Offsetting Behaviour: 2023 Minimum Wage increases

Friday, 31 March 2023

I had a chat this afternoon with Newstalk on the 2023 minimum wage increases.

A few notes I made in advance of that chat, not all of which I was able to get to:

The 2023 minimum wage increase of 7% was slightly above MBIE’s recommended increase of 6%, and slightly above forecast year-end March 2023 (6%)

Minimum wage now at about 76% of the (June 2022) median wage (will be lower when we have 2023 data), which is very very high in international context. MBIE estimates 223k workers affected and some 5k fewer jobs.

The 2021 OECD data had NZ’s minimum wage, as proportion of the median wage, lower than Colombia, Costa Rica, Chile and Turkey. On that measure, our minimum wage was 67.6% of the median. That was higher than France (60.9%), the UK (57.9%), Australia (51.5%, but be careful!), Canada (49.5%), the Netherlands (46.3%), and the US (Federal minimum 29% of median, but most states will have higher minimums).

Over the recent period, employers would have had a hard time filling vacancies at entry level offering only the minimum. So it isn’t a surprise that the latest survey of NZAE economists suggested that this year’s minimum wage increase might not have particularly large overall effects, currently.

In that survey, three quarters of economists agreed or strongly agreed that there would be little effect on overall current employment – though government-employed economists were more optimistic than economists in academia. More academic economists agreed or strongly agreed than disagreed, but a substantial portion of academics disagreed.

But overall effects can mask harms on specific cohorts. 61% of surveyed economists agreed or strongly agreed that the increase is likely to have potentially negative effects on employment of riskier workers; only 18% disagreed.

The real risks come in any coming downturn – and one is looking more likely. And there, government economists and academics had sharper disagreements. About 55% of academic economists agreed or strongly agreed that there would be more risk of harm in any coming downturn, with under 20% disagreeing. But 30% of government economists agreed, and about 40% disagreed or strongly disagreed.

Standard macroeconomic models hold that unemployment in downturns is worsened when it’s harder for employers to cut real wages. If nominal wages are rigid, and inflation drops, then the higher minimum wage puts more jobs at risk in the downturn.

Work by Motu in 2021 suggested that, overall, NZ minimum wage increases have done less harm to employment than a lot of economists had expected, but they’ve also not really done much good. They aren’t great as an anti-poverty programme, because a lot of minimum wage workers are second-earners or teen workers in higher-earning families. Not all, to be certain. But other benefit programmes are more strongly targeted toward the working poor. At the same time, the effects of these other benefit programmes undo some of the increase in the minimum wage. MBIE’s review, for this round of minimum wage increases, showed that a 7% increase in the minimum wage would turn into a 6.8% increase in take-home earnings for a single worker, but only a 1.33% increase for a sole parent receiving WFF and the accommodation supplement. Income-linked benefits claw back when minimum wages increase. And while that can sound fine, because employers are then paying a higher share of the take-home pay, it also means that the cost to employers is very high relative to what workers in those situations wind up receiving – and employment and disemployment in a downturn will depend on those costs facing employers.