The minimum wage debate

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No one would argue that those earning the minimum wage are living a glamorous lifestyle, and I think a large proportion of the population of New Zealand support the planned increases. However, if you own a business that is reliant on a large amount of manual labour, things just got interesting.

The fact is that the lowest paid employees in New Zealand businesses are going to get a government forced pay rise from $16.50 to $20.00 an hour over the next three years. Let’s then assume that the direct supervisor of those lowest paid employees is currently earning $20 an hour. Logic tells me that the supervisor is going to be looking for a pay increase pretty quickly, probably at least $3.50 a hour to be precise. In turn, the wage increases will then likely keep flowing upwards through the business. As such, some commentators are predicting that for businesses heavily reliant on manual labour, overall wage costs may well increase by up to 20%, directly as a result of the 27% rise in the minimum wage.

What would the bottom line of your business look like if your direct costs rose by 20% over the next three years?

For many businesses that we see, such an increase in costs, without a corresponding increase in the sale price of the goods or services being generated, would be more than enough to put the business into a loss-making position.

So, what does a business facing a 20% increase in labour costs do? Most likely, it simply puts its prices up to offset the cost increase and protect margin. If it can’t do this (for example, as its pricing would become uncompetitive against imported products), then it needs to find a way to cut other production costs, cut overhead costs, or increase the efficiency of its current labour force. Failing any of those actions, potentially, the business will cease to trade.

I question if the Government has fully modelled the impact that increasing the minimum wage could have on the economy. Have they done the maths on the likely flow on effect on wage rates above the minimum wage? Have they factored in potentially higher unemployment rates and the inflationary impact of businesses putting up their prices in order to survive? I’m picking not, I’m picking that they have simply rushed to implement what is generally a popular policy (particularly to non- business owners). However, despite what some are saying, I can’t see the New Zealand economy coming to a grinding halt due to the minimum wage increase and in all likelihood, businesses will simply suck up the increased costs and then find a way to protect the margins they require in order to make the risk and stress of being in business worthwhile.

The important point in all of this is for businesses to start planning for the increased costs now. They need to model what impact the cost increase will have on the bottom line and work out what needs to be done to counteract it. The clock is ticking.

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