As has been widely broadcast the minimum wages across the country are heading higher. It seems like the States are in a race to see who can force minimum wage to $15 an hour in the shortest amount of time. The theory is that if you can move minimum wages higher, the people at the bottom of the wage scale will be moved to a position of financial strength improving their spending power and benefiting all. Politicians look at it as a transfer of wealth from those that can afford it to those that need it most. On paper this seems to make sense but digging a little deeper and it is clear that this is another government intervention that will have unintended consequences.
I certainly understand the political agenda behind raising the minimum wage. I also understand that without some form of government intervention wages at the lower end of the spectrum would stagnate forever. That said the problems with the most recent round of forced increases are the timing and the rapid acceleration of the base wage.
First let's look at the timing of the wage increase. Were the economy booming companies would be competing for workers and the natural order of business would result in pay rates rising to attract workers. Currently the economy is on such weak footing that the Reserve Bank is hesitant to raise interest rates even a 1/4% higher. Furthermore as long term readers of this blog will know, while the unemployment rate is relatively strong, the labor participation rate and the U6 unemployment rate is pointing to anything but strength. Had the politicians waited for economic strength the market would have been resilient enough to handle the increases however this is not the case today.
The second issue is that the wage rates will increase pretty much every year through 2020 by which time most if not all States will have a minimum wage of $15 an hour. This rapid acceleration will impact earnings significantly and will be a factor that needs to be considered before starting any new business or expanding into new areas. This will slow down hiring and make companies reduce expansion affecting job creation. Furthermore the wage increases are not limited to minimum wage earners but has been extended to lower management as well.
By the end of the year salaried employees earning less than $48,000 a year will be required to be paid overtime. This impact will be the largest of all as companies will scramble to reduce these key employees' hours or remove the position completely by consolidating the position into one higher paying position. It will also impact the upwardly mobile as these go getter's will have to reduce the hours worked thereby negating their advancement opportunities as they will not be able to showcase their can do attitudes without costing the company money.
The biggest impact of these new policies though is that this is yet another barrier to entry for small and start up companies. To these companies a high level of pay would be $40,000 a year and that would equate to a senior manager. Making this position cost more is akin to putting a bullet in the heart of small business and business start ups. As you would have read in last week's blog there is already a major slow down in net company formations and this slowdown is one of the largest causes of anemic GDP growth. Raising the cost to starting a company even further will have a massively negative impact on small company start ups which will kill any idea of GDP expansion.
The results of all of this is that the economy will stagnate. GDP growth will be anemic until such time as all of these wage increases can be factored into the price of goods and services and given the weakness of the global economy this will take a long time. In the meantime during this adjustment period the divide between those that have and those that do not will widen even further in complete contrast to the desired impact. This new law has effectively placed another golden spoon in the hands of large business at the expense of the job and GDP growth engine, small business; their moat is even more secure and this is a huge problem if you want to see GDP accelerate. Better get used to the stink of stagnation!
The results of all of this is that the economy will stagnate. GDP growth will be anemic until such time as all of these wage increases can be factored into the price of goods and services and given the weakness of the global economy this will take a long time. In the meantime during this adjustment period the divide between those that have and those that do not will widen even further in complete contrast to the desired impact. This new law has effectively placed another golden spoon in the hands of large business at the expense of the job and GDP growth engine, small business; their moat is even more secure and this is a huge problem if you want to see GDP accelerate. Better get used to the stink of stagnation!
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