Prime Minister John Key is considering how much to increase the legislated minimum wage and is weighing up the impact on jobs. This suggests he may be looking to restrict the size of the increase to less than the inflation rate to avoid increasing employers’ costs and causing job losses.

Opposition leader Phil Goff has called on Key to increase the minimum wage by 25% to $15/hour. This is ludicrous and should be dismissed out of hand.

But Key should stop mucking around and increase the minimum wage by the consumer price inflation rate. People on the minimum wage are struggling and spend a higher proportion of their disposable incomes than those on higher wages. If the logic of encouraging consumers to spend to defeat the “Paradox of Thrift” is correct, then increasing the wages of the poorest makes sense.

For those looking to rectify the imbalance between the rich and the poor then this is one way to do it, although to be fair, an inflation-sized increase will do little to redress the imbalance, but it may stop it widening much.

It also has the benefit of not increasing the budget deficit. This is a pay increase the government orders but doesn’t have to pay for. Small and large businesses will pay for it, but some of the biggest employers of minimum wage employees are state-owned or state-controlled bodies, including health boards.

The minimum wage was increased significantly over the last nine years and it was one of the good things the Labour-led governments did. We still have an unemployment rate at 4.2%. The minimum wage increases appear to have not been a factor in costing jobs in the last decade.

But this attempt to close the gap in a way that doesn’t worsen the budget deficit shouldn’t stop here.

Key should freeze public-sector pay increases. Over the last couple of years public-sector accelerated further ahead of private-sector pay. It has been a factor in the deterioration in the budget balance in the last two years and was completely out of step with inflation and productivity growth.

Restricting public-sector pay growth would help redress that balance. A lot of the pressure to pay extra to nurses, doctors, teachers and policy analysts has abated now that employment demand elsewhere in this economy and in Australia is easing.

Key must also be looking for any opportunity to improve the parlous budget outlook. If he doesn’t make tough decisions like this, New Zealand may well be punished with a downgrade to its sovereign credit rating by Standard and Poor’s and inevitable forced adjustment.

There’s another reason I think the minimum wage should be raised. It encourages employers to find other ways to do boring, unsatisfying, dirty and dangerous work. France, for example, finds all sorts of machines and automation to do this sort of work because wages are relatively high and it is difficult to fire people.

I also saw up close and personal what a low minimum wage does in America. It has been a factor in creating a large underclass of working poor who feel locked out. Do we really want to encourage the same sort of fast-food-driven, strip mall culture here?

Freezing public-sector wages is fair and makes sense. Freezing the minimum wage would hurt the people who can least afford it.

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