ACT backgrounder: Simon Chapple and Jonathan Boston on rolling the dice on a minimum wage increase

“Some advocate raising the minimum wage significantly to reduce child poverty. Unfortunately, lifting minimum wages will do little for child poverty.

This is because most of the extra wages received by parents on low incomes will be clawed back by the Government. The most obvious losses are through income tax and ACC levies.

Further, families partly reliant on welfare benefits and partly on paid employment may lose part of their benefit. In addition, Working for Families payments and housing assistance are reduced as earnings rise.

Consequently, net family income may grow only marginally for many families, even after a considerable rise in minimum wages.

Furthermore, a large hike in the minimum wage can result in job losses. New Zealand’s minimum wage is among the most generous in the OECD relative to average earnings, and the most generous relative to earnings in our history. Going much higher takes us out of our zone of historical experience.

Although past minimum-wage rises have not resulted in large job losses, we know that at some point they will.

Advocating large rises in minimum wages means rolling the dice on the jobs of the least advantaged employed people.”

From “New deal for kids” by Jonathan Boston and Simon Chapple, Listener, 21st June 2014

Boston and Chapple are co-authors of Child Poverty in New Zealand (2014)

http://www.listener.co.nz/current-affairs/new-deal-for-kids/

 

ACT Backgrounder: Minimum wage as a tax on low skilled workers

 

From the standpoint of the employer profitability and willingness to hire, the increase in labour costs from a $3.75 tax increase on low skilled workers is identical to a $3.75 increase in the minimum wage.
 
Now, if a political party was going around in an election suggesting that the government place a $3.75 dollar per hour tax on low skilled workers and suggested that this would not harm their employment prospects, no one would take anything they say seriously ever again.
 
Labour and the Greens are going around saying that if you increase the labour costs on employers by $3.75 per hour, this will not harm the employment prospects of low skilled workers.
 
The reduction in profitability and increase in the costs of labour are identical irrespective of how they came about – be it from a tax increase or from an increasing in the minimum wage.
 
A common proposed solution to high unemployment during recessions overseas are temporary cuts in social security payroll taxes paid by employers. The reason for this tax holiday is a very obvious belief that if you lower the cost of hiring labour, more will be hired.
 
A common response to high unemployment in recessions in New Zealand and abroad are job subsidies. The government offers subsidies to employers to hire more employers.  The rationale is if the subsidy makes it cheaper to hire teenagers, employers will hire more of them. Employment subsidies make no sense unless the price of labour, the cost of hiring, influences the willingness of employers to hire more workers.
 
If a $3.75 per hour wage increase does not harm the employment prospects of low skilled workers, why not give everybody a $3.75 per hour wage increase? What’s stopping a general wage rise of $3.75 per hour if increases in labour costs does not reduce the willingness of employers to hire?
 

ACT’s 5 point plan to reduce poverty and raise incomes

During this election campaign, there has been much discussion of child poverty.

The discussion is confused by a definition of poverty unrelated to real, dollar incomes. A child is said to live in poverty if she lives in a household whose income is less than 60% of the median household income. On this measure, doubling everyone’s income would make no difference to the number of people living in poverty.

Even on this wonky definition of poverty, the common allegation that poverty is increasing is false. Child poverty rates (so measured) have fallen from about 34% 20 years ago to 16% today.

Nevertheless, no one can deny that the opportunities of many children are reduced by the relatively low incomes of the households they live in.

Like the other parties, ACT wants to see those at the economic bottom of New Zealand doing better. And we want their children to have better prospects in life.

Unlike the parties of the left, however, we do not believe that the answer is yet more welfare and yet higher taxes. We believe that the poor will benefit most from a dynamic, job-creating economy and from better education.

More specifically, we have a 5-point plan to reduce relative poverty and raise incomes:    

1. Cut the company tax rate.  There are almost no households in poverty where the adults have jobs. Cutting the company tax rate will create jobs and opportunities for those who are now unemployed.

New Zealand has one of the highest Company Tax rates in the OECD. It raises little income and is stopping investment, growth, jobs and real wages.  By lowering the company tax rate to 12.5%, funded mainly by ending tax hand-outs to selected companies (“corporate welfare”), we can restore full employment and increase real wages. This single measure will do more to create jobs and lift incomes than all the other parties’ spending plans put together.

