The Consequences of the Minimum Wage in New Zealand
Despite the minimum wage having objectives which are globally accepted, a major disagreement is gaining momentum on whether it is effective in achieving its objectives. In spite of the enormous experience and knowledge gained from decades of economic studies conducted, arguments regarding the pros and cons of minimum wage are still apparent today. These laws are still highly controversial, and as a result, have gained more support from the general public than from economists (Neumark Wascher, 2006).
Moreover, minimum wage laws are not universal but vary from one nation to another. In New Zealand, the minimum pay is categorized into three rates which play an important role in setting the wages of employees. These include the adult minimum wage, new entrant minimum wage and training minimum wage. The adult minimum wage which has been currently raised to 12.75 per hour is applicable to employees who are not trainees or new entrants and in addition to that must be 16 years old and above. The rate for the new entrant minimum wage which is 10.20 affects employees aged 16 to 17 years old, excluding those with three months or 200 hours of employment, supervisors, trainers and trainees. While the training minimum wage which currently stands at 10.20 affects employees undergoing industrial training which involves a minimum of 60 credits per year (Department of Labour, 2010).
The wage structure requires a political redefinition in order to achieve the most appropriate income distribution which is socially acceptable. The minimum wage comprises of a strong social appeal based on the market capability to cater for the needs of members of the less skilled workforce through provision of income equity (Eatwell, Milgate Newman, 1987). Redefinition is important as minimum wage laws are normally judged against their touchstone of poverty reduction. This paper explores the consequences of the minimum wage in the society and economy of New Zealand, and also analyzes the effects of increasing it. The essay is divided into two parts positive consequences and negative consequences.
Positive consequences
In societies, the lowest social class is characterized by high poverty level and lack of education hence constitute the less skilled employees in the job market. Minimum wage ensures equity in the distribution of income thereby improving the living standards of the poorest and most vulnerable class in society by raising them to an average level (Filion, 2009). Without minimum wage laws, such employees will be susceptible to discrimination as will receive wages inadequate to sustain themselves thereby resulting to their languishing in poverty despite being employed.
Pacheco (2007) has covered several impacts of a high minimum wage in New Zealand. Among the findings is that a higher minimum wage can affect wage inequality particularly among the youth. The study revealed that by raising the real minimum wage by a large margin, the level of wage dispersion among teenagers is affected negatively. This supplements the notion that increasing the minimum wage, income inequality is eliminated, the study results proved the same as from 2000 onwards the level of wage dispersion among the teenagers and young adults were noted to be decreasing steadily as the minimum wage rose.
Since 2001, the government of New Zealand has been increasing the minimum wage steadily each year and as a result, the country has a higher minimum wage with regards to that of the United States (Pacheco, 2007). Despite economists arguing that the increase has negative consequences on employment rate, it plays a crucial role in motivating and encouraging employees to put additional efforts in their duties as well as increase their working hours (Hyslop Stillman, 2004). An increase in wages or salary acts as a motivator to employees since it shows that their efforts are appreciated and adequately rewarded. In addition to that, it increases their work ethics as employers will be expecting more from them due to the high labor cost (Filion, 2009). Normally, low income earners have low work ethics due to their low wages and employers do not demand much from them however by raising their wages they become more responsible and disciplined as employers expect more.
An increase in working hours was realized among youth employees in New Zealand following an increase in the minimum wage (Hyslop Stillman, 2004). This provides an implication that employees were motivated to work longer hours in order to earn more. A low minimum wage demoralizes employees and in addition to that employers never care much about their performance thereby resulting to their low productivity. On the other hand, a high minimum wage provides insight to employees on the importance of a high income and in addition makes employers aware of the importance of employees performance level. This therefore resulted in employees particularly the young adults, working additional hours and putting more effort in order to improve their performance and productivity.
According to a research by Filion (2009), an increase in the minimum wage affects the economy positively. By increasing the minimum wage more money is placed in the hands of the low-income earners thereby stimulating consumption as they spend their entire paychecks. By having more money at hand, expenses also increase and this in turn results in more cash flow and economic growth is realized with time. In New Zealand, young adults and teenagers are expected to gain more as a result of the increase in minimum wage since they will be taking home more money thus meeting their increasing needs.
High poverty level implies more government spending through social welfare programs. By increasing the minimum wage, incomes of the lowest paid employees also increase thereby resulting in poverty reduction and in turn the cost of social welfare programs funded by the government decreases (Filion, 2009). This can be attributed to more families and individuals being able to meet their basic needs hence not requiring much support from the government.
