Interview: Trent Smith (Economics Lecturer, University of Otago) on the new $21.20 minimum wage ...

a radio 91 FM podcast uh yes we are in studio now with economics lecture at Trent Smith the minimum wage Rose today for the fifth successful year up by 6% and it now stands at $21.20 um Morena Trent happy Financial New Year um so this increase it still doesn't match the living wage which is currently $22.75 so how much an impact will the dollar2 raise actually have um that's a good question the you know in economics well so in economics would tell you the first effect of minimum wage is that well low wage low wage workers get paid more but then we would quickly tell you well wait a minute right and this is what we teach in first year is uh you know it also could mean Less jobs right like employers have to pay more they might hire fewer workers uh the good news though is that economists actually looked at the data on this and that second effect the disemployment effect is is negligible like it's just it's almost not there in the data yeah wow yeah and so it's actually kind of a Pity that we teach the simple version of this theory in our first year because uh um turns out that the data say something else um so what the data do say is that um you know economists have kind of clever ways of of studying this and the econ the sort of the economists in the field who study actually study the data on minimum wage um ask questions like uh you know what's going to you know you know is there going to be is there going to be um decreased employment as a result of this um there could potentially actually be increased employment there are more complicated economic theories that actually say that it's possible that you could actually have more jobs as a result of minimum wage those are very interesting um and that's actually sometimes been found in the data the place they study this the most is in the US because um in the US the minimum wage varies state byst state and it changes over time state by state and sort of irregular ways so you can look at you know you can look at the data from like in in in in many other ways like you don't even notice the state borders in the US right so you can you can be in a big urban area and not even realize you're crossing the crossing the state border you know six times a day um but you can you can find lots of examples where there's been um you know an increase in one state increase in minimum wage in one state but not in the other and then you can compare what happens right this is a great natural experiment right it's almost like a laboratory experiment like what's going to happen on the on the high wage side of the Border after this change and so they looking at looking at instances like that they've they've been able to show that yeah you don't lose a lot of jobs when this happens um and they ask questions about okay well you know these workers are getting this extra money where does it come come from right so the two big places are it could come from profits their employer profits they could employer could just be making less profit now um or it could get passed through to Consumers right they could raise the prices to um and it turns out um at least in the service sector it's mostly the latter so uh in the in the US instances right that uh that it's mostly passed on to Consumers um it's not as not uh that's not so true in other sectors of the economy like manufacturing um but uh you know the good news is here in New Zealand it's well I don't know if it's good news here in New Zealand you know I think wage workers are something like 80% 80% service industry right right so this is this is what in the US they show that in in that industry uh it's you know wage wage Rises get passed on to Consumers do you think that's going to happen here in alo alo New Zealand well we can only guess I mean New Zealand doesn't have all these you know dozens of natural experiments over the years like the US does um but yeah the you know the best data the best data economists have is from the US from all this state level uh variation there's also there's also been studies in Europe too but uh um in New Zeal so so like I say we're only guessing about what'll happen in New Zealand but um the the thing about New Zealand is our by World standards our minimum wage is actually very high already so in the in the US there's data on this and you know they almost never find they they well no no they often find a small disemployment effect like there actually are fewer jobs in many instances after you have a a minimum wage Rise um but it's it's very small all right so it's it's it doesn't come close to like offsetting the you know the benefit from the perspective of low-income workers that they get they get a pay rise um but the sort of the highest minimum wages in the US are you know or in these studies is something like 2third of median wage right two-thirds of the middle wage worker in the economy and uh the New Zealand minimum wage you know this week is going to be about 80% of median wage here in New Zealand sh so and like I say it's one of the highest in the world and because like the we have from these studies only goes up to about 2/3 of median we're way out here in the you know beyond the frontier of the data on at 80% gosh like that's an important sense in which we can't we can't there's got to be a limit to this right you can't you can't uh raise raise wages to the point that everyone in the economy is earning the same thing no because obviously bad things would happen but yeah yeah yeah um so act leader David seamour claims this change will mean businesses just raise their prices or will have to close um is this true like is it tooo big an increase at such a short notice should there be some kind of step for the government to support businesses um you know like I say my best guess is that mostly what happens uh is that is that consumers pay more as a result of this uh and so and so you know and then an obvious concern is that you know okay that causes inflation and we've already got some inflation in the economy you know what inflation though is really just it's always just a change in relative prices right so wages go up that's one price in the economy yeah you know uh you know consumer goods go up that's another price in the economy and the the inflation statistic we all pay attention to is that you know the Consumer Price Index and it's it's the bundle of things consu goods and services that uh consumers pay so it doesn't really include the wages um and so this sort of thing where it's a one-time rise in or you know or at least just a periodic uh you know uh scheduled rise in low-income wages um is going to you would expect it to cause a one-time increase in prices right that's not the kind of um you know long-term inflation Dynamic that we usually worry about that like the reason we worry about inflation is that um you know not everyone's seeing the same price Rises not everyone's getting the same wage Rises and but also that it could set up a dynamic where everybody expects the prices to rise by so much every year and then as a result everybody's raising their wages in advance and and it just sort of becomes a self-fulfilling thing where you get stuck in this yeah you get stuck in this wage price uh dynamic they call it gosh well thank you so much for coming on uh Trent unfortunately I think we we're a little little behind schedule um but thank you very much for coming on man pleasure we hope to have you on uh in future segments this was a radio1 91 FM podcast you can find more at r1. co.nz or wherever quality content has found