Unionist Matt McCarton’s article in the Herald on Sunday (31-01-2010) supporting an increase in the minimum wage to $15, while rubbishing the Government’s decision to increase it by only 25c, is economic lunacy.

Citing a poll which found that two out of three New Zealanders want to see the minimum wage increased to $15 per hour, he argues that an increase in the minimum wage to $15 in the current economic climate will have no impact on unemployment whatsoever. He goes on to claim that in his experience if all employers in an industry pay a higher wage to their staff it makes no real difference to any of them.

Now these are interesting arguments. At face-value increasing the minimum wage appeals to our social conscience and seems to be a great idea. After all, people are suffering at the bottom and we want to give them a hand-up. What better way to do this then by increasing the minimum wage. Individuals will have more money to spend helping them move away from the poverty line and - according to Mr McCarten – employers won’t care about the increase in wage costs as long as everyone else is paying higher wages too. Sounds great, right? But something about that last argument doesn’t ring true…

Let’s look at it from a different point of view. If the price of something increases, does it not make you think twice about buying it? Of course it does. If the price increases too much it may even stop you from buying it altogether as you simply cannot afford it.

What if it is an essential good – something you just cannot do without? Well, if it becomes too expensive, you will either seek out an alternative or, if no alternative is to be found, you will buy it but will end up sacrificing something else that you would normally get to be able to pay for it.

This theory holds true in all areas of our lives. So why does Mr McCarten think that employers will behave differently?

If employers have to pay higher wages, then they will think twice about how many people they employ, the number of hours that they will get staff to work, the amount of work they expect employees to produce and the type of employee they will hire. While a minimum wage law can set wages, it does not guarantee jobs and an increase in costs will have employers reviewing all these aspects of their business.

Employers do not have an endless amount of money from which they can pay employees’ wages just the same as employees do not have an endless supply of money from which to pay their bills. Both must work within a budget and if costs increase, decisions must be made on what is affordable and what is not.

Studies in the U.S have shown that at their current wage levels an increase in the minimum wage would result in a decrease in employment of low-skilled workers by 1-2 percent. The theory that an increase in the minimum wage results in an increase in unemployment is reflected in New Zealand’s own employment statistics. Forty four percent of unemployed people in New Zealand are under 24 years old. Since youth-rates were abolished in 2008 more than 13,000 15-19 year olds have lost their jobs. How can anyone argue that increasing the minimum wage has no effect on employment, when the figures show so clearly that this is not true?

They can’t.

Let’s look at an example. Mark graduates from high school with below average grades, no work experience and no desire to go to University. He does not want to go on the dole so he applies for a few jobs and manages to get one working in the kitchen at a local restaurant earning $12.50 per hour.

Mark starts at the bottom but the boss notices his initiative and starts to give Mark more responsibility. Gaining critical work experience Mark is able to get a promotion and an increase in his wages. Mark’s employer, seeing his potential, offers to pay for him to complete a Diploma in Hospitality Management at the local Polytechnic. Mark completes the Diploma and takes over managing the restaurant for his boss.

The restaurant takes off under Mark’s management and becomes renowned for its service and food quality. Other restaurant owners notice the success of the restaurant and soon Mark is being head-hunted by an international hospitality company who wants Mark to manage their business. Mark is now highly respected in his industry and can command a high salary.

Alternatively, Mark finishes high school with below average grades, no work experience and no desire to go to University. He does not want to go on the dole so he applies for a few jobs paying the minimum wage which recently increased to $15 per hour.

Unfortunately for Mark, because of his low-skills and lack of work experience, he is turned down for all of the jobs as he is told they can only afford to hire someone with experience. Mark has to go on the dole. He continues to apply for jobs, but the number of job-seekers has increased for some reason and he finds it hard just to get an interview. A year passes and Mark’s self-confidence and sense of self-worth is at an all-time low.

Finally, he manages to secure a part-time role working at a restaurant. Mark works hard, and the manager noticing his initiative offers Mark a role with more experience, but tells him they cannot afford to give him a pay-rise. Mark takes on the role anyway, as he is keen to get more experience, but is disappointed that there is no increase in pay.

The restaurant that he works at needs a new manager and Mark talks to his boss about the role. His boss tells him that, although he thinks Mark would be good in the role, he needs a Certificate in Hospitality Management. He tells Mark he would have to pay for it himself as the restaurant cannot afford to.

Mark is still on the minimum wage, so he cannot afford to pay for the course. His boss hires someone else who already has the qualification and experience. Mark becomes disillusioned with his job and his work quality starts to drop. His boss talks to him about it repeatedly but it makes no difference. After a while, Mark quits at the restaurant as they clearly don’t value him as an employee. He goes back on the dole while he looks for another job.

This example highlights the side-effects of increasing the minimum wage can result in. Increasing the minimum wage to $15 would result in a decrease in the level of employment, either through loss of jobs or a reduction in working hours. Increasing the minimum wage also has an impact on other benefits that employees don’t think about straight away – break times, staff training, staff bonuses and the possibility of overtime.

The reality is that the people that the minimum wage hurts the most are the very people that it is trying to help – those workers with low-skills. Although increasing the minimum wage may seem like a great idea, the unintended consequences make it far too costly. In today’s current economic climate New Zealand simply cannot afford it.