Sunday 6 March 2016

How high is too high: minimum wages edition

Radio NZ listeners tuning in to hear me, Tim Hazeldine and Laila Harre talking minimum wages and living wages this morning might find some of these references useful.

[Update: the audio is here; RNZ's write-up is here.]

Let's start with living wage proposals.

New Zealand's Living Wage proposal is poorly targeted and badly constructed.

For example, look at page 24-25, where they describe how they came up with the weekly expenditure on food. Prices come from the supermarkets with the highest sales volumes, rather than from any examination of where poorer people actually shop. Shelf prices are used, ignoring specials or coupon prices. I'm not in a low income decile, but when things we buy are on special, we stock up. It would be surprising if poor people didn't carefully check coupons and specials when shopping. Food cost estimates that ignore that people adjust their weekly bundle according to what's on special that week likely are missing something important.

As for targeting, look at Treasury's analysis (and here). 63% of households earning below the targeted $18.40 are single adults with no dependants; almost all teens and a majority of those in their 20s earn below $18.40/hour. Those in most need would see most of any living wage abated through clawbacks in other benefits.

Treasury notes that disemployment among teens and young adults is to be expected. And if the point is to focus on those in long term low income, only a quarter of those in the bottom decile in 2002 were there in 2009.

Treasury concludes that the Living Wage project's method was geared to produce a number around two-thirds of the national average expenditure of a two-adult, two-child household. It's blunter than most things I've seen from Treasury.

How does New Zealand's minimum wage stack up?

First, here's growth over time, or at least through 2013, from Treasury's analysis of the Living Wage. The recent increase continues to well outstrip inflation.

If we look internationally, New Zealand's current minimum wage, at 66% of the median hourly wage, is very high. Here's how Treasury illustrated things, using 2009 OECD data:

So, New Zealand's minimum wage is one of the world's highest, in relation to the median wage. This matters when we think about American evidence that hikes in American minimum wages have had little effect on overall employment. A minimum wage that's 40% of the median wage will have rather less effect than one that's 66% of the median wage.

Think about it this way. Imagine the government set a minimum price on new cars. The median car is, say, a Civic that sells for $40,000, and a cheap Kea goes for $20,000. If the minimum price were set at 40% of the median, you wouldn't notice much. At 50%, it would have some effect. And at 66%, even more.

What about minimum wages as antipoverty tool?

Work by Tim Maloney and Gail Pacheco (published version here) showed that a much larger fraction of minimum wage workers in New Zealand come from high decile families than is the case in other countries. This will in part be due to New Zealand's relatively high minimum wage. Here's what the distribution of minimum wage workers, by decile, looks like:

Increases in the minimum wage are poorly targeted if the point is to help those in most need. Only about 40% of minimum wage workers are in households in the bottom 3 deciles.

A ten percent increase in the minimum wage, even if we assume zero effect on employment or hours worked, only reduces poverty rates by 0.08 percentage points in their simulations. If it results in a 3% reduction in hours worked, poverty rates only drop by 0.05 percentage points.

Work in Canada by Aninda Sen and coauthors showed that Canadian minimum wage hikes resulted in increased poverty: a 10% hike there in the minimum wage yields about a 5% increase in the percentage of families living below Canada's Low-Income Cut-off line. The intuition runs as follows. In households above the LICO where the second-earner's earnings are critical in keeping them above LICO, disemployment due to minimum wage hikes easily knocks folks below the line. But there aren't that many families that are close enough below the line that a 10% hike in the minimum wage would bring the family over the line.

And it's also worth remembering that unhappiness from job losses can trump unhappiness from not being paid as much as you'd like.

Back to New Zealand now. The Cabinet paper on this year's $0.50 hike includes Treasury's advice that the hike is poorly targeted and that disemployment effects on youths could have longer term consequences for labour market connectedness. They don't point to it, but here's some evidence.

So, if minimum wage hikes are a bad way of helping the poor, what would I suggest instead?

  • Flatten some of the EMTR ranges where clawbacks compound to provide very little return to the next dollar earned.
  • Fix housing. Fix housing fix housing fix housing. The gap between before-housing-cost and after-housing-cost measures of poverty is striking. Look at Table 2 in The Initiative's latest report on poverty. In 1982, 18% of children lived in households that earned less than 60% of 1998's median household income, before housing costs. That number dropped to 10% by 2014. Great news, right? Except, if we look at after-housing-cost measures instead, we get a rise from 12% to 17%. 
  • Recognise the difference Working For Families, a wage subsidy programme targeted towards those in work with kids, has already made. Earnings subsidies like this have the advantage of not encouraging employers to fire people. 


Addendum: The background notes provided to the panellists pointed to Marc Amlinger's summary of the effects of Germany's recently adopted minimum wage. It notes drops in the number of 'mini jobs' (which they estimate at 133,000 losses) but no particular decline in the number of other jobs. The Ifo Institute for Economic Research's Hans-Werner Sinn, by contrast, puts the number of minijob losses at 170,000-180,000, with expectations of longer term losses of 900,000.

And think too about the refugee crisis. Germany's hosting now huge numbers of refugees, for whom German would be a second language at best, and who need jobs. How many minijobs might have been created for these workers? Is the number of jobs lost the right counterfactual when there should have instead been lots of entry-level low paid positions created with the big influx of refugees?

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