger than most OECD countries. With hints at a large spend up coming from Finance Minister Grant Robertson, economic optimism may sufficiently hold until next year’s poll.
It cannot last much longer than that however, especially with the final scheduled increase to $20 following in 2021. What shade will Roberston have up his sleeve after that?