Tuesday, October 18, 2011

Hypothetical questions...

We're involved in the ownership and management of a couple of small to medium businesses. So we were interested to see that Labour was releasing its work and wages policy today.

One thing stands out immediately; Labour's desire to increase the minimum wage to $15.00/hour. So here's a hypothetical scenario:

Let's say our business has just employed an office junior; a young person who rocked up to our offices seeking work. This person was unemployed, and had little work experience but there was something about them that made us think that we could develop them into a really good team member. Lo and behold; there's a change of government, and suddenly instead of paying this person $13.00/hour (which they were thrilled to be earning), we have to pay them $15.00/hour. The young person is doing really well, and we take the hit and keep them on.

But then we have two accounts clerks who each earn $16.00/hour, and an office manager on $20.00/hour. The reason that they are paid at those rates is because of the value their respective jobs, and their performance in them add to the business. Aren't we honour-bound as a "good employer" (unlike Matt McCarten, we pay PAYE on due date) to increase their pay as well, by a similar rate to that which the office junior's pay went up?

But we're only a small business; we can't afford to pay all our office staff around 15% more. We've had a tough couple of years, and our income has dropped. We certainly can't put our prices up, or the customers we still have will be priced out of the market. Do we have to let the office junior go, and share their work among the other staff?

Hypotheses over, that's the very dilemma that many small and medium businesses find themselves in right at the moment. Small business simply can't afford big wage increases in the current climate. And a wage increase across the board is going to have a significant inflationary effect; many businesses will have no alternative but to put their prices up, or to lay staff off.

Who wins then? Certainly not our hypothetical young unemployed person walking the streets looking for work. As it happens we did take on a person in those circumstances earlier in the year, and they are paid at a rate somewhat higher than minimum wage.

A minimum wage of $15.00 per hour might sound good to those low-waged New Zealanders. But it cannot just be imposed on business, especially at a time when many small, medium and even large businesses are just hanging on by their fingernails after a recession, a global financial crisis, and a downturn in consumer spending. Labour needs to seriously consider the overall effect on the economy that such a policy will have.

26 comments:

jabba said...

it is easy to afford KS .. Labour/Greens/Mana say so

robertguyton said...

We're involved in the ownership and management of a couple of small to medium businesses. So we were interested to hear Bill English declare today that our Kiwisaver contributions are set to sky-rocket! B*stard! They just love compulsion, those Nanny Nats!

robertguyton said...

I know what you're thinking, jabba, בָּרוּךְ אַתָּה יי אֱלֹהֵינוּ מֶלֶךְ הָעוֹלָם, אֲשֶׁר קִדְּשַׁנוּ בְּמִצְו‌ֹתָיו וְצִוָּנוּ לִקְבּוֹעַ מְזוּזָה

but what can I say to that! I suppose you are correct (for the first time! Praise Allah!)

jabba said...

bOb, breath man.
It's great to hear you pay all your employees above the min rate bOb .. I guess your business can afford to do so, after all you are an organic farmer charging big money for your potatoes and apples. The growers in Franklin simply grow as much as possible to make money and feed the majority while you supply the rich

Inventory2 said...

Pretty much all our staff, including my wife and I are enrolled in Kiwisaver anyway Rob; it's something we encourage. The more the merrier as far as I am concerned.

Robert Winter said...

As I have just blogged - either we stay as a low-income country - following perhaps the Seafood Industry Council model of overseas crews and slave labour (which it is in practice)- or we move up the value chain. NZ employers, in general, haven't done so for over two decades, pleading the difficulties, which simply reinforces the tendency to put downward pressure on wages and promote the low road. The data tell us this irrefutably. So, if employers, who are the first movers in this, won't do it themseoves, they may have to be chivvied. The ISA model allows for voluntary alternatives - good employers can move in that direction. This is the right direction.

jabba said...

Kiwisaver is a waste of time for me .. I'm in a very good super scheme through my work at 5%, from memory, ($ for $ from the company) .. the company has already said they won't do both

Inventory2 said...

