Minimum wages to the maximum

Dr David Law
Insights Newsletter
4 December, 2020

Last week, the Helen Clark Foundation and the New Zealand Institute of Economic Research released a joint report (the HCF&NZIER report) calling for a higher minimum wage to reduce inequality and lift productivity.

The minimum wage increased from $17.70 to $18.90 in April of this year. With 22,000 jobs lost in the September 2020 quarter, the report suggests New Zealand shift to a “living wage” instead – that’s $22.10 per hour. This can be done without losing more jobs, it claims.

But even if that’s true, would lifting the minimum wage reduce inequality? Not really.

Minimum wages are a blunt tool for tackling poverty and inequality. For instance, a study using New Zealand data estimated that a 10% increase in minimum wages would only lower the relative poverty rate by less than one‐tenth of a percentage point.

So, would hiking the rate fix this country’s flagging productivity? Of course not.

If it could, firms would have already raised wages on other own. Most workers are paid above the minimum wage because their productivity warrants it. Even if the argument had some merit, why is the optimal level $22.10?

And is it really clear that lifting the minimum wage would not hurt employment? Not at all.

The report acknowledges that the literature on this point varies widely but suggests New Zealand need not be concerned because the most frequent finding suggests that there is little adverse effect on employment. The trouble is that minimum wage rates and economic conditions vary widely across countries too.

The OECD helpfully warns that the initial level of, and expected increase in, the minimum wage when thinking about effects on employment are of critical importance. The key question is how binding the minimum wage is and will be, and on whom.

So, how does New Zealand’s minimum wage compare to other countries?

In 2019, the minimum wage in New Zealand was among the highest in the OECD, at 66% of the median wage for full-time workers. The OECD average was 54%. The Kiwi minimum wage is now at 70% of the median and would rise to 82% on a “living wage.” Only Colombia’s rate would be higher.

High minimum wages hurt the vulnerable – the young, low-skilled and inexperienced. These groups can expect to lose at least 33,500 jobs if minimum wages rise significantly, according to MBIE. For that reason, the Government should not lift the minimum wage.

See more: “Minimum wages to the maximum: The risks of lifting the minimum wage

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