Friday 11 November 2011

Treasury on minimum wages [updated]

Patrick Gower says:
Everyone knows it’s got bloody hard to live on the minimum wage - even John Key admits that. His defence is that a rise from $13 to $15 an hour will cost jobs. Key has used this defence in a televised debate, and he's used it to workers on the shop floor at McDonald's as seen in my story last night. But what Key doesn't want to admit, is that this claim is not the full picture and may just be fear-mongering - a rise may not cost jobs at all. That's what Treasury says in this advice from March 2010 obtained by 3 News under the Official Information Act.
Gower should spend less time reading single analysts' emails and more looking at what Treasury's actually said. He's citing a 2010 email released under the Official Information Act (don't the italics make it all seem secret and hidden and stuff?); here's Treasury in 2010 recommending that Key keep the minimum wage at $12.75 instead of raising it to $13. It's in the regulatory impact statement [ht: Greg Dwyer]. What does Treasury give as reason for recommending keeping the minimum wage at $12.75?
The economic recovery is slow and the labour market remains volatile

Overheating in China and commodity prices in Australia may increase vulnerabilities for New Zealand over the next 12 months

Increasing the minimum wage in this environment could create wage pressures (both directly through increased wage costs and indirectly through pressure on wage relativities) for employers who retained their workforce during the recession, and employers who are expanding their workforce as the economy is recovering

The Department of Labour estimates that keeping the minimum wage at $12.75 may lead to an employment gain of between 1360 and 1960 jobs
Treasury further comments:
As a proportion of the median wage, New Zealand’s minimum wage is the second highest in the OECD (in 2008)

The minimum wage has increased significantly since the late 1990s. In real terms by 63% for adults and 128% for 16 and 17 year olds since 1999 (the latter is largely likely to be due to the abolition of the youth minimum wage in 2008)
Let's recap. Gower paints Treasury as supporting a two dollar increase in the minimum wage when in fact they fought against a twenty-five cent increase in 2010.

I weep for journalism in this country. [Part one of Gower nonsense on minimum wages] Update: Here's Treasury in the Cabinet Papers from the 2010 review.
Treasury has some concerns that increasing the minimum wage may constrain employment growth and impose costs on businesses, particularly given the subdued labour market recovery, minimum wage increases over the last decade, and the level of the minimum wage relative to the average wage. There are also fiscal costs associated with an increase in the minimum wage.

While unemployment is decreasing, New Zealand’s labour market has been volatile in recent quarters. Treasury considers that increasing the minimum wage in the current economic environment would create wage pressures for employers (both directly through increased wage costs and indirectly through pressure on wage relativities) who have retained their workforce during the recession, and limit the opportunity of employers to expand their workforce as the labour market recovers.

There is also a risk that increasing the minimum wage could exacerbate New Zealand’s high youth unemployment. The unemployment rate for 15-19 year olds was 23.3 per cent in the September 2010 quarter. (New Zealand’s youth unemployment rate is four times as high as the adult unemployment rate, and the ratio is high compared to other OECD countries). International evidence indicates that increases in the minimum wage leads to employers substituting non-skilled workers (such as youth) for low or semi skilled workers, as non-skilled workers become relatively more expensive. Youth unemployment is of particular concern because it can have long-term consequences in terms of lower income and poor labour market outcomes. Ministers may wish to ask the Department of Labour to carry out more analysis on the impact of the minimum wage on youth unemployment.

New Zealand’s minimum wage has increased substantially in the last decade, increasing in real terms by 36.6 per cent for adults and 128 per cent for 16 and 17 year olds since 1999 (the latter rise is largely due to the abolition of the youth wage in 2008), compared to a 35 per cent increase in the average wage. New Zealand’s minimum wage is also high compared to other OECD countries. In 2008 New Zealand’s minimum wage as a proportion of gross median wages was the second highest in the OECD (see minimum wage review 2010 Regulatory Impact Statement, page 30, figure 4).

Treasury considers that the total fiscal costs are likely to exceed estimates provided in the paper. Other agencies are likely to be impacted by increases in the minimum wage, and bargaining by state sector employees to retain wage relativities could contribute to the fiscal cost of a minimum wage increase. ...
Odds Gower will have any shame and retract his slur on Treasury?


  1. Poor Treasury. So misunderstood. Yep, what Treasury and its dogmatics need is a champion. No - they need a campaign of public support, cos wow, it's not like they have the slipstream of a global hegemonic ideology to ride along on. A numeric ideology masquerading as a science, no less. Cos we know a science would revisit its fundamental assumptions once disproven - say, over the last 40 years - ergo the "good" economists currently dying of shame and recanting these days, while the rest cover the holes and continuing to cash their pay checks.

    Yup, it's a good game to get in on, if you're confident of winning, or numbers give you a woody, or just a sociopath. As far as ponzi schemes go, free market capitalism puts the Catholic Church to shame.

    Delete this post if you know I'm right.

  2. @Fantail: If you want more money going to poor workers, wage subsidies beat minimum wage increases. They're more equitable as the burden is borne progressively through the tax system rather than largely by the purchasers of the goods and services provided by minimum wage workers - who are typically lower income themselves.

    There are better and worse ways of achieving objectives. If your objective is more money paid to poor workers, why choose one that throws many of them out of work?

  3. Just a heads-up. The live chat with Don Brash at Stuff had a question RE minimum wages, Don cited your youth estimates in his reply. Maybe others will follow. Keep up the good work.

  4. @Anon: Thanks for the pointer; it's not the first time he's pointed to it. I'd put more caveats on it than Brash usually does, but that's fine.