Opinion: How NZ's high minimum wage imposes costs on businesses, consumers and the unemployed

By Infometrics economist Nigel Pinkerton Like the 30,000 members of the facebook group "bring back Georgie Pie", I have fond memories of the franchise. Some would swear by the taste, but the biggest attraction for many was that the pies were cheap. Georgie Pie's $1, $2, $3, $4 menu became legendary in fact, but therein lies the problem. The economic and regulatory environment has evolved since the 1990s, and the costs of doing business for an outfit like Georgie Pie have increased substantially. If McDonald's were to resurrect the brand, they may be able to milk some extra revenue and free publicity out of it. But the cost of a pie would likely come as a shock to many people. The Georgie Pie experience would never be the same. The average item that cost $1 in 1996 would cost more than $1.35 today because of inflation. The $1.35, $2.70, $4.05, $5.40 menu wouldn't sell itself in quite the same way the original menu did. But Georgie Pie's problems would run deeper than this. Georgie Pie's costs would have increased much faster than inflation, had the franchise not been shut down.

Georgie Pie had a reputation for paying its mostly youth workforce relatively poorly. When I was growing up a job at McDonald's paid up to $3 an hour more than a job at Georgie Pie, where a 15 year old at started on about $5/hr. The minimum youth wage has been increased several times since the late 1990s, when it was set at $4.20/hr (the equivalent of $5.60 in today's dollars). This rate originally applied to 16-19 year olds, but from 2001 the adult minimum wage was extended to cover 18 and 19 year olds. Following this change, the youth minimum wage was practically abolished in 2008. Arriving at the present day, all employees over 15 years old must be paid $12.50/hr (although some under 18 year olds can be paid a training wage of $10/hr for up to three months after hiring). For the record, I am in favour of having some form of minimum wage. But this is largely a value judgement. An informed debate about minimum wages has to acknowledge that there are costs. A minimum wage is not money for nothing, and like many other government policies it imposes costs on one group of people for the benefit of another. In the case of minimum wages, the beneficiaries are employed low-skilled workers. The costs of having a minimum wage are borne by different groups within society, including unemployed low-skilled workers, and consumers "“ such as fast food eaters. The fast food industry has a high proportion of low-paid workers and increases in the minimum wage can directly affect the price of fast food. For those of us who have fond memories of really cheap fast food, the kind Georgie Pie was famous for, this loss is one price we pay for New Zealand's choice to have a higher minimum wage. In theory, if it costs more to employ a particular group of people (e.g. youth) then fewer of them will be employed. Those lucky enough to have a job earn more but it becomes tougher for the unemployed to find work. The negative effects on employment increase the higher a minimum wage is set, relative to the market wage for low-skilled labour. Anyone who wants to hire people on less than the minimum wage, such as a people with disabilities, has to get the employees individually assessed by a suitably qualified professional. Many advocates for people with disabilities find this process overly bureaucratic and restrictive. A minimum wage not only restricts employers rights to set pay levels, but restricts the rights of the unemployed (whether disabled or not) to drop their asking wage to a level where they might get a job. A further drawback of setting the minimum wage too high is that it can discourage up-skilling, by lowering the returns to training. If an unskilled youth is lucky enough to get a job, the current minimum wage means they will be paid quite well. When I was 17 and earning about $7/hr part-time in today's dollars, all I could think about was gaining the experience and qualification that would increase my earning potential. Had I been earning $12.50/hr, leaving school at 17 would have been a reasonably attractive option. Minimum wages benefit the low-paid who are already in work, but a high minimum wage imposes costs on businesses, consumers and the unemployed. New Zealand's relatively high minimum wage makes it difficult to sell cheap fast food, for example. Recently there have been ignorant claims that we can raise living standards by simply raising the minimum wage. Next time someone makes this claim and it sounds sensible, just remember Georgie Pie. ________________ * Infometrics is an economic information and forecasting company based in Wellington. To find out more, see its website here. This piece first appeared in the Dominion Post.