If you understand supply and demand, you'll understand why a high minimum wage isn't exactly good for you.
New Zealand's minimum wage rose again on April Fools’ Day 2020.
Headlines like “Minimum Wage Rise Good News As Return To Work Looms” and “Coalition Government Delivers Boost For Low Income Kiwi Workers" flooded local newsstands and newsfeeds. These positive statements cooked up by politicians and journalists project the increase of New Zealand’s minimum wage across all industries — from $17.70 per hour to $18.90 per hour — as a triumphant one for the country’s economy. However, the opposition party and many economists, who likely asked “Is this an April Fools’ joke?”, think otherwise.
This no-joke, very serious government-mandated law, which sets a price floor for wages employers should pay employees, has long been disputed, mostly by small businesses, some legislators and almost all economists from around the world. But it remains a popular policy, for politicians to win polls and people to prosper—unfortunately, just not the people from the low-income or low-skilled bracket, which this policy is supposed to “make a big difference” for.
I used to be someone who was all for a high-wage economy, because being born in Malaysia, I have seen the consequences of a low-wage monopsony, where vulnerable individuals ultimately get exploited and are worked to death, figuratively and literally. But today, by understanding basic economic principles and taking on ceteris paribus-applied assumptions; plus living and hoping to continue to work in New Zealand where additional increases in the already high minimum wage may make it an even more binding policy, I’m pivoting to the other side of the proverbial fence on this conundrum. Not because I think it’s bad for the New Zealand economy in the long-run, or that it’ll slow growth, but because I now understand that a higher minimum wage policy has a cost: The very people it claims to help and protect.
If seen purely as a tool to benefit the poor, such binding policy on minimum wage does close to nothing for them, and may even potentially harm their livelihood, especially now where most businesses are suffering the brunt of a pandemic and already laying off people.
Using the conservative model of supply and demand — where when price goes up, quantity goes down — the more expensive labour becomes, the less of it is going to be retained. Some businesses in certain industries cannot hire more minimum wage workers because they cannot afford them, potentially causing strains on their production and eventually, eating into business revenue.
Topped with mass layoffs currently happening, the high minimum wage also may cause a shift in the quantity of labour supplied. In this case, more people, because of the lure of higher pay, will try to enter the labour market, inundating it with rife competition and causing unemployment.
A free labour market, on the other hand — in theory and assuming that all business owners are rationale — will clear up by increasing salaries to attract workers when there is a shortage, thus reaching market equilibrium and helping industries and individuals to thrive. Though, there are visible cracks in this system, as employers in the US were reported to choose handing out bonuses and benefits instead of raising wages of employees while in developing countries, sweatshop conditions are still widespread. Even so, a hike in minimum wage means a hike in costs for businesses. And studies that centre on least-skilled workers find evidence that their jobs are the ones most affected when a high minimum wage is first implemented.
From a policymaking perspective, this is of importance since the minimum wage is intended to help least-skilled, uneducated workers escape poverty. If employment among these people declines considerably, this policy is moot. Furthermore, as the authors of Beyond Money: Toward An Economy Of Well-Being, pointed out, “losing income may have a greater influence on wellbeing than gaining income does.” And again, this is important to the current New Zealand government seeing as how, only a year ago, The Treasury announced the nation’s first-ever “wellbeing budget”, which tries to measure the happiness of citizens as opposed to the country’s overall economic success.
Hence, empirical evidence of having lived and tried to gain work experience in New Zealand has convinced me that the minimum wage is a significant cause for a smaller demand for paid workers, particularly among the unskilled. This will affect general well-being and thus, in the future, may incur higher cost being allocated to the wellbeing budget. For businesses, they may choose to innovate and find close substitutes such as robotics if labour prices continue to go up, or they may go bust. Volunteerism could also rise in popularity, even necessity, to prove a worker’s worth before securing a paid job as employers become more risk-adverse in the increasingly high-wage economy of New Zealand.
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