Monday, 9 April 2018

Don't fear minimum wage increases because of their effects on the cost of living

Mike Hosking wrote in the New Zealand Herald this morning, about the increasing minimum wage:
Costs are market-driven, market and demand. The prices for something are based, or should be, on what the market can bear.
The Government coming in over the top of that equation and arbitrarily handing out instruction disrupts the markets. It brings an artificiality into it that the market might not be able to bear, and if it can't, the only loser is the person out of work. Or worse, the owner out of business.
Further, the more cost you put into the market, the more inflationary it is. The higher the tax on petrol, the more literally everything costs because everything has a transport component to it...
So are you prepared to pay for more for your coffee? Can you afford for your cost of living to rise?...
Life is about to get more expensive, the Government is arguing this is a good thing. Let's see shall we.
It is true that wages are a cost to business and that, when costs rise, businesses tend to increase their prices. Indeed, that's what has been in the news this week and what prompted Hosking's column. However, how much will prices rise as a result of an increase in the minimum wage? It turns out, not much. As I wrote earlier this year, a research paper by Tobias Renkin (University of Zurich) and co-authors found that:
...a 1 percent increase in the minimum wage would increase grocery prices by around 0.02%.
That is, increases in the minimum wage are passed onto consumers. However, the actual impact on consumer prices is only small. Granted, the Renkin et al. research was on grocery stores, and minimum wages will be a greater proportion of costs for cafes, etc., but because consumers don't spend a high proportion of their income at cafes the impact on the overall cost of living of a change in the minimum wage will still be small overall.

That doesn't mean that the news for minimum wage increases is all rosy though. The latest evidence does still say that minimum wage increases decrease employment, which is a point that Hosking makes in his column as well.

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