A new adjustment to the minimum wage will have severe consequences.

From today, minimum wage workers in New Zealand will earn $20.00 (NZD) per hour, a 5.82% increase from the previous hourly rate of $18.90. The change fulfills an election promise made by Prime Minister Jacinda Ardern to raise the minimum wage if her Labour government won re-election.

The increase comes in spite of warnings from the public service that the raise is too large and too soon. In December, the Ministry of Business, Innovation and Employment recommended raising the minimum hourly wage to $19.15 instead of $20, and delaying the increase by six months, from April to October.

The department explained that employers may “respond to minimum wage increases by reducing their highest input costs, which is usually labour. Negative employment effects resulting from this include job losses, lower job growth, unfilled vacancies and reduced hours of work. The extent of these effects will depend on the size of the minimum wage rate increase, the economic and labour market context in which the rate increase occurs and how firms respond.”

It estimated that, in 2021, there would be approximately 9,000 fewer jobs under a $20 minimum wage than there would be if the existing minimum wage of $18.90 remained in place. The review warned that young people, Māori, Pacific peoples, informal, part-time and low-skilled workers are “more likely to be the first to experience negative employment effects resulting from minimum wage increases, such as reduced hours or job loss.”

The department instead recommended raising the minimum wage to $19.15, an increase it estimated would directly affect approximately 106,000 workers without causing substantial restraint on employment, or inflation. It argued that its proposed rate would achieve “an increase to the wages of lowest paid workers that matches the inflation rate (actual and forecast) between the last minimum wage increase on 1 April 2020 and the proposed increase on 1 October 2021.”

This advice put the government in a difficult situation. Raising the minimum wage to $20 an hour was a policy of the nationalist New Zealand First party ahead of the 2017 election, a policy that the Labour Party agreed to implement by April 2021 as a condition of the coalition agreement formed between the two parties after the 2017 election. In the lead-up to the 2020 election, Labour leader Jacinda Ardern re-affirmed her commitment to a $20 minimum wage, and although Labour no longer relies on the support of New Zealand First to govern, it was not keen to break an election promise.

Who benefits from the minimum wage increase?

It is estimated that the increase to $20 an hour will directly impact 175,500 workers who were previously earning less money. Pay will increase by as much as $44 per week (before taxes) for minimum wage workers who maintain the same working hours as they received before the change.

What are the negative consequences of the minimum wage increase?

For businesses, the minimum wage increase will exacerbate financial difficulties caused by the pandemic. Higher wages are of no benefit to workers if businesses are unable to pay them, and it is feared that thousands of workers could see their working hours cut, or lose work entirely, as cash-strapped businesses are forced to cut labour costs to avoid closing down.

To stay afloat, companies may also charge more for goods and services, resulting in a higher cost of living that partially negates the wage increase for minimum wage workers and puts further strain on low-income households.

The most serious ramifications, however, affect the unemployed. With labour costs rising, employers will be less inclined to create new positions. The minimum wage increase could prevent the creation of thousands of new jobs, limiting employment opportunities and decreasing the likelihood of unemployed persons finding work. Last year, the Ministry of Business, Innovation and Employment estimated that there would be approximately 8,000 fewer jobs under a $20.00 minimum wage compared to a $19.15 minimum wage.

Young job-seekers will be hardest hit. Studies have consistently shown that increases in the minimum wage are likely to cause increases in the youth unemployment rate, as fewer entry-level positions become available for workers with little or no previous experience.

While the minimum wage increase may be a small piece of good news for those who receive it, the benefits will almost certainly be outweighed by the parlous cost to more vulnerable sections of society. The timing and extent of the change can only be described as reckless and uncaring.