@ Robert W; seven years on, our main business has finally reached almost break-even. In that time it's gone from being a one-woman band to a business with over 30 staff. A government-imposed 15% wage increase would have huge consequences for us, and would cause both our business banker and our accountant severe heart palpitations.

The irony too is that we dn't pay any of our staff at minimum wage rates; even the young person we took on this year who came to us with no experience, limited skills but a great attitude is paid well in excess of the minimum wage. But in order to saty competitive in the labour market, we would have to push up wages if the minimum wage was raised.

Our current wage bill including PAYE, Student Loan repayments and Kiwisaver deductions and employer contributions is in the region of $100k per month. The thought of that increasing by $15k per month (or $180k per annum) without any increase in revenue to compensate, other than the natural progression of the business would be crippling.

Robert Winter said...

Inv2: that's my point. I understand the dilemma (lots of friends in your position, been a manager myself on and off for 30 years), but yours is an argument that by definition requires NZ to stay in the low-road model. It is where we've been since 1984 and nothing has shifted it.

Lee Kwan Yew faced the same circularity in Singapore in the late 1970s. He simply decreed a major pay rise. His argument was twofold. He didn't want companies in Singapore that did not pay good wages, and, also higher wages meant companies would have to move up the investment stakes and inprove productivity, which, for him, would also allow local companies to nenefit from engagement with MNCs.

I'm not suggesting a Singaporean model here, but the cycle has to be broken or we are condemned for ever to be an ever-lower waged economy, from which our skilled people will flee.

The best way is by encourgament and demonstration effects, but I've heard business leaders in NZ say quite openly that many/most businesses in NZ are now so inured to a low-road model that that cycle seems inviolate.

What's tha answer if it isn't wages pushing investment?

Inventory2 said...

I would argue that our business is anything but low-wage Robert, and our accountant and bank manager would probably agree. I guess it's where our kaupapa as a couple kicks in. We have CHOSEN to pay our staff well, but if wages increased generally, we would feel obliged to match that. Sadly, that would have a significant negative impact on the vialility of the business, and could lead to us needing to cap our staff, or even reduce numbers. Who benefits from that?

I have strong doubts about the viability of a government legislating wages up, and I wonder if Labour has thought through the implications for business, who will be expected to meet the cost without compensation. Business has done it tough for the last few years; for many small and medium sized businesses, this could be the final straw. Are wholesale job losses and acceptable trade-off for wage growth?

Whafe said...

The first thing that comes to mind for me is that for a decade of being ruled by Pinko's and the global economy having more cash than many knew what to do with, still there was no significant lift in the minimum wage, well not to the increase % that is being spoken of at present by Labour...

There wouldn't be anyone in NZ more or less that wouldn't like to pay staff more. There is no perfect time for an increase, but economically now is not the time... It would hammer our business.

Inventory2 said...

And I've just noticed this comemnt at Kiwiblog:

slightlyrighty (2,020) Says:
October 18th, 2011 at 7:41 pm

The Dept of Labour Website links to Cabinet discussion documents on the minimum wage under the last Labour Government. (Just search under “Minimum Wage”). Labour refused to raise the minimum wage to the maximum demaded by unions because they believed that it would cause a spike in inflation and a loss of jobs.

They knew what the effects would be. They still do. They don’t care.

These idiots should not be let anywhere near the treasury benches, and if they keep coming out with policy like this, they won’t.


If this is as reported, Labour faces a significant credibility problem on the issue of the minimum wage.

homepaddock said...

Well said I2.

The minimum wage is only one of several policies in today's annoucnement that will hamper employment.

Kiwisaver contributions should be part of a total wage package so they don't increase costs.

Robert Winter said...
This comment has been removed by the author.
Robert Winter said...

So, as I pointed out, Inv2, your only option is, at an economy level (not at your individial firm level, for it is incontrovertibly the case that we are a low-wage economy), a low-wage economy?

