Middle income workers will also expect pay rises when minimum wage goes up - economist Brad Olsen

A leading economist says the increase to the minimum wage will feel like an "April Fool's joke" to businesses while middle and lower-income earners will be celebrating.

The Government announced in February the minimum wage will increase from $20 per hour to $21.20 per hour, which will come into effect from Friday.

It comes after a 5.9 percent increase in the price of goods and services in New Zealand in the last three months of 2021 compared to 2020 - the biggest jump since a 7.6 percent annual increase in 1990.

Brad Olsen from Infometrics told AM on Wednesday the increase in minimum wage will put more pressure on struggling businesses.

"Businesses are going to feel a little bit like this is an April Fool's joke as they do most years. That increase to minimum wage is coming at a time when a lot of businesses are still under a lot of pressure and importantly the Government took a lot longer than normal to put out what the minimum wage increase was going to be," Olsen told AM.

"Businesses are going to be looking at their bottom lines thinking, how are they going to pay effectively six percent more - $1.20 an hour more - and also thinking about the rest of their workers."

Olsen said even though the increase is only to the minimum wage, workers in the next income bracket will also want an increase in their wages to keep their pay in a "relative sense".

"It's not just those on the minimum wage that this will affect, everyone who is slightly above the minimum wage - for the next $5-10 an hour - will also want to keep their pay in a relative sense, so they will be looking for increases too," he told AM.

"So across the board, businesses are going to have to go, not only how do I pay this increased wage but increasingly given the pressures that we see with businesses across the economy, we are likely to see those wages continue to push up, while the other costs of businesses, those will be felt in the goods and services that everyone else pays."

The increase in the minimum wage will benefit around 300,000 workers and Olsen feels the Government had no other option but to increase it by $1.20.

"This minimum wage increase comes after about three or so years of quite large minimum wage increases and importantly this year, it's to match inflation," Olsen told AM.

"The Government couldn't have really done anything else. If the Government came in with an increase that was below that six percent mark, they would've been saying, look we are mandating that those on the lowest incomes have to be making a loss in effect.

"They will not be able to keep up in real terms, they won't be able to buy as many goods and services because of how high inflation has gone.

"So very important we keep people in the same position, you are not seeing any huge boost, it just means that purchasing power of those lower-income families will be wanting to get a bit more but you do get the feeling there is a bit of support as well hopefully coming through for those middle-income workers who will be in a stronger position to bargain for better wages because of the pressures in the labour market - the lowest unemployment rate - that is all going to contribute."