2. Cut red tape.  Government red tape as measured by statutes and regulations has increased under National, stifling economic growth and making housing unaffordable. ACT wants regulation generally reduced and the Resource Management Act replaced with planning laws based around the Common Law.  This will make housing affordable again.

3. Reform welfare. Virtually everyone in poverty is on a benefit.  Welfare must become a hand up not a hand out.  In America the use of lifetime limits has transformed welfare.  A lifetime limit for able-bodied adults (with those who exceed it receiving strictly controlled payment cards instead of cash) will motivate long term beneficiaries to return to work. We can then be more generous with those who really need our support.

4. Improve education for poor children. Too many New Zealanders leave school with no employable skills. Many cannot read or do arithmetic.  New Zealand’s real inequality is in education; the best in the world for 80% and awful for 20%. President Obama supports Charter schools because allowing communities to set a program that suits the community works.  The 5 pilot schools in New Zealand have seen dramatic improvements in pupils who were failing in state schools now. ACT wants all schools to be able, where the board and parents wish, to become Partnership Schools.

5. Deal with addiction. There is not enough money, even in the deep pockets of Treasury, to fund drug and alcohol addictions. ACT supports moves by the present government to require those on the unemployment benefit to pass drug testing and to assist addicts to become drug free.

Those at the economic bottom of New Zealand need the opportunities provided by a vibrant economy and a good education. And they need incentives to pursue these opportunities.

They do not need more generous welfare, as the political left are promising. That will only undermine incentives to study and work. And, through the deadweight cost of the increased taxes required, it will reduce economic growth, wages and the job opportunities available.

The other parties make a great display of their concern for the poor. But concern is not enough. Their policies will increase the number of people who are stuck at the bottom.

Only ACT’s policies offer the poor a real chance of getting ahead in life.  

The Greens' minimum wage will cause mass unemployment​

"The evidence from economics is that a small change in the hourly rate has a big effect on employers - it is common sense. If you can get your lawns mowed for $10 you will hire, but at $20 you do it yourself," said Jamie Whyte.

"Anyone who has been to Europe can see the mass unemployment that Europe's high minimum wages cause young people.  Up to 30 percent of graduates cannot find jobs where they can get a chance to prove themselves.

"We have all seen that in times of recession there is mass unemployment. The reason for that is wages, unlike most things, never go down.  In a recession an employer would keep more people employed if wages could decrease. Higher minimum wages mean more employers will decrease or reverse their plans to hire.

"Minimum wages are a form of price control. The reason New Zealand does not have price controls on food, housing and fuel is because price controls lead to shortages. The suppliers will just not provide enough to meet the market demand. Price control wages, and there will not be enough jobs created to meet the demand for jobs.

"If the Greens proposal is adopted it will cause mass unemployment among those who most need a job. For example, part time work that students rely on will just disappear."

Greens will put tens of thousands out of work with their $18 minimum wage

"The $18 minimum wage championed by the Greens will throw tens of thousands of low skilled New Zealanders out of a job and condemn them to a life on the benefit. At no point do the Greens discuss the employment consequences of their massive minimum wage rise," said Dr Whyte.

"What is deeply suspicious is the Greens did not ask BERL or Infometrics to QA their policy. Dr Norman was officious to the point of prissiness about the use of independent consultants to QA his economic policy releases,” said Dr Whyte.

“Obviously, the Greens didn't like the inconvenient truths they were going to be told if they subjected their employment policy to an independent audit. Once they have opened that door, the Greens cannot pick and choose when they have their policies subject to independent audits," said Dr Whyte.

"The economic effects of minimum wage increases could not be plainer. Professor Gail Pacheco’s research repeatedly finds that the increases in the minimum wage over the last 10 to 15 years in New Zealand reduced employment, increased unemployment, and reduced enrolment in education and training among teenagers:

1.                   Maloney and Pacheco (2012) found that the real minimum wages increased by nearly 33% for adults and 123% for teenagers in New Zealand between 1999 and 2008. Where fewer than 2% of workers were being paid a minimum wage in 1999, more than 8% of adult workers and 60% of teenage workers are receiving hourly earnings close to the minimum wage. They estimated that a 10% increase in minimum wages, even without any offsetting reduction in earnings due to a loss in employment or hours of work, would lower the relative poverty rate by less than one-tenth of a percentage point!

2.                   Pacheco (2011) reviewed the impact of rising minimum wages on employment in New Zealand over 1986–2004 and found significant negative employment effects of a higher minimum wage.

