Tuesday, 24 May 2011

Minimum wages. Again. [Update 3]

Phil Goff has gone where common sense has feared to tread. Desperate for the attention of anyone, even Matt McCarten’s union, he told Labour delegates over the weekend that if he somehow found his way into Premier House in November, the first thing he would be doing is to price unskilled labour out of the employment market.

Which is exactly what raising the minimum wage to $15/hour would do.  In fact, that’s what having a government-imposed minimum wage does. It sets a floor below which freely-agreed wage rates between employer and employee are made illegal, and would-be marginal employees are instead made depressingly unemployed.

It’s like kicking out the bottom rungs of the employment ladder, and telling the unemployed you’re doing it for their own good.

Now I doubt that Phil Goff disagrees with any of the analysis suggesting his move would cost young and unskilled jobs. Like Paul Bennett, he cares more about his job than theirs.  But if you really think that raising the minimum wage by one-sixth (by $2/hour, from $13 to $15) won’t affect the number of folk to whom employers can offer paying work, then I suggest you buy just as much when the price of beer goes up by one-sixth; just as much milk and cheese when the price of milk and cheese goes up by one-sixth; just as much petrol, as many hamburgers, as much on your mortgage.

If you think that putting up the costs of a thing won’t affect how much of the thing can be bought, then I have a large number of overpriced things right here to sell you.

It’s no different for jobs than it is for milk and cheese.

The only way that raising the minimum wage rate won’t affect any jobs at all is if raising the rate is simply a ratification of wage rises that have already occurred due to increases in productivity and investment. And if you think you’ve seen any of those, I suggest you head to the nearest optometrist to get your eyes looked at.

John Key reckons he knows all  this. He reckons Phil Goff’s wrong. Mind you, if he did know it and if he did care about it enough, then his party wouldn’t have raised the minimum wage rate in February. But they did, so he clearly doesn’t .

And if he did know about, and care about its effect on marginal employees, his party would have voted for Roger Douglas’s bill to abolish the ban on youth rates and so allow employers to pay youth rates again to young unskilled employees (the abandonment of which has seen youth unemployment soar).

But they didn’t. So I doubt he does.

PS: Just as ignorant as the claim that raising minimum-wages by fiat doesn’t cause unemployment is that claim that it does cause price inflation.  That it sets off a so-called “wage-price spiral.” The proponents of this argument reveal an ignorance even greater than Phil Goff’s.

Price inflation is a phenomenon in which we see universally rising prices right across the board. But if the price of Product A goes up because the wages of the those producing it have gone up, then that leaves less in consumers’ pockets to buy Product B, C and D—in which case the reduced demand for these products will lead to lower incomes for these producers and unsold stocks of goods.

The only way the prices of all products can go up right across the board is if the government expands the money supply so that all products can be bought at the new higher prices. In other words, if the increase in money wages is accompanied by a commensurate increase in monetary inflation.

Which is, I suggest, what Phil Goff is counting on when he talks about raising money wages.  At root, he’s just another inflationist.

UPDATE 1: Higher wages do not create price inflation. Don’t just believe me. After all, I don’t even wear a tie:

UPDATE 2: “Could someone please ask Phil Goff [asks Eric Crampton]why, if a fall in unemployment following a small increase in the minimum wage during a boom period is post hoc ergo propter hoc evidence that a large increase during a recession would not reduce employment, why he isn't promising to raise the minimum wage to $20?”

UPDATE 3: Danyl at Dim Post drops this dangerous graphic into the conversation and concludes “more research is needed.”



  1. Love it. More of the same from all parties, only outdone by MORE of the same! If a minimum wage or a tax is as good a thing as the people believe, then the best party is the one with the biggest numbers!

    Or the lowest numbers. I’m not sure.

    Anyway, it’s much fairer, and more equal. Must be.
    Somebody has to pay for the coal in the nations train, everybody must do their bit. It’s only right. It’s only fair. And if you don’t, we will show you just how benevolent we really are. You’ve been given permission to work the train, and the tracks are being laid down. No man lives or can live for himself. We have a stake in you and you in us. It’s all for the greater good, you know.
    Where do the tracks lead? Why a train? No, we do not want a skyscraper. How quaint. Anyway. We are all equal, and you’ve been given permission.

    You’re so very good at keeping the passenger car clean. So very good.

    No, Galt’s Gulch is not on the list of destinations.
    Never heard of it.

    Elsworth Toohey

  2. Of course, it's the Law of Unintended Consequences again. Just as his other dumb policy of setting up a Ministry of Children will result in more children being put at risk and consigned to lives of poverty than ever before.

  3. New Zealand's wage rates always have been - and remain - far to high in global terms.

    With Aussies now being 150% as productive as Kiwis, it's clear NZ wages need to fall by 30%-50% not rise!

    The minimum wages need to be abolished, along with the ERA, the restrictive parts of the crimes act, the holidays act, and of course all the bludging unions!

    It's like 1991 - only much worse: back then we were only 15% behind Aussie.

    The utterly basic ignorance of simple mathematics - let alone economics - that all our major party leaders exhibit just goes to show none of them should be enfranchised in the first place!

  4. Good post , Peter, I like the analogy you have used about prices been increased by 1/6.

  5. There's a far stronger argument in NZ for a maximum wage rather than a minimum wage.

    If we're going to have civil servants, benefits, etc, a maximum wage - say $15 per hour - would be a great idea. No-one on a "wage" - with unions, employment court etc- could be payed more than the maximum - and of course all state sector workers would have to be on that maximum wage.

    The savings would let us reduce corporate tax and FBT to zero - resulting in a very sharp choice: earn $15 (or ideally $10) per hour in the unionised, waged, state sector, or negotiate under simple laws of contract in the private sector as an independent contractor, and pay no tax on any "work expenses".

  6. While I don't disagree with the general premise of the article, I'm not sure that graph is much use. All it shows it that there was a loose correlation between unemployment rising and the minimum wage level.

    There would be a much stronger correlation between the timing of the recession and the rise in unemployment, which your opponents would quickly point out.

    Either way, correlation does not *prove* causation.

  7. I don't disagree with a word of it, but it was Seamus that wrote that post, not me. He's come out of hiding to help out while I'm on the road in the States.


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