How do we break the low-wage cycle? We've had hard-line neo-liberalism - that didn't do it. We've had half-and-half for nine years - that didn't do it. We are heading back to the hard line again, that won't do it. Is the NZer simple happy here, or should be attempting to break the cycle?

If the latter, then some companies will go the wall and an active labour market policy will be required? But, if we don't do it, then our future is irrevocably poorer.

Genuinely, what is the alternative?

Inventory2 said...

It is indeed a vexed question Robert; too vexed for my ageing brain tonight, so I'll sleep om it, and address your comment in the morning. Ata marie!

robertguyton said...

9:40 pm - Po marie!

Inventory2 said...

Tena koe Rob G; did you notice how Robert Winter and I were able to have a reasoned argument where we were able to take up opposing positions, whilst respecting the other's viewpoint?

robertguyton said...

Yes, Inv2. Like Robert, I'm waiting with bated breath to read your morning's address. His questions are searching. I trust your response will be credible.

Sthn.Jeff said...

Fortunately Inv 2, these will only be hypothetical questions for this election at least.

jabba said...

I see Ali G's stupid brother Bobby is bored again. bOb, sorry I haven't visited your blog for a month or so but I guess even you will admit it is dead set boring

Inventory2 said...

@ Robert W; I see where you are coming from, but I have concerns for your means of achieving a higher-waged economy. Is punishing small business, collectively the largest employers in New Zealand the right way to go about it?

A 15% increase in the minimum wage has to translate into an across-the-board wage increase, or the relativity of the system is compromised. Employers pay staff proportionate to their perceived worth, and the value they add to the business. But many of these small business owners are just hanging on as it is now.

So which is the lesser of two evils; wages continue at roughly their present rates, and employment grows as more employers take staff on; or the government imposes a minimum wage increase of 15%, which translates into unsustainable wage growth, and employers either lay off a proportion of their staff, or flag the whole thing away and close their doors, thus increasing unemployment?

My take on Labour's proposal is that they are seeking a Utopian solution where wages rise, and employment grows. In the current economic climate, that is simply not going to happen. The situation here is not one where the government will bear the fiscal cost; rather the government will expect small and medium-sized businesses to carry the load. Business ownership is already fraught with risk, as I have found out over the last few years. Many business owners may just decide that this is one risk too many. Who's the winner then?


PS: apologies for the delay in responding, but we have had company at work for most of the day; ironically, people who have been taking a critical look at out business model and advising us on risks and rewards!

robertguyton said...

From the sidelines of this discussion...it seems that you haven't, Inv2, answered Robert's question, but have pursued your own demolition of the $15 minimum wage issue. If I'm wrong about this, both Robert and you will doubt straighten me out.

Inventory2 said...

Not at all Rob; I've acknowledged Robert W's questions at the start, and indicated that I don't agree with what he suggests. I've added my own thoughts, and posed questions at the end.

But then as you say, you're only watching from the sidelines, so I'll excuse you not getting it...

Robert Winter said...

I fear that there will be pain in whatever direction we go. Our current direction is more and more low pay for the circularity I describe here

(http://robertwinter.blogspot.com/2011/10/labours-employment-policy-hysteria-on.html)

is in train. That future is very miserable indeed. Low wages, skill loss overseas, lower wages etc etc. To be honest, I don't think that the $15 minimum wage is really the big issue at the level of the economy, though I can see that at firm level it can be a pain. No, we need to shake our whole system such that it cannot move ever downwards, and that will require some compulsion or pressure.

Neo-liberals like the idea of compulsion by the unfettered market. We've tried that and it failed, and will fail again. We are a low wage economy because of the 1990s, not despite them.

The other, Bolshevik, exreme is not on the cards and not particularly desirable.

So we in Labour favour the European model, that drove Sweden and Austria and Germany and France etc to high wages in a previous period, and which, if adapted to the different conditions we face now, are our only alternative.

What is not acceptable is the "do nothng" approach of the current government, which by default is simply exacerbating the problem.

Robert Winter said...

Apologies: " which.... is" not "which...are"