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Treasury’s verdict on raising the Minimum Wage?

11 November 2011 9 comments

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It appears that even Treasury does not buy into the neo-liberal argument that raising the minimum wage will “destroy jobs”,

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Full Story

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National politicians,  employers, right-wing reactionaries, and some low-information voters have the strange notion that raising the minimum wage will “destroy jobs”. In the second Key-Goff debate, held in Christchurch and hosted by “The Press”, Key outlined how raising wages would affect a cafe selling coffee and muffins, and would result in either prices going up – or the employer sacking staff.

What people forget is this,

  1. ALL workers on minimum wage would have their rate increased to $15 an hour. That means ALL cafes would be on an equal, level, playing field when it comes to employing staff. So one cafe owner couldn’t pay, say, $12 an houtr and try to cut costs that way.
  2. Workers on low wages tend to spend ALL their disposable income. Remember how the Nats gave empoyees the option to reduce their contributions for Kiwisaver from 4% to 2%? That was done because the government considered those earning low incomes were contributing too much to Kiwisaver, thereby reducing the amount of their disposable incomes.
  3. So,  Let’s say that “Mary” currently works 40 hours a week and currently earns the minimum wage, $13 an hour, making a gross weekly income of $520.  After tax, she is left with $447.85. She spends over half of that on rent, power, insurance, transport, and phone, – perhaps leaving her with $50 to spend on herself. That’s $50 a week  on entertainment, clothing, saving for a weekend away, sporting/club/leisure activity or some other way to enjoy herself. That’s $50 that various retailers and service providers will get out of her.
  4. Now let’s calculate Mary earning $15 an hour. Her outgoings remain relatively the same. But she is now earning $600 a week, or $513.85 net.  She now has $66 a week left over for discretionary spending. That’s an extra $16 a week she can spend on entertainment, clothing, saving for a weekend away, sporting/club/leisure activity or some other way to enjoy herself.
  5. Mary now has a few dollars extra. And she shouts herself a coffee and a muffin at her local cafe, once  a week.
  6. The cafe owner’s turnover increases by the extra $5 week. Actually more than that – because Mark, Mathew, Melissa, Madison, and a whole heap of other workers on minimum wage are also frequenting that coffee shop, each spending around $5 a week.
  7. The coffee shop owner finds that his income has actually exceeded the slight rise in wages he has had to pay his staff.  By increasing the minimum wage, people have more cash in their pockets, and some of that is flowing into his cash register.

That is how raising wages works.

Increasing turnover at the coffee shop does not necessarily work by cutting taxes. Those on higher salaries will not buy any more coffee or muffins than they are already consuming. They are already consuming as much as they want.

To increase his  market share, the coffee shop owner has to “grow” his customer-base. And the best way to do that is to increase wages so people can buy his products.

That is how a consumer society works.

If anyone doubts the scenario I’ve just outlined – consider working it in reverse.  Cut wages in half.  Then figure out how much spare cash Mary will have to spend on consumer goods and services.

The clever chaps and chapesses at Treasury know all this, of course. That is why Treasury has stated,

The Department of Labour says the rise will cost 6000 jobs. But Treasury has a counter view; “This has not been true in the past. The balance of probabilities is that a higher minimum wage does not cost jobs.Source

Andy Martin agrees,

Andy Martin runs a pub, employing 26 people in Oamaru. He says put the wage up and people just spend more money – everyone wins.” – Ibid

Andy Martin is a shrewed businessman and understands this better than most National politicians,  employers, right-wing reactionaries, and some low-information voters who don’t understand the economics of increasing the minimum wage. Raising the minimum wage from $13 to $15 is not just being fair to workers.

It makes damn good business sense.

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Additional Reading

Key’s figures dodgy on minimum wage – blog

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+++ Updates +++

MPs get pay rise package of $7000

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