Minimum wages and employment

Stuff's Susan Edmunds asked me for comment on the employment effects of the latest round of minimum wage hikes. She chose the right quotes out of this more verbose missive I'd sent through, copied below. 

“Minimum wage hikes always bring argument about the effects of those increases on jobs. MBIE regularly provides estimates of the number of job losses likely to be caused by different levels of increase; this time, MBIE expected that the increase to $18.90 would reduce employment by about 6,500 jobs, with some 242,400 workers overall being affected by the minimum wage increase. The employment reduction is not really an estimate of the number of people who might be dismissed because of the wage hike but rather will include jobs that are not created in the first place.

New Zealand’s labour market remains very strong. Employment rates since 2016 have been at historic highs. I worry a lot less about the minimum wage hike causing problems in the current employment environment and a lot more about what it will do come the next economic downturn. New Zealand’s minimum wage, relative to prevailing wages, is very very high by international standards. The most recent OECD data, from 2018, had our minimum wage as the fourth-highest in the world, relative to median incomes, and the highest in the world when compared to average incomes. The effect of a minimum wage on employment depends on its ‘bindingness’ – how many workers would earn a lower wage but for the minimum wage. The closer the minimum wage is to the median wage or to the average wage, the more binding it is. And the more binding it is, the greater the expected effect on employment come the downturn.

So we then have to wonder whether minimum wage hikes are the best way of helping the working poor. To begin with, a lot of the increase in the minimum wage will be clawed back by the government for workers receiving Working for Families or other income-linked support. MBIE estimated that while a minimum worker receiving no other income support would see a 6.45% increase in take-home pay due to the minimum wage hike, an Auckland-based couple both earning the minimum wage while receiving Working for Families and the accommodation supplement would see only a 1.7% increase in take-home pay. And the minimum wage is not all that well targeted, if the idea is to make sure that people can afford to support a family. A lot of minimum wage workers are in higher-earning households, at least according to decade-old work by Gail Pacheco and Tim Maloney. That work is now grossly out of date, but Statistics New Zealand does not exactly make it easy to update those things. Enhancing Working for Families can be better targeted, and with less harm to employment come any downturn.” 

Looking at the OECD table again, we were tied for fourth-equal rather than fourth outright - we're tied with Portugal. Above us are only France, Chile and Turkey.