Negative consequences
A research by Abbott (2000) revealed that minimum wage laws resulted in exclusion of low-cost competitors from the labor market, emergence of numerous industrial-economic inefficiencies, unemployment and in addition to that, impeded industries from reducing their cost of wages during times of economic and trade downturns. During the trade decline period, the profit incurred by industries decreases forcing industries to adopt appropriate strategies which would result in their augmentation. Such strategies entail cutting expenditures and this can be achieved through reduction of their employees wages or the number of employees. However, since minimum wage laws forbid organizations from reducing wages of their employees beyond the set limit, many will opt to reduce the number of employees thereby resulting in an increase in unemployment rate and poverty.
An increase in the minimum wage from time to time can affect adversely the rate of employment of teenagers and young adults. A study conducted by Maloney (1997) in New Zealand concluded that an increase in the minimum wage has a significant negative effect on employment rate of young workers. This can be attributed to organizations becoming more wary when hiring less skilled employees. A research by Chapple (1997) using time series and data panel sets analysis also replicates these results despite the negative effect on employment rate being minimal. A high minimum wage implies that organizations will be spending more on their workforce and in order to maintain their profit margins better strategies need to be adopted. Such strategies may involve hiring programs within organizations being halted thereby resulting in few employees being able to secure employment.
Moreover, a more recent study by Pacheco (2007) concluded that high minimum wage can affect employment propensity. During the study individuals were isolated in order to provide an adequate distinction of the impact of the minimum wage on different groups. The results revealed that negative employment effects for most groups were concentrated within the class of 16 to 29 years old. Moreover, the sub-groups which stood-out as most adversely affected by the high minimum wage were 16 to 17 year olds and the Maoris, which is an ethnic minority group. This provides an implication that the effects of an increase in the minimum wage in New Zealand are felt strongly by the minority ethnic groups, teenagers and young adults.
Minimum wage laws benefits the skilled and productive employees at the expense of the unskilled and least productive ones (Black, Hashimzade Myles, 2009). This results in segregation of certain groups of employees from the labor force which are usually characterized by lack of experience and skills, and include teenagers, young adults, minority ethnic groups, migrants and many others. Organizations may prefer hiring skilled individuals whose experience will result in high productivity being realized and not the less skilled one whose productivity is low. However, in a study conducted in New Zealand, Chapple (1997) noted that there was no tendency of small industries firing the less skilled employees as the minimum wage increased. In spite of that, the rate of hiring less skilled employees was expected to decrease as the minimum wage grew. Furthermore, with higher minimum wage, industries are expected to cut costs hence will spend less on employee training. As a result, hiring skilled employees becomes the best option since they do not require much training thereby resulting in the less skilled employees being left out.
Consequently, the effects of the high minimum wage are spreading to the educational sector and influencing the rate of enrolment. In their study, Pacheco and Cruickshank (2007) noted that for 16-19 year olds the increase in minimum wage had a significant negative effect on their enrolment levels in learning institutions. Many teenagers and young adults are opting to enter the labor market rather than pursuing higher education. This result also provides assistance in explaining the relationship between higher minimum wage levels and augmented rates of labor force participation. Education is essential in ensuring individuals have a bright future, however the high minimum wage is enticing teenagers and young adults to participate in the labor force hence exposing their future to risks. Moreover, it is imperative for individuals to pursue higher education at a tender age to avoid the difficulties experienced when the brain and body start to wear out at old age.
Conclusion
Minimum wage laws play an important role in the New Zealand society and the countrys economy. By increasing the minimum wage, the society realizes numerous benefits associated with it. These include improved living standards, reduction in wage dispersion leading to wage equality, performance improvement as employees become motivated to work for longer hours and in addition, the government saves many resources which would have been used in social welfare programs. High minimum wage has also been noted to have a positive effect on the economy of New Zealand as low-income earners have more money at their disposal hence are provided with the capability to spend more.
On the other hand, the shortcomings of a high minimum wage are apparent and their effects are influencing the society adversely. Studies conducted reveal that high minimum wages result in increments in unemployment rates and segregation of teenagers, young adults, migrants and minority ethnic groups from the labor market. Moreover, it forces employers to adopt strategies which harm the less skilled employees while benefiting the highly skilled ones. In addition to that, it affects adversely enrolment levels in learning institutions as teenagers and young adults choose money over education.
It is therefore apparent that a high minimum wage brings benefits and limitations to the society. This makes it imperative to redefine minimum wage laws and the wage structure in a way that benefits of the minimum wage are increased while limitations are eliminated. Conversely, as a result of some studies having contradicting results regarding the consequences of increasing the minimum wage, more research should be conducted in New Zealand to ensure the controversial debate is settled.