Palmerston North KFC workers protest for pay rises on Rangitīkei St in April.

Palmerston North’s small-business owners are warning they’ll need to make lay-offs and hike prices to survive a hefty minimum-wage increase.

The incoming Labour-led coalition Government plans to increase the hourly rate incrementally over the next three years to $20 an hour – a 27 per cent increase from the current $15.75.

Cafe Cuba owner Darlene Woodhead said many small businesses, like hers, already had tight profit margins and will struggle with the increased expense.

“It’s a little bit unrealistic. Wages already take up a lot of my turnover… [so] where am I going to get the money from?”

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Woodhead employed 44 people at Cafe Cuba and their wages took 42 per cent of the businesses income – the bills and general operating costs took up much of the rest, she said.

The only way to stay open would be to raise prices, but customers wouldn’t stand for too big a hike, so eventually, small businesses would need to make cuts.

JK Cleaning Services owner Barry Smith said he was deeply worried his family company won’t survive the wage increases.

“It will kill us eventually. Once it gets to $20 I’ll probably have to lay off 60 per cent of my staff just to try and keep the business running.”

Smith knew of at least two other small family business that would need to do the same.

He said the rise was coming too fast for small businesses to adjust, and a longer roll-out would’ve been better received by business owners.

“We try to pay fair wages, but this will be too much of a stretch for us.”

Palmerston North Labour MP, and newly minted cabinet minister, Iain Lees-Galloway said the coalition Government wouldn’t leave small business in the lurch.

“We want to make sure people are paid more – enough to live on – but we appreciate the impact this will have on small business.”

Lees-Galloway said the Government was looking into what they could do to help small businesses adjust, as part of their tax review.

A possible option was a lower company tax rate for businesses under a certain level of turnover, he said.

Unite national secretary Gerard Hehir said setting the minimum wage just 20 cents short of the current “living wage” provided an overall benefit for everybody.

Council of Trade Unions research showed nearly 40 per cent of New Zealanders earned less than $20 per hour – so would benefit directly from the rises

But, there were also less obvious benefits to the policy, Hehir said.

He said New Zealand’s economic productivity was among the lowest in the OECD, and has been falling as the country headed towards a low-wage, low-skill economy.

Raising the minimum wage will help reverse that. Employers will want to get more out of their workers if they have to pay them more, which will increase productivity, Hehir said.

“So they’re going to put more investment into training, skills and new technology. And that’s the path we should be on economically.”

Hehir said hospitality businesses, for example, average 70-80 per cent staff turnover every year – which is hugely costly and unproductive for the employer.

“But at $20 per hour, workers are more likely to stay on, because they’re not having to look for new jobs, or take on another part-time job, to make ends meet.”