Workplace Relations Minister Michael Wood wanted the Government to increase the minimum wage from $20 to $21.40, before Cabinet eventually worked him down to $21.20.
A Cabinet paper shows officials from MBIE recommended an increase to $21- a real-terms pay cut for roughly 160,600 minimum wage workers, as the increase would have been lower than the rate of inflation. Wood overruled this in his advice to Cabinet, and pushed for a larger increase.
Officials also presented Cabinet with a compromise option, which was to increase the minimum wage in line with the four-year average of annual increases under the current Government.
This would have seen the minimum wage increase to $21.25. Instead, Cabinet opted to undershoot that and landed on an increase of $21.20.
The Cabinet paper shows Wood disagreeing with officials over what exactly the minimum wage is meant to do. MBIE argued minimum wage hikes should be pegged to inflation to maintain the purchasing power of the lowest earners.
The MBIE view was that "adjusting the minimum wage to account for inflation will achieve the objective of the minimum wage review, which is to protect the real incomes of low-paid employees while minimising the risk of job losses".
Wood disagreed, arguing in the paper that the purpose of minimum wage increases was broader than inflation, saying a "different approach" would "better support the Government's key workplace priorities".
The paper said those priorities were to "invest in workers by growing their incomes and wages, especially for those earning the least; to make it easier for employees to receive fair wages and conditions; and avoid competition based on low wages".
Act's small business spokesman Chris Baillie said the paper showed Wood's proposed increase would "inflict even more pain on Kiwi businesses".
"Presumably his colleagues could see how ludicrous his proposal was and shot it down," Baillie said.
"This shows the Minister's fundamental lack of understanding of how small business works, as MBIE's advice stated "With the recent lockdowns and continuing economic pressures on businesses, there is a risk that the additional wage costs may result in employers increasing prices, reducing workers' hours, their staffing levels, or, for some vulnerable businesses, ceasing trade," Baillie said.
MBIE models the impact of the "restraint on employment" of every minimum wage increase. This is the number of people who would not be employed as a result of the minimum wage increase, either by losing their jobs or by employers' reluctance to take on new staff because of high wages.
MBIE reckoned a hike to $21.40 would lead to 7,900 fewer people in work, and result in an economy-wide increase in wages of $458 million (with $59.4m of direct costs to the Government).
MBIE also believed the hike would have "0.15 per cent inflationary impact".
By contrast, hiking the minimum wage to $21.25 would lead to economy-wide increases in wages of $389 million, with a direct cost to the Government of $52.9m and "0.12 per cent inflationary impact".
Wood dismissed these concerns, noting that minimum wage increases under the current Government had not seen a discernible impact on employment levels. He warned Cabinet that the "dis-employment effects of minimum wage increases should not be overplayed".
"We have consistently raised the minimum wage every year on average by 6.18 per cent since 2018 without notable economic impacts," Wood wrote in the paper.
"After the 2020 minimum wage was increased to $20 per hour, unemployment fell to its current 14-year low despite the impact of Covid on the economy. This can give us some confidence that increases of a broadly similar scale are unlikely to contribute to a significant reduction in employment," Wood wrote.
Another concern raised by MBIE was the fact the minimum wage is now catching up with the median wage.
In 2017, the minimum wage was 66 per cent of the median wage, by 2021, the minimum wage was 72 per cent of the median wage.
MBIE said this was a concern because it meant that further increases in the minimum wage would not just capture the roughly 7.8 per cent of workers on the minimum wage, but workers above that rate as well.
This would increase costs to business because each minimum-wage hike would need to be passed on to more and more workers.
Baillie said the wage hike was inflationary, along with other parts of the Government's pandemic response.
"The Reserve Bank has printed – and Labour has borrowed and spent – tens of billions of dollars in the past two years. That money is moving around the economy and pushing up the price of everything," Baillie said.
He said with inflation at a 31-year high and Kiwis "being squeezed from every direction", the "only adequate response is a return to rational economics".
A spokesperson for Wood said the decision was "collective", and Wood took "three options for consideration", although the paper shows none of these options was chosen.
"The Minister is proud that the agreed minimum wage increase has directly benefited approximately 300,000 workers,
"He will continue to advocate for supports that help those on low incomes, such as the implementation of Fair Pay Agreements," the spokesperson said.
The spokesperson said Wood disputed claims boosting incomes increased unemployment, saying such a claim was "typically designed to keep wages for everyday Kiwis low".