What’s going to happen when the minimum wage increases?
In October with the election of the Labour-led coalition in New Zealand there came on the horizon some significant future issues for employers.
One of these was increasing of minimum wages in two stages to $20 per hour in 2021, the first of which is an increase of 75 cents per hour to $16.50 per hour in April 2018 – an increase of just under 5% for those on the lowest wage.
For an employee working a 40 hour week, this amounts to $30 per week additional wages before tax. The employees concerned will barely notice a difference in their take-home pay.
For an employer with many employees, however, the difference could be significant over time – an additional $1560 per annum per employee base line wage.
So if a 40 hour per week employee on minimum wage is paid an additional $1560 per annum, how might an employer pull this back in gross margin? This is the real issue, and each business will be different in that regard.
- Increasing productivity per hour for the employees – who are likely to have specific measurable output goals is possibly one way – increase the pressure and the expectation, but most employers will already have optimised this avenue.
- Increasing revenue by increased prices and thus gross margin, and hopefully holding volume is another avenue that many will follow – but in a price sensitive and post-recession marketplace, there may be no real give or scope for increases. This is definitely worth consideration.
- Reduction of other overheads is possible – given that human hours are necessary for productivity – or even investing in AI, functional integrations and automation for some businesses to replace human productivity with machine productivity.
- Reduction of total staff hours is the most likely avenue for employers initially, meaning that as new employees are taken on, their hours are relatively fewer at the slightly higher rate to effectively balance the overall wage bill, but this is likely to have had a detrimental impact on overall productivity – and the circle continues.
Fortunately, the initial wage increase step is a small one in a rising economy, so employers can make adjustments and consider options. However all paths in this dialogue lead to the topic of Lean Management – of utilising all resources to the maximum possible level of efficiency, increasing outputs without increasing overheads to the same degree – investing in technology and in smarter, more efficient or more innovative ways of doing things, because the one constant in business is that change is inevitable.
This forced minor wage increase is another change to be met with innovative forward thinking business management.