Assessment of the options for the minimum wage review 2010
This section assesses the options for the minimum wage review 2010 in terms of two criteria. First, the options are assessed in terms of gains and losses from changes in the minimum wage. Matters considered include the impacts of the options on specific population groups and the main social and economic impacts. Second, the options are considered in terms of changes to the minimum wage as part of the broader policy package of Government income and employment-related interventions.
Assessment criterion 1: Gains and losses from changes in the minimum wage
The first assessment criterion is an assessment of gains and losses from any change to the minimum wage. A number of factors have been identified for consideration in relation to this assessment criterion. These factors have been used in this assessment of the options as much as possible. However, we do not have data available for factors such as the impacts on some types of low paid workers like new migrants, temporary workers, and workers with disabilities.
Number of people affected by the different options
The following tables estimate the number of workers, aged 16 to 64 years, who would be affected by the minimum wage options.
|Minimum wage option||18 - 64 year olds||18 - 19 year olds||20 - 24 year olds||25 - 64 year olds|
Source: 2010 New Zealand Income Survey, Statistics New Zealand
Note: The numbers are rounded to the nearest 100. It is assumed that those earning below the minimum are exempt from being paid the minimum wage.
|New entrants’ minimum wage||Adult minimum wage|
|Minimum wage option||%||Number||Minimum wage option||%||Number|
In Table 3, it can be seen that a much larger proportion of workers in the 18 to 24 years age group will benefit from an increase in the minimum wage. Table 4 shows that any increase is likely to affect a high proportion of 16 and 17 year olds, as they tend to be paid at or near the minimum wage.
The estimates in Table 3 and Table 4 are for workers who may directly benefit from the minimum wage options. There may be other impacts as a result of the change of the minimum wage. For example, if the minimum wage increases, employees may choose to (or wish to) work more hours, or employers may choose to offer fewer hours to employees. Employers might change their hiring practice by substituting one type of worker for another, such as employing more experienced workers. This might mean that more 16 and 17 year olds are indirectly affected by the minimum wage change than those aged 18 years and over. Employees earning near the minimum wage may ask for pay increases to keep their current relativity to the minimum wage.
Impacts on employment and unemployment
Evidence regarding the impact of increasing the minimum wage on employment is mixed. The conventional view on adjustment in the labour market suggests that when the price of labour increases, due to an increase in the minimum wage, there will be a decline in the demand for labour (possibly due to substitution of capital inputs). The industries that are most affected by an increase in the minimum wage may experience an impact on employment growth.
Research on the effects of the minimum wage
There is a mix of views on the effects of the minimum wage on employment levels. The ILO has found that whether a minimum wage has a negative or a positive effect on employment depends on many factors such as its relative level, the structure of the labour market, and the country concerned.
Research finds minimum wage laws raise pay rates at the bottom of the wage distribution, and this effect is generally associated with lower dispersion of earnings. However, despite considerable efforts, researchers have not identified the effects of the minimum wage on other aggregate economic outcomes, such as unemployment and employment.
Research from the United Kingdom (UK) suggests that minimum wages may simply have no effect on employment, or that minimum wage effects might exist, but they may be too difficult to detect and/or are very small. In any case, with 64 studies containing approximately 1,500 estimates, they conclude that if there is some adverse employment effect from minimum wage rises, it must be of a small and policy-irrelevant magnitude.
Australian research indicates minimum wages may play a role in providing the financial incentives for people to take up, or increase their hours in, jobs paid at minimum wages, or may enhance social inclusion through their role in providing a safety net. Minimum wage decisions may also have employment effects; however, these effects are not clear cut.
Impacts on employment growth
With the mixed results from research elsewhere in mind, the Department has taken a cautious approach and only considered the relationship between the minimum wage and employment growth and unemployment. This approach is also driven by the availability of data.
The Department has analysed employment impacts with respect to real minimum wage changes (i.e. we adjust for changes in price levels using a relevant price deflator, as discussed below) and by using a range of employment adjustment factors (elasticities) that are broadly derived from econometric analysis conducted by the Department and others. It is important to note that our analytical framework assumes that everything else remains the same and it does not specifically deal with important economy-wide and other feedback effects, some of which may have a positive impact (e.g. productivity, demand and fiscal effects), while others may be negative (international competition). The timing of the adjustment is also simplified and a one-year adjustment period is assumed for the period 1 April 2011 to 31 March 2012.
