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Short term opportunism has a price

Gareth MorganEconomics, Tax and Welfare

- Photo Kristina D.C. Hoeppner

Short term opportunism has a price – Photo Kristina D.C. Hoeppner

It’s not obvious at first glance that allowing employers to breach minimum wage regulations is bad news for youth employment. Clearly if the price of youth labour is going down, more will be hired, so what is the problem? In the short term, yes, turning a blind eye to minimum wage breaches laws gives a short term boost to employment – unemployment rates would be higher without it. However the long term consequences of ignoring minimum wage and other employment laws aren’t positive.

Minimum wage and other employment laws are a regulation just like any other. They sit up there with rules about food safety, standards for registered doctors, disallowing farmers to use DDT – these are minimum standards we as a society have decided to enforce because we require that protection for our population. All of these regulations cost the wallet – going to the doctor would be a lot cheaper if we didn’t insist that our GPs were registered, food wouldn’t cost so much if we tolerated the risk that it was laced with DDT – but we as a society have decided the cost is worth it. Minimum working conditions are no different. Whinge about the cost if you like, lobby someone to change them if you feel strongly, but they are there for a reason.

[quote align=”right” color=”#999999″]if you fail to enforce the regulations effectively you sponsor the growth of businesses who do exactly the sort of things society finds unacceptable. [/quote] Whenever any regulation is not evenly enforced you interfere in the structure of the ‘regulated’ sector. The ones who comply can’t compete while the ones who break the rules grow at their expense. Look at the finance sector. In the 1990s and early 2000s businesses set up as banks were subject to prudential standards, but finance companies could scoot under the radar. The finance company sector grew much faster than the banks as a result, crashing to a halt when the global financial crisis hit. Why did they fail? One reason was the prudent behaviour that was imposed on the banks by regulation was missing in the finance company sector. The lesson from the finance company debacle is that if you unevenly enforce regulations you skew the economic base towards the very activity you wanted to stamp out.

Minimum wage regulations are no different – if you fail to enforce the regulations effectively you sponsor the growth of businesses who do exactly the sort of things society finds unacceptable. Businesses who risk employee health and safety by breaching minimum wage and employment laws become an ever growing share of our economic base. The job options available to our population become steadily worse.

Low skilled workers are most affected because they are the ones who realistically face getting the minimum wage or something close to it. And new entrant youth workers are likely to be most vulnerable of all, having yet to get experience and establish a track record with anyone. They are also most exposed to foreign competition as immigration laws permit young tourists to accept any work here for up to two years. Unlike older migrants, there is no need to establish that their skills are in short supply in New Zealand. With the quality of possible jobs steadily declining in New Zealand there is a point at which New Zealand youth will simply and quite rationally stop accepting work, or even looking for it, disconnected immigration laws enabling migrants to fill the gaps.

In the past five years the population of 15-19 year olds has fallen by 8,000 but the number of 15-19 year olds prepared to work (they either have jobs or are looking for them) has fallen by over 40,000. For most youth, paid work is not at the expense of study, but complementary to it. So this withdrawal from the workforce is a significant loss to the economy.

A lesson from the finance company case is that growth driven by unenforced regulation is unsustainable. The regulations are there to address real risks and the risks will play out if the regulations are left unenforced. In the finance company case, stresses were mounting before the global financial crisis but that was the final nail in the coffin.   The risks to society from failing to enforce employment law are obvious – a decline in population health and safety, a more transient workforce and growing disillusionment and alienation, particularly among our youth. The consequences of eventually clamping down on unenforced regulations are disruptive – and yes, there might be a short term rise in youth unemployment. But if you delay because of this you merely build more risks into the system.  If ever there was a lesson from the finance company debacle it is this – act now or pay later.

Short term opportunism has a price 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.