3.                   Pacheco and Cruickshank (2007) found the youth minimum wage increases resulted in some age groups undergoing a 91% rise in their real minimum wage over the last 10 years. They found that for 16–19 year olds, minimum wage rises have a statistically significant negative effect on educational enrolment levels,” said Dr Whyte.

“Minimum wage advocates fail to take seriously that the low paid workers who lose their jobs because of minimum wage increases are real, living people. They suffer when their interests are traded off for the greater good of their fellow low-paid workers who are lucky enough to retain their jobs at a slightly higher pay, many of whom come from much wealthier households than them,” said Dr Whyte.

“The case for the minimum wage increase championed by the Greens gets no better if you think of it as offsetting alleged market power of employers to keep wages down. A small minimum wage increase, and the literature in this area only ever supported small minimum wage rises, must jump the following hurdles:

1.       The minimum wage must be chosen correctly – the optimum minimum wage can be set only if the demand and supply of labour are known over a considerable range;

2.       The optimum minimum wage varies with occupation (and, within an occupation, with the quality of worker);

3.       The optimum minimum wage varies among firms (and plants); and

4.       The optimum minimum wage varies, often rapidly, through time;

"A uniform national minimum wage, infrequently changed, is wholly unsuited to these diverse local labour market and individual business conditions," said Dr Whyte.

“The notion that every employer in New Zealand will be willing to start an ordinary 16-year-old school leaver on $18 an hour defies belief. School and university students working part time in supermarkets and cafes can kiss their jobs good-bye.

“If the minimum wage can be set at the click of a political finger in an election campaign, what's stopping the Greens from putting the minimum wage up even higher, to the average wage? When will the minimum wage be too high under a Greens dominated government? ” said Dr Whyte.

“The Greens should listen to the impeccably left-wing New York Times from 1987, when it still remembered some basic economics:

‘Raising the minimum wage by a substantial amount would price working poor people out of the job market. A far better way to help them would be to subsidize their wages or – better yet – help them acquire the skills needed to earn more on their own…

Raise the legal minimum price of labour above the productivity of the least skilled workers and fewer will be hired. If a higher minimum means fewer jobs, why does it remain on the agenda of some liberals?

A higher minimum would undoubtedly raise the living standard of the majority of low-wage workers who could keep their jobs.

That gain, it is argued, would justify the sacrifice of the minority who became unemployable.

The argument isn’t convincing. Those at greatest risk from a higher minimum wage would be young, poor workers, who already face formidable barriers to getting and keeping jobs.’

"The title of that editorial was The Right Minimum Wage: $0.00.

“The only way to lift the rate of wages growth for the low paid is faster economic growth. Only ACT’s policies of a top tax rate of 24% and a company tax rate of 12.5% by 2020 will increase the economic growth rate by at least one-third,” said Dr Whyte.

ACT Launches its Employment Policy

Media Release
Dr Jamie Whyte, ACT Leader
Monday 9 June

ACT Launches its Employment Policy

ACT has today released its employment relations policy, which focuses on growing businesses, increasing jobs and increasing incomes.

“New Zealand businesses and employees are poorly served by the Employment Relations Act. It is a burden that stifles growth, productivity and wages”, said  Dr Jamie Whyte..

“Businesses are tied down by a law that limits who they can employ and increases the opportunities employees have to make unjustified dismissal claims.

“ACT has four policy proposals to address this imbalance. ACT will extend employment trial periods, from 90 days to 12 months.  In Australia, employees have to wait between 6 months and 12 months before they can make an unjustified dismissal claim. In the UK, employees must wait two years.

Employing staff is one of the most important investments a business owner will make. Short trial periods don’t give employers a fair opportunity to assess their new employees’ capabilities.

“ACT’s 12 month trial period will also increase the chance for unemployed to get work. This has been the experience in other countries and will emerge here too. 

ACT will also remove the employee’s right to reinstatement and provide an opt-out provision for higher earners.

“The ERA tries to patch up ‘marriages’ between businesses and employees that can’t be rescued. Limiting remedies to monetary damages allows everyone to move on, rather than perpetuating a failed relationship. Higher earners – who are often crucial to the success of an organisation – will be able to opt out of personal grievance provisions of the law and pre-negotiate an exit package.

