OPINION:
Minimum wage increases are less effective than their supporters believe — and less damaging than their critics claim.
At least that is the takeaway message from a careful study of minimum wage policies and their effects over the past 20 years or so by economists at the think tank Motu, David Maréand Dean Hyslop, funded by the Ministry of Business, Innovation and Employment (MBIE).
Last April’s increase to $20 an hour pushed the adult minimum wage to 260 per cent of its level 20 years ago, when it was $7.70, outstripping the increase in consumer prices (151 per cent) and the average wage (194 per cent) over the same period.
At 70 per cent of the median wage, the minimum wage is high by OECD standards.
Is it pricing people, especially the young who are the main beneficiaries, out of a job?
The short answer from the Motu review seems to be no, but we might be closing in on that point.
Before getting into the results of their number-crunching, it is worth noting this account — by former Council of Trade Unions economist Bill Rosenberg at a recent panel discussion of their findings — of how the minimum wage gets set.
“Essentially it is a political decision,” he said. “We have a minimum wage review each year in which the CTU and Business NZ routinely give the same advice [that they always do] and then officials write a paper of varying length and penetration, having cranked the handle on a model that they have got, and then the politicians ignore it and do what they wanted to in the first place.”
It might be time, he suggested, to outsource the process to an independent commission as the British do.
Crucial to appraising the effects of a minimum wage increase is the incidence of the minimum wage, that is, what proportion of various sub-groups of the population are paid it and in what industries they are mainly found.
Unsurprisingly age is the main driver.
Among 16 and 17-year-old employees in 2020, 48 per cent were on the minimum wage, while 38 per cent of 18 and 19-year-olds were and 20 per cent of young adults (20 to 24-year-olds).
Only 5 per cent of “prime age” employees (25 to 64-year-olds) were on the minimum wage last year, even though they represented 49 per cent of all those paid the minimum wage.
The former youth rate was abolished in 2008 — New Zealand is unusual in this — but there is still a lower rate, set at 80 per cent of the adult minimum wage, for “new entrant” and “starting-out” teenage workers and those undertaking approved training.
“Our main conclusion from this review is that minimum wages in New Zealand over the past two decades de facto have become a teenage wage setting policy,” Maré and Hyslop said.
Importantly, they found no clear evidence in the data that increases in the minimum wage have led to job losses.
As a high level generalisation this is not surprising. New Zealand may have a high minimum wage relative to the median wage by international standards, but it also has a relatively high proportion of the working-age who are employed. That is prima facie evidence that there is no simple seesaw relationship between the two.
But the Motu economists add an important caveat: “However, the risk of losses is found to increase disproportionately when the minimum wage directly affects a high proportion of workers, as it does for youth and low-skilled workers”.
The concentration of minimum wage-earners is highest among those industries like retailing and hospitality, which have a higher prevalence of young workers.
During the panel discussion Hyslop said that in those “teen” industries in 2001, the minimum wage share of total labour costs on average was 2 to 3 per cent. By 2020 it was over 12 per cent, as minimum wage workers accounted for over 20 per cent of employees.
“So one reason minimum wage increases historically don’t affect employment too much is that, if they are a relatively small share of the wage bill then firms live with it.”
But the risk is that firms where younger workers account for a large share of the wage bill are now getting to the stage where minimum wage increases could affect employment.
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During the panel discussion, NZ Initiative chief economist Eric Crampton raised the issue of regional variation in how binding minimum wages are.
The risk of too high a nationwide rate is that it could “encourage migration to Auckland when that is not efficient and people would prefer to stay where they are, with a lower cost of living, but now they are being priced out of the labour market,” he said.
The household labour force survey for the March 2021 quarter found 35,000 people aged 15 to 19, or 11 per cent of the age group, neither employed nor receiving any education or training.
Among 20 to 24-year-olds it is even higher, 51,000 young adults or 15 per cent of the age group.
That is too many to be written off as some sort of unavoidable waste stream.
An MBIE survey of employers in 2018/19 asked them about how they responded to increased minimum wages.
Over half (56 per cent) reported doing nothing different. “However, 21 per cent of employers reported increasing the prices of goods and services, effectively passing on some of the costs of increases to consumers. A further 21 per cent reported reductions in either working hours (8 per cent) or employment by not replacing staff who left (13 per cent).”
The survey also found 29 per cent of employers reporting that the increase in minimum wages resulted in their increasing wages for employees already earning above the minimum wage.
But that is rather at odds with what the Motu economists find in the data over the past 20 years, which is that there has been little spillover beyond the low end of the wage distribution.
“As the minimum wage increases it has swept up more low wage workers but not really much beyond that,” Hyslop said.
Only in the last couple of years dominimum wage increases look to have shifted the distribution to the right, that is higher, rather than just compressing the lower end.
For example in 2020 there were 4 per cent fewer wages at or below 10 per cent below the median than there had been in 2017.
But some of that could be explained by the care workers’ pay equity agreement, rather than a spillover from higher minimum wages.
The CTU sees the minimum wage becoming less important as a wage floor if wages are determined by fair pay agreements, pay equity settlements and the living wage movement.
The relatively limited extent to which the minimum wage “bites” affects how effective it is.
And judging effectiveness is difficult given the absence of any clear agreed objective.
Should it be seen as a redistributive, income support policy? In that case it is not very efficient as it does nothing, of course, for the incomes those who are not employed, and many of the low-paid belong to households where incomes are not particularly low, Maré and Hyslop point out.
Should it be seen as a means of protecting low-skilled workers from employer exploitation in a buyer’s market? The absence of adverse effects on employment from minimum wage increases suggests a labour market that is less than perfectly competitive, in other words, that employers could have afforded to pay more before they were compelled to.
What about the human rights argument for abolishing the youth minimum wage, on the grounds that it represented a form of age discrimination?
“We note that there are several age-based policies with arguably less economic rationale, for example the 20 per cent discounted rate for Job Seeker Support recipients aged under 25.”
The continuation of the starting-out and training minimum wages implicitly recognises that there should be a link between wages and human capital, but the limited uptake of those exceptions suggests firms may consider the administrative and compliance costs too high for them to be worthwhile.
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