Why Minimum Wage Isn’t Great for Exceptional Employees

New Zealand’s minimum wage of $23.50 per hour (or $25 with holiday loading) guarantees fair pay for workers. But is this system truly fair for above average employees? For those who excel at their job, the minimum wage structure may actually work against them. It also works against the economy as a whole as I would argue through this post. 

The Problem with High, Flat Wages

Under the current system, businesses are required to pay all employees a minimum of $25 per hour, regardless of skill or productivity. This creates a frustrating scenario: 

• Flat, rigid structure: A highly efficient and skilled worker earns only slightly more than an average or underperforming employee. For example, a star employee might earn $27 or $28 per hour, while someone barely meeting expectations still gets $25. The narrow gap between wages leaves little incentive to work harder or stand out, limiting opportunities for growth or reward. Granted employers can go hire someone else and replace it with an average employee but there is a cost to hiring, training etc. So often employers would just pay a small differential to a great vs an average employee as opposed to going through the pain to keep hunting for a better one.
• Businesses Can’t Afford to Reward Excellence: The high minimum wage already strains small businesses. Employers face significant costs for even average workers, making it nearly impossible to pay top performers what they’re truly worth. For instance, a café owner paying $25 to an average worker can’t afford to offer $35 to a skilled worker, even if they deserve a, say $10 differential. The system therefore forces businesses to treat “racehorses” and “donkeys” similar, if not the same, stifling motivation and productivity. 
• Missed Opportunities for Star Employees: A rigid wage structure means good workers have limited options to increase their earnings. It’s a viscous cycle, as exceptional performance rarely translates into significantly higher pay which means overtime you tend to be come the average (lower it actually) as opposed to raising the average. Revenue-sharing models or performance-based bonuses—potential solutions—are restricted as they are on top of the minimum wage. Also such models are not applicable in most industries. 

When hard work and talent don’t lead to meaningful financial rewards, employees may lose motivation. The system effectively discourages innovation and effort, as even the best workers find themselves stuck in a limited wage bracket. 

Lets talk about productivity

When compared to OECD (Organisation for Economic Co-operation and Development, a group of 38 rich countries), New Zealand ranks 3rd in terms of minimum wage as of 2019, ahead of UK, US, France, Germany etc. Meanwhile, our minimum wage has increased by 30% since 2019 so not sure where we rank now. And productivity data of OECD shows that our productivity has dropped over the years. As per an OECD report “Most countries with a labour productivity level below the OECD average in 2000 have seen a substantial catch-up since then, pointing to a convergence of labour productivity levels across OECD countries. However, the gap with the OECD average deepened for Greece, Israel, Japan, Mexico and New Zealand in the last 20 years”. 

Granted productivity is a function of innovation, technology adoption etc. and not just wages but we can see that increasing wages has at least not helped improve productivity compared to most other OECD nations. 

High cost of living in NZ

One argument is that minimum wage is a function of cost of living and since NZ cost of living is high, minimum wage should support that to have a decent living standards. But is the cost of living not high, partly because of minimum wage? One has to at least pay $10 for a decent lunch primarily because of rent and wages cause ingredients are not even a third of the cost you and I pay for any product sold in cafes and restaurants. Talking about food, most restaurants close after 8 or 8:30 PM as it is not viable to pay minimum wage as traffic slows at night. Auckland, our largest city, does not have a night life to speak off. Even on weekends you would struggle to get a good dinner post 9PM. 

Imagine a small town, say Gisborne, where the GDP per capita was 51K in 2023 vs Auckland and Wellington’s $87K. But businesses in both places are expected to pay the same minimum wage. Is cost of living same for Auckland and Gisborne? 

And are our living standards not commensurate with our abilities? Be commensurate to the skills brought to work? So an above average employee will be able to have a better life compared to the below average. That is how capitalism works. Why is it unfair? 

What is required? 

A more flexible approach could create room for above average employees to thrive and encourage entrepreneurs to take risks creating a great recipe for economic growth. After a basic minimum pay, which should be much lower than the current $25, allowing performance-based pay or revenue sharing could give top workers the rewards they deserve. Services such as cafes will open late and new businesses will be launched leading to increase in overall employment. Business that are usually closed on weekends may keep them open for a few hours on Saturdays. All this will lead to economic growth and higher employment. 

Seeing the large differential payment may also encourage average or below average workers to be motivated and challenged to work harder. This would only foster a culture of productivity and growth. 

To conclude

While the minimum wage ensures fair pay for all, it inadvertently penalizes star performers. The incentive to excel is low. By failing to reward excellence commensurate with effort, the system limits opportunities for top performers and holds back overall productivity. It’s time to rethink how we value and incentivize talent in New Zealand’s workforce.