ACT will repeal Part 6A of the ERA. Under Part 6A, if a tenderer wins a contract that utilises certain classes of employees, the successful tenderer must employ the staff of the existing contractor or negotiate redundancies with those workers. This defeats the purpose of tendering in the first place.

These are ACT’s first steps towards unwinding the current legislation and replacing it with contract law and modest codification of the common law. The goal is to reduce regulation, while at the same time protecting people from clearly abusive behaviour. Employment law must give freedom to employers and employees to come to arrangements that suit them both. And these four policy steps are a start along that path.

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Re-establishment of Youth Minimum Wage A Win For ACT

Today National unveiled its ‘Starting Out Wage’ policy – a watered down re-establishment of the youth minimum wage.

For their first six months in a new job, youth aged 16 and 17 will have a minimum wage of $10.80 – which is 80 per cent of the $13.50 adult wage.  After six months on the job they return to the adult rate but the six months begins afresh with each new employer.

While the policy is not as bold as ACT would have liked, this announcement is step in the right direction and represents another win for ACT as National adopts another of our core policies. 

When Labour abolished the youth minimum wage in 2008, youth unemployment soared.  A study by the former Department of Labour found that abolishing the youth wage resulted in a loss of up to 9000 jobs.  Removing the youth minimum wage priced young people out of the market. 

The reason for this is obvious - hiring a young person is more of a risk.

Most youth have little or no experience and do not have the life skills or maturity of older workers.  Employers cannot look to their work history to ascertain whether they are reliable and suitable for the job, or how productive they will be.  If employers must choose between a young person or an older person at the same rate of pay, employers will usually choose the older, more experience worker.  

Different wages for adults and young people gives employers an incentive to employ a young person with no experience.   It gives young people the chance to get their foot on the job ladder where they can gain valuable skills and experience, eventually moving into better, higher paid jobs.

Some people will say that youth workers are just stealing jobs off older people and that we are left no better off.   However a young person who gets a job produces goods and services on the one hand and spends their money on the other.  By working they produce more for people to buy, leading to more production and the creation of new jobs. 

Making it easier to work actually increases employment. 

On the other hand keeping people at home on the dole produces nothing new for anybody to buy, and actually penalises those who are working by making them pay taxes for welfare payments.

ACT has campaigned for the re-establishment of a youth minimum wage since Labour and the Greens abolished it. 

In 2010, we introduced the Minimum Wage (Mitigating Youth Unemployment) Amendment Bill which would have reintroduced the capacity to establish differential minimum wages for those aged 16-17.   

Not one party in Parliament, aside from ACT, voted for this bill.  

Those parties instead voted to keep our youth at home on the couch, doing nothing, learning nothing and earning nothing - rather than in a job paying $10 an hour.

Labour and the Greens went so far as to argue that demand and supply is not affected by price.  They argued – and still do - that minimum wages have no impact on employment and therefore it could not be the reason for our high rate of youth unemployment.    

Yet, here we are, in 2012, and both these parties are campaigning to raise the price of cigarettes and alcohol as they say a higher price will lower demand.   That’s rich - but we digress.

Two years, and many unemployed young people, later, National’s announcement – a back-down on their previous position – is a welcome step to getting our young people into employment and moving forward in their careers. 

We just wish it hadn’t taken National so long. 

 

The Devil Is In The Detail - Goff light on policy in his latest photo-op

ACT New Zealand’s Labour spokesman Chris Simmons today said he isn’t surprised that Labour Leader Phil Goff was light on policy detail during his recent photo opportunity.

Mr Simmons was responding to the article in today’s ‘Dominion Post’ on Mr Goff’s visit to engineering firm A. E. Tilley yesterday.

“In light of Labour’s policies on raising the minimum wage to $15 an hour – and even higher for some industries – Phil Goff visiting small businesses is akin to Daniel entering the Lion’s Den,” Mr Simmons said.

“The factory owner, 78-year old Don Tilley, stated he didn’t know what Labour’s policies were. I suspect if Phil Goff had informed him, he would have been aghast.

“Mr Tilley specifically stated that he doesn’t like laying staff off. He still pays double-time when his guys work overtime, and his workers are supporting him currently by taking unpaid leave during the current hard times. For 89 years the Tilley family has run this business – it is hard to think he needs the government telling him how to do anything. Yet, here is Labour promoting Labour policies that would leave him no other choice – and would likely mean that we will not see 100 years of A.E. Tilley.

