What impact will 2019’s minimum wage hikes have?

 

By Marisa Bidois, CEO, Restaurant Association of New Zealand

The Government will introduce its second minimum wage increase in April next year as it moves towards the goal of reaching a $20/hr minimum wage by 2021. This move will benefit thousands of low-wage earners but will have a significant impact on the hospitality sector which is both a highly labour-intensive industry and has a disproportionate number of workers on the minimum wage.

Feedback from Restaurant Association members on minimum wage rises provides insight into the challenges of small business owners who are dealing with fine profit margins, high labour costs, as well as increasing outlays in all other areas of their business.

Around 75 percent of the Restaurant Association’s membership employ less than 20 employees. It is not easy for these small businesses to absorb additional labour costs, so increases to the minimum wage have long-reaching effects, particularly with the introduction of a substantial increase as we are expecting to see over the next three years.

While 69 percent of hospitality employers say their primary means to offset increasing labour costs is to raise menu prices, a common concern raised is that there is a ceiling that they are not able to exceed with menu prices. The competitive nature of the industry also causes reluctance to increase prices. Customers are unwilling to pay more than a recognised limit, so business owners find they are not able to fully recoup the increased labour costs. As one restaurateur commented, “Our margins are so very tight and there is huge consumer resistance to price increases.”

While 40 percent of employers say they absorb additional costs when minimum wage levels are raised, 47 percent say they reduce the number or length of shifts for employees and 40 percent of businesses reduce staff levels.

An industry employer commented, “It is actually impossible to absorb the costs as it is not only our wages but also all our suppliers’ prices which increase. For now, we are thinking about raising our prices and reducing employees’ shifts. The next step will be reviewing our trading hours.”

Previous Restaurant Association surveys have identified that hospitality owner-operators work the longest hours of any hospitality employees. Of concern to the Association, therefore, is the 50 percent of employers who indicate that the effect of a minimum wage rise will be to increase the working hours of the owners of the business.

While impacts from smaller incremental minimum wage increases can be controlled by businesses, a larger minimum wage increase in one jump is viewed as having an ‘extremely negative’ impact by 48 percent of employers. A recurring comment from employers is their concern for pay parity for other employees and the upward pressure on all wages in the business. This is seen as the biggest issue. “In previous years the increases were more manageable and impacts were felt only on the most junior staff,” said one employer. “Now with the promised increases being much larger, the impacts are expected to be much more broad, as the ‘halo effect’ will affect all staff and what their pay expectations are.”

Employers also identify that a higher minimum wage can have a detrimental effect on the sectors of the workforce that it is trying to help. Minimum wage earners are much more likely to be under the age of 25, to be in study, and to be working part-time – you might say this describes the typical hospitality worker. Many employers feel that youth, who are entering the workforce for the first time, with considerably fewer skills, should have an initial wage that reflects that inexperience. An unfortunate result of a higher wage is that there is a disincentive for employers to give young workers a chance.

So, what is a manageable minimum wage rate hike? Wages are one of the hardest expenses to keep under control and in hospitality it can be extremely difficult to make ends meet when labour costs rise. Asked to consider what minimum wage increase would be reasonable for their business, 34 percent of employers considered a 0.25c/hr increase in 2019 to be appropriate, with another 34 percent indicating that a 0.50c increase was manageable. Just over 12 percent advocate for a 0.75c rise, with 14 percent still finding a $1.00 increase reasonable.

New Zealand already has the highest minimum wage in the OECD, and this will extend further over the coming years. Hospitality employers in discussion with the Association repeatedly comment that they value their employees highly and would like to reward them with higher wages. 52 percent support the living wage. However, they find it not currently achievable for their business. As one industry employer commented, “The balance between looking after staff and rewarding the ones that work hard or take on extra responsibility becomes more difficult if everyone is being paid a high wage.”

A Restaurant Association member suggested that there are other ways for the cost of living to be reduced by Government, thereby assisting low-wage earners, rather than through the “Government’s artificial inflation of the minimum wage”. In our ongoing discussions, the Restaurant Association advocates for the Government to consider balancing minimum wage increases with incentives for business to offset increased costs and as Business NZ have previously commented, the use of further tax cuts, rather than increases to the minimum wage rates, is a more effective way of increasing real wages.

The Restaurant Association is consulting with MBIE on the minimum wage increase and will be advocating for the Government to provide an achievable balance between remunerating employees fairly for the work they do and providing an ongoing opportunity for employers to run profitable businesses.