Monday 29 February 2016

Nominal wage rigidity and low inflation: minimum wage edition

Workplace Relations Minister Michael Woodhouse says an increase to $15.25 per hour will directly benefit approximately 152,700 workers and will increase wages throughout the economy by $75 million a year.
“With annual inflation currently at 0.1%, an increase to the minimum wage by 3.4% gives our lowest-paid workers more money in their pocket, without imposing undue pressure on businesses or hindering job growth,” he says.
Woodhouse just mandated a 3.4% nominal hike in the minimum wage, which is also a substantial real increase at low inflation.

Median hourly earnings at the 2015 Income Survey were $22.83 per hour. And so the minimum wage is about two thirds of the median wage.

The DoL background papers aren't up yet. It would be nice if they updated this chart.

The minimum wage was $12.00/hour when National took office in 2008. Median hourly earnings were then $18.75. The minimum wage was 64% of the median. Since then, the minimum wage increased to $15.25, a 27% increase. Median hourly earnings* are up to $22.83, about a 22% increase. 

I wonder what National would have said, in the 2008 election, if Labour had then campaigned on minimum wage increases outstripping median wage increases, and on getting minimum wages to being no lower than 66% of the median.

Economists dicker over whether nominal wage rigidity is really a great explanation for equilibrium unemployment: employers could just offer lower starting wages at the outset if it were the main issue, and there are puzzles around why fired workers would continue to be sticky. But minimum wages at 66% of the median wage are a rather more concrete form of downward nominal wage rigidity.

And remember that we shouldn't extrapolate from American findings on small effects of minimum wages, where minimum wages are around 40% of the median, to scenarios where minimum wages are 66% of the median. 

* This will update when the 2016 figures are out. We shouldn't really be basing this on the 2015 median income figures, but we have this problem every year: minimum wage changes are effective April; income data is on the June NZ Income Survey figures. 

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