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What impact will 2019’s minimum wage hikes have?

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The Government will introduce their second minimum wage increase in April next year as it steps towards the goal of reaching a $20.00/hour minimum wage by 2021. This is a move that will benefit thousands of low-wage earners, but will have a significant impact on our hospitality sector which, as we know, is both a highly labour-intensive industry and has a disproportionate number of workers on the minimum wage.

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

A November 2018 Restaurant Association survey found around 75 per cent of the Restaurant Association’s membership employ less than 20 employees. It is not easy for small business to absorb additional labour costs so increases to the minimum wage have long reaching effects, particularly with the introduction of a large increase as we are expecting to see over the next three years.

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 per cent 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, as this restaurateur comments:

 

“In previous years, the increases were more manageable and impacts were felt only on the most junior staff. 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.”


While 69 per cent 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 with menu prices that cannot be exceeded. The competitive nature of the industry also causes a reluctance to increase prices, which means it is difficult 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 per cent of employers say they absorb additional costs when minimum wage levels are raised,
47 per cent say they reduce the number or length of shifts for employees and 40 per cent of businesses reduce staff levels. An industry employer makes the comment, “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 per cent 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.

Employers also identify that a higher minimum wage can have a detrimental effect for 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 less 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.

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 per cent 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.”

The Restaurant Association suggests that the Government consider balancing minimum wage increases with incentives for businesses to offset increased costs. 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.

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 per cent of employers considered a $0.25 per hour increase in 2019 to be appropriate, with another 34 per cent indicating that a $0.50 increase was manageable. Just over 12 per cent advocate for a $0.75 increase, with 14 per cent still finding a $1.00 increase reasonable.

The Restaurant Association is consulting with MBIE on the minimum wage increase and will be advocating on behalf of members 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.

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