ECONOMICS Waging War Over Wages

Business people sounded predictable warnings when the Government announced the latest increase in the minimum wage. The increase in the face of an economic downturn “is not the way to economic growth”, growled Business New Zealand chief executive Phil O’Reilly. “You can’t just legislate higher wages into existence.”
Most Organisation for Economic Co-operation and Development countries have some form of minimum wage. In many cases it is set by law. In others – Sweden and Switzerland, for example – minimum is set by collective bargaining contracts every year.
In Britain, the Blair government introduced national minimum wage for the first time in April 1999, for workers aged over 22. But municipal regulation of wage levels in Britain began in some towns in 1524. Much later, the Trade Boards Act of 1909 created trades boards that set minimum wages, varying from trade to trade, in sectors where collective bargaining was not well established. Trades boards became wage councils in 1945 but these were abolished in 1993. The current minimum wage for British adults aged 22 or more is £5.05.
The first attempt at establishing minimum wage in the United States was made in 1933 when $0.25c-an-hour standard was set as part of the National Recovery Act. The United States Supreme Court declared the Act unconstitutional in 1935 and the minimum wage was abolished but it was re-established in 1938 at $0.25c an hour (US$3.22 in 2005 dollars.)
During the Clinton presidency, states were given the power to set their minimum wages above the federal level. In January, Maryland became the 18th state in the nation to enact law that will make Maryland’s minimum wage higher than its federal equivalent.
Britain’s minimum wage is much higher than in the United States. So is New Zealand’s. Both countries have lower unemployment.
In this country, the minimum adult wage, which applies to people over 18, increased from $9.50 to $10.25 an hour from 27 March (enough for couple of beers at your columnist’s local boozer, or latte, club sandwich, muffin and slice of cake at his local coffee bar). The minimum youth wage – for workers aged 16 and 17 years – increased by nearly eight percent to $8.20 an hour, to stay at 80 percent of the adult minimum wage. The minimum training wage increased to the same rate.
The latest increase is expected to bene-fit around 91,000 adult workers, most of them women, and around 10,000 youth workers. “It can be made with confidence in the current economic and labour market conditions, without being at the expense of jobs,” said Labour Minister Ruth Dyson.
More legislation is being considered to provide for youth and adults to be paid the same minimum wage. Parliament in March decided to send Sue Bradford’s Minimum Wage (Abolition of Age Discrimination) Amendment Bill to select committee.
Economists have argued the toss for years about the costs and benefits generated by introducing minimum wage and of raising it. There are arguments in favour: minimum wages reduce low-paid work, which may be unfair and exploitative; they stimulate economic growth by increasing the purchasing power of workers; they stimulate economic growth by discouraging labour-intensive industries, thereby encouraging more investment in capital and training.
There are arguments against: they curb economic growth by increasing the cost of labour; they increase the price of goods and services because employers will pass on wage costs in the form of higher prices, and this may decrease the purchasing power of workers; they decrease the incentive for some low-skilled workers to gain skills.
The Business Roundtable, in policy backgrounder, said research on the impact of the minimum wage in New Zealand is limited, reflecting paucity of useful data. But it referred to study by Tim Maloney (1995) showing that 10 percent increase in the adult minimum wage produced 3.8 percent decline in the employment of young adults. “This is broadly consistent with evidence from the United States,” it said. Another study (Pachero and Maloney, 1999) found no consistent evidence that minimum wage reduced the employment prospects of females without qualifications.
The Council of Trade Unions, in rebuttal, points the business sector to research done by the Treasury in 2004. This found that 69 percent increase in the minimum wage for 18 and 19 year olds in 2001 and 41 percent increase in the minimum wage for 16 and 17 year olds over two-year period had no adverse effects on youth employment or hours worked. Hours of work actually increased for 16 to 17 year olds relative to other age groups.
Your columnist draws no conclusion, but does muse that most readers of this column probably live more comfortably on their salaries than they would if they were paid the minimum wage. It’s great to be in management, eh?

Bob Edlin is regular contributor to Management.

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