Question 2: Won’t wage rises higher than inflation just cause unemployment to rise?

25 May

Won’t wage rises higher than inflation just cause unemployment to rise? What about John Key’s claim that an increase in the minimum wage to $15 will cause 8000 jobs to be lost?

No. There is no evidence that can connect rises in the minimum wage with increases in unemployment. In fact the opposite appears to be the case.

The figure for the alleged loss of jobs comes from the government’s advisors in the Labour Department. They claimed an increase to $15 now would lead to the loss of between 5,000 and 8000 jobs. With a labour force of 2.1 million jobs this is actually margin of error stuff. However let’s take a closer look.

Unite Organiser Joe Carolan confronts John key over minimum wage and GST hike

For decades the right wing economists have argued that any increase in the minimum wage would lead to an increase in unemployment. The Act Party opposes any minimum wage at all. In the 2025 Task Force on closing the gaps with Australia former National Party leader and Reserve Bank Governor Don Brash argued for the reintroduction of a lower youth minimum wage with the claim it would help combat the increase in youth unemployment.

The Labour Department concedes that their estimates of up to 8000 job losses if the minimum wage was increased immediately to $15 was based on these economic theories in the following comment from its “Regulatory Impact Statement” on the minimum wage:

“The estimates of constraint on job growth are based on a neo-classical model of firm decision-making, whereby firms operating in perfectly competitive markets adjust output and inputs, including labour, in response to relative prices. This modelling approach does not adequately reflect the dynamic nature of employment responses to changes in minimum wages, and, in particular, any investments that employers may make to increase the productivity of low paid workers. One consideration for the impact on the demand for low wage workers is how minimum wages change relative to average wages. If minimum wages keep pace with average wages then we would expect to see little change in the relative demand for low wage workers or low wage jobs.”

Instead of using a model for an economy that does not exist, we can use the actual changes that have occurred in New Zealand.

(Part of a series of extracts from “Exposing Right Wing Lies” by Mike Treen, Unite National Director)

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One Response to “Question 2: Won’t wage rises higher than inflation just cause unemployment to rise?”

  1. Mikaela Henegar July 10, 2012 at 12:47 am #

    Unemployment is really a problem these days, i hope that the economy will become much better. Unemployment rates are still very high on our country. ,.”” check out our new domain

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