Kiwis' wages need to rapidly rise, even if 'inefficient' businesses crumble - economist

An economist says Kiwis' wages need to rapidly accelerate - even if it means "insufficient" businesses with low-paying roles crumble.

In Tony Alexander's latest economic newsletter, he wrote staff are in short supply and employees need to be used where the best profits can be made. He said that means market prices for work need to be "substantially" higher than they are right now, adding "that's how capitalism works".

"What we need in our country is a reallocation of people to higher-paying, higher profit jobs. That requires that the inefficient firms unable to pay decent wages to go out of business," Alexander said. "Enforced higher wage and non-wage costs are a way of doing that.

"It's called 'creative destructionism' and it lies at the very core of capitalism. We need more businesses to fail - not because of an economic downturn but because they don't produce a product or service valued enough by consumers to be able to pay high wages."

He wrote while it was bad news for many businesses when their costs rise, labour was in short supply and it needed to go to profitable firms that can afford higher costs. He added tsome businesses have attempted to avoid higher wages by bringing in cheap labour, which suppresses wage growth and means firms take longer to decide to boost their output through more investment in people.

"Such investment is commonly associated with mid-growth phases of newly growing businesses and not so much the older businesses which have switched to cost-control as a means of staying afloat," Alexander said.

"There is however a problem with this model of [the] standard of living growth through enhanced natural attrition of businesses. The timing right now is not so great."

Kiwis' wages need to rapidly rise, even if 'inefficient' businesses crumble - economist
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Alexander said it was a tough environment for businesses and would get more difficult if Labour won next year's general election. He added it's best to get ahead of the curve and recommend businesses shut down if they couldn't handle paying staff more money.

"If you cannot afford another hike in the minimum wage, close down now. If you cannot afford extra imposts associated with paid leave and a new holiday, close down now. If you are losing staff generally and cannot afford higher wages on average to get new ones or retain existing people, either close down or boost your labour productivity," he said.

"That may mean new systems, location, whatever. At a minimum, it means getting external help if necessary to help you figure out where exactly your best profit comes from. 

"You may need to stop trying to grow your customer base and your product range and instead concentrate on the highest yielding locations, products, production and distribution methods, and so on.

"Running a business is never easy. We are in a sink or swim environment. 

"If you’re going under, the sooner you jump out of the pool the better for you, your family and probably your staff."

The minimum wage increased to $21.20 on April 1 but this rise only just kept up with inflation. One expert said low-income households would still continue to struggle with this and it needed to be supported by other measures.