Tuesday, 24 October 2017

The big minimum wage hike

Labour's proposed increasing the minimum wage to \$20 by 2021.

This isn't an end of the world bad idea, but it isn't a good idea.

The government has been targeting a minimum wage of about 66.7% of the median wage. That's already very high by international standards. If we assume median hourly wage growth continues at 3.4%, then the median wage in 2021 would be \$27.43. A \$20 minimum wage in 2021 would be 72.9% of the median wage.

Here's how Treasury illustrated that kind of wage in its review of the living wage in 2009.

So imagine a new arrow at the 73% mark of uncharted territory instead of the 85% mark.

Or put it another way. If the minimum wage today were 72.9% of the median wage, it would be at \$17.50 instead of \$15.75. What did MBIE's last minimum wage review say about a \$17.50 minimum wage? Well, they didn't have that one on the table. They plotted out the effects of a \$0.25, \$0.5, \$0.75, \$1.25, and \$4.55 increase, but not a \$2.25 increase. Why the big gap? Because the \$4.55 one was the living wage proposal that was floating around.

Anyway, if we do some simplistic extrapolation between the \$16.50 and \$19.80 minimum wages to see what the effect of a \$17.50 wage might have been, it looks like about 15,000 fewer jobs, and net costs to the government of about \$125 million. Those costs are net because while minimum wage hikes increase what the government has to pay in wages to some workers, it reduces the government's outlays under Working for Families because much of the income gets clawed back - especially for workers on less than 30 hours per week. They don't get to keep much at all.
All of my analysis on this stuff from last year hasn't changed. If you want to yell at me about this post, go read that one first. Working for Families is a better way of supporting the incomes of the working poor than are minimum wages. Why?

First, it's better targeted. Pacheco and Maloney found that only about 40% of minimum wage workers are in households in the bottom three deciles. I go through that in the link above.

Second, it's better supported. The burden of minimum wage increases is shared among disemployed workers, purchasers of the goods and services produced by minimum wage workers, and owners of firms employing minimum wage workers. The burden of WFF falls heavily on households in the 8th, 9th and 10th deciles. Both versions will have negative effects on the overall economy, but spreading it through the tax system at least tries to minimise the overall deadweight costs of raising that next dollar of wage subsidy.

Caveat on all this: if the pending review of the Reserve Bank Act winds up deciding on much higher inflation, then a \$20 minimum wage might wind up being 67% of the new higher nominal median wage.

I'll be chatting through some of this with Mike Hosking tomorrow morning on the radio at the ridiculously early hour of 6.30 am or thereabouts.