“The business environment is hostile enough already. Statistics show that more small businesses closed in 2010 than in any other year over the last decade. When one considers that small businesses employ most of our workforce, and drive our economy, this is very bad news indeed.

“Last year, almost 98 percent of new businesses started with between zero and five employees. Such businesses are the most vulnerable to failure. Under National that has proven particularly so – and Labour’s plans will drive many more entrepreneurs out of business.

“The only Party that recognises the potential of business entrepreneurs is ACT. ACT knows that business entrepreneurs drive our economy. For everyone’s sake we need an economic environment in which they can survive, then thrive.

“With 18 years of running my own management consulting business, working with entrepreneurs around the world, and networking with leaders in the field of entrepreneurship, I know how important it is to have a regulatory environment that supports business owners.

“ACT is the only Party with a vision to create an entrepreneurial economy that supports and attracts entrepreneurs to build businesses from a New Zealand base,” Mr Simmons said.

Labour Launches Attack on Small Businesses - ACT

ACT New Zealand’s Labour spokesman Chris Simmons today slammed the Labour Party’s new ‘Work and Wages’ policy, labelling it an unprecedented attack on New Zealand’s small business sector.

“Labour’s plans for raising the minimum wage to $15 an hour, a return to the archaic award system, and the abolishment of the 90-day trial period will do nothing but increase costs for employers and put more workers out of jobs,” Mr Simmons said. 

“We can already see so many empty shops in our towns and cities around New Zealand.  At a time small businesses are hurting, Labour wants to well and truly put small business owners out of their misery.

“Unemployment will go up not because businesses have one or two spare staff to lay-off.  It will go up because businesses will fail outright.  Most small businesses have lean profit margins; squeeze them too hard, as Labour plans to do, and they will have to shut up shop.

“The costs grow larger still: in many medium-sized businesses the minimum-wage worker is being supervised by a staff member who is most likely currently earning around $15 an hour. When the minimum wage goes up, the shift co-ordinator’s wage must also go up.”   

Mr Simmons also dismissed Labour’s proposal to Mondayise public holidays as yet another costly bribe.

“We have never recovered from the productivity hit of giving every person four weeks leave. To Mondayise public holidays will further reduce the country’s overall productivity and directly hit the bottom-line of every small business in the country.”

Self-employed for 18 years, Mr Simmons strongly suspects that Labour’s policy was devised by “people who have never employed a person in their careers; have never been responsible for covering a payroll; have never had their family home on the line.”

“Small business owners are already looking at the return they get for being an entrepreneur and asking themselves ‘why bother?’ It is easier just to let someone else take the risk and move their families and their skills to Australia and start again.

“This sort of craziness is exactly why government should never try dictating how people run their business.  ACT policies will let New Zealanders get on with their lives and cut the bureaucracy that holds back employers and employees alike,” Mr Simmons said.

Labour’s Work and Wages Policy Will Hurt More People Than It Helps

Labour’s Work and Wages Policy announced today will cost us jobs and will hurt the very people Labour claim they are trying to help – those on low incomes, ACT Leader Don Brash said today.  

“Labour just doesn’t seem to get it - the more something costs, the less people buy.  Employers are no different to their customers in this regard.  Higher minimum wages will cost us jobs – particularly among those with low skills,” Dr Brash said. 

“It is a disgrace that Labour pretend to champion the rights of workers, but at every chance push policies that harm those on low-wages rather than help them.  

“Creating more restrictions to employment laws and raising the minimum wage will see employers hire fewer staff.   It is the people on the margins - the lowest paid and unskilled - that will be the first to suffer. 

"We only have to look at what has happened with the abolition of the youth minimum wage to see this effect.  This legislation was passed with the best of intentions but has had pernicious effects. 

“The Department of Labour found that up to 9000 young people are now out of work as a direct result of the abolition of the youth minimum wage.   Raising the minimum wage to $15 an hour without an increase in productivity will be equally disastrous.   

“Labour cannot disregard the laws of economics.  We need to focus on policies that create growth, delivering liveable wages to all New Zealanders. 

“Like Labour, ACT wants to see wages in New Zealand rise.  But, unlike Labour, ACT knows the best way to achieve that is to reduce taxes and regulations so business can grow, invest and create more jobs.   Labour’s Work and Wages policy will see more people at home on the dole than ever before,” Dr Brash said.

 

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