How to get rid of smart and honest employers

Gareth MorganEconomics, Tax and Welfare


The latest youth unemployment figures

The latest youth unemployment figures

The Living Wage campaign is quite rightly drawing attention to the issue of pay and working conditions in New Zealand. With record numbers of Kiwis heading for Australia, it’s certainly time for that debate. Regardless of where you sit on the issue of what level of wage employers should be paying, information coming out of this campaign about the wage and working conditions of our youth should stop you in your tracks.

Last week the Herald reported the plight of foreign student workers in Auckland, some getting paid the princely sum of $3 an hour or less. Legally, the lowest anyone can get paid is currently $10.80 an hour (first time youth workers working their first 200 hours). The image we’re left with is of dodgy back-alley owners of cheap-eats willing to break all sorts of laws – employment and immigration law, and probably tax if we bothered to look closely. But we don’t seem worried do we? Maybe we never eat in places like this, so think the problem is limited to very small numbers, or maybe we appreciate our cheap dinners.

But it’s not just dodgy back alley cheap-eats where employment rules get broken or where the affects are felt. No-one knows for sure about many employers break minimum wage laws in sectors like hospitality and retail because we don’t proactively monitor firms for compliance, we only react to complaints and tip-offs – and that’s a serious problem in itself. However if you ask around among any group of kids trying to get their first job you’ll hear plenty of horrors. Most kids don’t need employers to sign off on their visa form or have large debts to repay, but they’re desperate for work just the same. They need a first employer to get that all importance reference. From there they can go onto bigger and better things, but without it they’re stuck.

In any market the price of the next best alternative is the price that counts. The labour market for youth is no different. Any kid wanting a job has the option of working at the same rate or slightly lower than they last person employed. That means all kids – not just foreign students – have to be prepared to work at these sweatshop rates or else forego work. And kids are working but they’re getting exploited doing it.

We’ve heard anecdotes about youth workers – ordinary kiwi kids – being employed without written contracts; working for weeks serving customers alongside paid staff and contributing fully to the revenue of the business only to be told they their work days are unpaid “training days”; working long shifts without breaks which flies in the face of health and safety laws; being dismissed without a fair process; the list goes on. All the conditions we have listed breach current employment law. Are these kids likely to take complaints to the Department of Labour (now buried within the new Ministry of Business, Innovation and Employment)? And risk getting branded a troublemaker? Yeah right.

The knee jerk reaction of many readers to this will be – “So what? The kids are getting experience and references, the willing ones are getting ahead. And it’s creating work”. The so what is this – society has decided what the minimum wage should be, if you don’t like it get society to change its mind. If we want a country of entrepreneurs who can only get ahead not by being smarter at how they use their staff, but by cheating society’s laws then we’re on the right track.

Of course we should be aiming for an economy made up of employers who get ahead by being smarter in how they do things, not law breakers. But these employers, who do follow the rules, currently operate with a handicap – they ultimately can’t compete with the cowboys paying staff rates of $3 an hour or less when they pay $10.80 or higher. So they go out of business. Some of Wellington’s best known eateries for example, have been feeling a sufficient pinch to consider closure.

If we cleaned up these practices – by doing spot checks on premises for compliance with employment laws in the same way we check for hygiene standards –  then we’d have a business sector full of firms who compete by being smart, not by cheating and exploiting the vulnerable. Firms who compete by being smart would not only survive while following our laws, but the smartest ones would grow too – filling much of the gap currently filled by cowboys. Or we would go without our $5 dinner, but building an economy on those is hardly progress.

There is a risk of course that unemployment for workers with no or very low skills will rise when we shut down the cowboys. There will be some workers who not even smart employers can profit from unless they’re practically free. But the proper place to correct that problem is the education and welfare system – and the minimum wage may well be the trigger that usefully directs people there.

Let’s take the current model to the logical limit. Once we’ve driven the pay rate for youth down close to zero the only employers we’ll have left are those who know nothing but how to profit while paying third world wages. The smart but honest businesses will have all gone to the wall. And how will our population be faring? For youth supported by their families it will make little sense to accept work at $3 an hour even if does come with a ‘reference’. They’d spend more money travelling to the job than they’d earn. Workers who have no other income or support will have to work at these wages, ending up indebted, unable to make ends meet and queuing for planes headed for Australia. Hang on a minute, we seem to be there already. This is an extreme example, but you get the drift.

This week the latest youth unemployment figures were released. They showed that 31% of kids aged 15 to 19 were unemployed in December 2012, up from 24% the previous December and an average of 17% over the 10 Decembers before that. This is a huge waste of the country’s human resources, and a preventable disaster. We need to re-establish a level playing field so smart and honest employers aren’t driven to the wall by dodgers. It won’t solve everything, but it’s a start.

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How to get rid of smart and honest employers was last modified: December 15th, 2015 by Gareth Morgan
About the Author

Gareth Morgan

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Gareth Morgan is a New Zealand economist and commentator on public policy who in previous lives has been in business as an economic consultant, funds manager, and professional company director. He is also a motorcycle adventurer and philanthropist. Gareth and his wife Joanne have a charitable foundation, the Morgan Foundation, which has three main stands of philanthropic endeavour – public interest research, conservation and social investment.