I used to tease the religious education teachers at school about teaching a "faith-based" subject.

Since the global financial crisis I have learned to keep my mouth shut. At least their subject provides solace to many.

Economics is a social science that aspires to be a pure science like physics. Unfortunately, human behaviour is tiresomely complex and endlessly adaptive. This is what makes the subject so interesting yet uncertain.

David Cunliffe recently announced that Labour would increase the minimum wage by $2 over time if it gained power. National responded by stating that this would increase unemployment by 6000. This number has a certainty that is unsupported by current economic literature. The truth is that the effect of increasing the minimum wage on unemployment is very uncertain.


Some of the economic theory taught at schools and universities could almost be described as dogma. Students are taught that if a government raises the minimum wage above some magical equilibrium wage this must cause widespread unemployment. What is not emphasised is that this assumes the wage rate in an occupation is determined purely by the impersonal forces of supply and demand. Employers are competing for workers and workers are competing for jobs. There is no power imbalance.

It also assumes that firms are selling their output in very competitive markets and cannot make excessive profits. If the government makes them pay a higher minimum wage then many firms will go bust and unemployment will rise.

The reality is that some firms in New Zealand operate in competitive markets but other markets are dominated by one or a few large firms. Some industries, such as supermarkets, retirement homes and fast food outlets, are notorious for paying minimum wages. But many firms in these industries are highly profitable. The wages they pay are largely the outcome of power imbalances in negotiations between employer and worker. Karl Marx may have had a point when he highlighted this fundamental tension between workers and the owners of capital.

Capitalism is an economic system that is meant to encourage and reward innovation, hard work and initiative. But the economic theory that supports this system is based on a fundamental assumption that markets are competitive. Otherwise wages and prices will largely be determined by those with the power.

MP Shane Jones highlighted such potential abuse of market power in the supermarket industry before he was offered a better job elsewhere.

The shock about growing income inequalities in New Zealand is surprising given that the bargaining power of low-skilled workers has been deliberately eroded over the past 30 years. The Reserve Bank is also required to keep inflation between 1-3 per cent. If inflation rises then the bank increases interest rates to reduce demand in the economy. It is doing this at the moment.

The outcome of this approach will always tend to be an increase in unemployment. This reduces demands for higher wages and helps control inflation. There is nothing mysterious about this process but the outcome will always be most harmful to workers with the least bargaining power.

There is an irony in the debate over the exorbitant salaries paid to top management and the cuts in top income tax rates. These trends are often justified by the need to ensure these people are motivated and work harder. Such logic is seldom applied to the wages paid to the lowest income earners in the economy.

It is often argued that raising the minimum wage will cause inflation if firms increase prices to compensate. There may be a one-off increase in inflation, as when this Government raised GST.

It is argued that many small firms may fold. But if their existence truly depends on paying subsistence wages, it might be better that they do.

It is argued that firms will replace labour with machines if the minimum wage rises. However, many low-paid occupations require the dexterity and touch of a human. Nobody wants elderly Aunt Mabel to be eviscerated by a robot when she is given her nightly medicine.

The arguments against raising the minimum wage are not as clear-cut as what is taught in Economics 101.

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