Higher wages likely to increase unemployment, warns Forsyth Barr

Research from Forsyth Barr suggests increasing wages could impact the unemployment rate. Photo/File.

Hallenstein Glasson, Restaurant Brands, The Warehouse Group, Tegel and Evolve Education are the public companies most at risk by incoming minimum wage hikes.

The Government's commitment to raising the minimum wage to $20 by 2021 will drive a higher rate of wage inflation and will likely lead to a higher unemployment rate, research by Forsyth Barr suggests.

Minimum wage hikes come with cost pressures, particularly for companies reliant on a large workforce of low wage earners, with retail, early child care and tourism sectors set to be the most affected.

While the retail sector is predicted to be the most exposed to wage increases it may also benefit from higher spending growth, research suggests.

Forsyth Barr retail analyst Chelsea Leadbetter said in research notes that minimum wage increases would put pressure on retailers' margins.

"With the majority of retailers' labour cost at, or linked to, the minimum wage an increase in the wage growth rate creates a step-change in cost inflation for the NZX listed retailers, which will put pressure on margins," Leadbetter wrote. "We also expect upward pressure on wage rates for staff not on minimum wage to maintain relativity."

Small retailers face the greatest risk, along with Hallenstein Glasson, The Warehouse Group and Restaurant Brands, the research suggests.

"We see Hallenstein Glasson as most at risk from higher wage inflation given its business model is already cost-lean," Leadbetter outlined. "The majority of its labour is in New Zealand, and the highly competitive fashion apparel sector provides limited ability to pass costs on to consumers."

For The Warehouse Group, Leadbetter said the additional pressure would not help the retailer "already going through a significant business transformation".

"We see The Warehouse Group as the retailer with the largest opportunity for reducing staff numbers given the inefficiencies in its business model," she said.

"While increased discretionary income for lower-income households may be supportive to sales, consumers have significant choice for products across The Warehouse Group categories which may weaken the upside potential."

Leadbetter said Forsyth Barr saw potential risk for Restaurant Brands not being able to offset escalating costs.

"Proposed changes will put pressure on margins in New Zealand but Restaurant Brands is a good operator and there are levers to pull to offset cost pressure (labour scheduling efficiencies, technology and pricing strategies). Nonetheless, we see risk [that] Restaurant Brands is not able to fully offset the escalating costs."

She noted, however, that US examples showed minimum wage increases were supportive to fast food operators.

With the majority of retailers' labour cost at, or linked to, the minimum wage an increase in the wage growth rate creates a step-change in cost inflation for the NZX listed retailers, which will put pressure on margins.

Michael Hill was found to be least at risk given the spread of its employee base throughout New Zealand, Australia and Canada.

Evolve Education was found to be most at risk out of all public companies as "there is wage pressure on early childcare wages if there is a shrinking of the gap to the minimum wage following the minimum wage increases."

The research outlined that there was a risk for poultry processing company Tegel Group "given the large manufacturing/processing component to its business and the unattractive nature of work."

Three per cent of New Zealand's workforce is paid the minimum wage. In 2016, there were approximately 73,300 workers paid minimum wage.

The first round of minimum wage increases is set for April to an increase of $16.50, up from the current rate of $15.75.