Friday 10 February 2012

Benchmarking the minimum wage increase

New Zealand's $13 minimum wage is now scheduled to go up by $0.50. The government says that's as much as they can increase it without bad employment effects, though I can't yet find any RIS or Treasury statement in Cabinet Papers assuring us of the safety of a 3.8% increase.

The Greens are mad because the CPI was up 4.6% in the year to September:
The nominal increase is 3.8% – but at the same time the Consumer Price Index increased 4.6% in the year to September 2011 and 1.8% in the year to December 2011.  So it is not “boosting incomes” at all, as Minister of Labour Kate Wilkinson claims, it is just keeping pace with inflation.
50c an hour is not going to help the people that need it most – people like the Bradley family who were profiled in the Herald this week, where dad is having to work three jobs just to feed the family. And even so, the parents are having to go without food some days just to feed the kids.
But let's not forget that the September quarter annual results include the one-off effect of the GST increase: a tax shift that was fully compensated for lower income earners through income tax cuts. So it's the December quarter annual results that form the relevant comparison. And the minimum wage increase is more than double that; there's no indication of any looming inflation on the horizon. The real minimum wage increase is pretty substantial. Real take home income is higher than the CPI would have you think, unless you're looking at December-quarter results (where the GST hit has washed out).

Most importantly, it's substantial relative to generalized wage movements. The latest figures from the Labour Cost Index show salary and ordinary time wage rates were up about 2% on average from December 2010 to December 2011.* The minimum wage hike is 1.9 times as large as average year on year average salary growth.

The 2012 New Zealand Income Survey isn't due 'till June quarter (October release). But if median hourly earnings wind up being up 2% up on the June 2011 results, they'll be around $20.79. The minimum wage will then be 65% of the median. This is more than high enough to start ringing alarm bells about disemployment effects.

To summarize:
  • The minimum wage increase of 3.8% is well in excess of average LCI wage growth. Describing it as miserly ignores the context of recent wage and price growth in New Zealand. 
  • The minimum wage is on track to hit 65% of the median wage. This is very high. Recall that American minimum wage campaigners have been trying to get the minimum wage to half of the median wage. The current US minimum wage, $7.25/hr (federal; individual states do vary upwards), is about 38% of the median US wage. While it's plausible that changes around that level within the US have had little effect on aggregate employment figures, it is reckless to extrapolate from those findings to minimum wage rates that are, relative to median wages, far higher.
I'm going to second what Ryan Avent blogs at The Economist. Minimum wage increases are a bad policy for poverty reduction relative to wage subsidies and are an especially bad idea in periods of high unemployment and low inflation.

And yet I can't find anybody quoted in the press saying anything other than that National's here being stingy. Tracy Watkins at Fairfax finds lots of folks calling it paltry. Radio NZ quotes a united opposition saying it isn't enough and the unions whining. The Herald's Amelia Romanos follows the same narrative. Same in the Yahoo poll Seamus cited. Nobody seems to have checked whether the minimum wage increase was above, below, or about the same as growth in median wages over the last year. It's not like that number's a secret; Stats New Zealand released it the day before the minimum wage hike was announced. Big headline "Wage rate growth steady at 2.0%". But hey, who cares about the real numbers. All that matters is reporting on the political horse-race and how outraged the opposition is.

Any minimum wage increase shy of giving into the opposition's demands for a $15 minimum wage would be met with the same scorn from the media and from the opposition. If Key takes as much stick for a fifty cent increase as for a zero cent increase, the marginal cost of his doing the right thing and following the advice Treasury gave him last time around really isn't high. Shame he rarely decides to do that.

* Hit Table 3.3 at the XLS file above. Series ref LCIQ, SH41Z9 at tab 3.3 or, better, SI511-515 at tab 5.3 that counts the percentage increase of salary and ordinary time wage rates by skill level. The lowish percent increase I'm quoting here clearly isn't because of any miserliness in prior minimum wage increases as it's the same across the board in skill levels (the SI511-515 series). I'm using the LCI here rather than QES because LCI gives figures adjusted for changes in workforce composition and skill - how much an employer needs to pay in salary for a fixed quantity and quality of worker. I think this is the relevant comparison for assessing the generosity, or otherwise, of minimum wage increases; the increase doesn't affect the quality of an incoming minimum wage worker except perhaps through disemployment of the lower tail of the productivity distribution. The unadjusted LCI figure is 3.2%, still less than the "stingy" increase in the minimum wage.


  1. There was of course the Treasury BIM which made as strong a case as is ever made in a BIM to completely abolish the minimum wage.

    Did Key & English even read it I wonder?