The model used to estimate the impact on employment growth considers how a firm that hires minimum wage workers will alter its hiring decisions based on changes in the minimum wage and the output price changes faced by the firm. The model is based on a conventional model of firm decision-making, whereby firms operating in a perfectly competitive market adjust outputs and inputs, including labour, in response to their relative prices.
The concept of “real minimum wage changes” is important for our discussion here. For example, Option 2 ($13.00 an hour) implies a 2.0% nominal increase and Option 3 ($13.50 an hour) a 5.9% nominal increase. However, it is important to consider these nominal minimum wage increases relative to changes in the output prices that a firm can expect.
Real changes in minimum wage options are adjusted using the Producers Price Index–Outputs (PPI-O). This measures the average change in output (selling) prices of firms across the whole economy.
Forecasts of changes in the PPI-O were obtained from the latest (December 2010) Quarterly Predictions, published by NZIER. NZIER forecasts that the PPI-O will increase by 4.4% over the year to March 2012. This is a relevant estimate for the period of the minimum wage options, which will be effective from 1 April 2011.
The Department has used a benchmark to estimate the impact of various minimum wage options on job growth. The benchmark is an estimate of the number of extra jobs that would be created in the economy if the minimum wage stayed the same in real terms from April 2011 to March 2012 (e.g. increased by the same percentage as the PPI-Output). The benchmark projected job growth is estimated at 1% or 22,100 jobs.
Option 2 ($13.00 an hour) does not constitute an increase in the real value of the minimum wage; while Option 3 ($13.50 an hour) would result in an increase of 1.5% in real terms.
Table 5 below sets out aggregate estimates of the level of possible changes to job numbers that may result from minimum wage increases. Currently, the Household Labour Force Survey for September 2010 reports that the total number of people employed is 2,193,000.
This is projected to increase by 22,000 jobs to 2,215,000 jobs in the March 2011 quarter according to the Department’s most recent forecast (of 0.5% per quarter). From March 2011, employment is currently expected to increase by 1% (or a further 22,100 jobs) to 2,237,100 in March 2012.
|Projected job growth||23,530 - 24,100||22,910 - 23,230||21,490 - 21,690||16,260 - 18,040|
|Potential impact on job growth (absolute change compared to the benchmark)||1,360 - 1,960||760 - 1,080||-660 - -460||-5,890 - -4,100|
|Potential impact on job growth (relative to the benchmark)||0.06% - 0.09%||0.03% - 0.05%||-0.03% - -0.02%||-0.27% - -0.19%|
|Potential impact on total jobs (relative to Option 1)||0%||0.03 – 0.04%||0.08 – 0.12%||0.24 – 0.35%|
Source: Department of Labour calculations
High and low scenarios of the minimum wage impacts
The Department has calculated high and low scenarios for employment impacts, with the scenario based on higher and lower employment adjustment factors (i.e. that employment is more or less sensitive to changes in the minimum wage).
The evidence of the impact of increasing the minimum wage on job growth is not strong. Econometrically estimated adjustment factors of employment with respect to the minimum wage show only a mild negative effect. The Department therefore considers the impact on job growth to be minimal (less than 0.1% of job growth) for Options 1, 2 and 3.
Compared with the benchmark, Options 1 and 2 could mean additional jobs are created as increases in the real minimum wage costs are expected to be negative (given a 4.4% increase in the PPI-Output over the period). This means that the increase in the price of minimum wage labour costs is less than the forecasted increase in the price employers are receiving for their goods. However, this assumes that a potential erosion of income in terms of the CPI does not reduce incentives to work.
Under Option 3 ($13.50 an hour), employment growth is estimated to be lower than the benchmark by between 460 and 660 jobs (which is small in terms of total employment), and reduced by between 4,100 and 5,890 jobs under Option 4 ($15.00 an hour).
The estimate can be further broken down by age group. While the 18-19 year old group is not expected to be affected much, employment growth of the 16-17 year old group may be fewer by between 40 and 220 jobs under Option 3 ($13.50 an hour), and fewer by between 370 and 1,980 jobs under Option 4 ($15.00 an hour).
Impact on unemployment
It is not straightforward to estimate the impact on unemployment. There is no data on whether those who are unable to find a job due to the potential constraints on job growth from a minimum wage increase will decide to be in the labour force or not. Those who cease work and withdraw from the labour market all together, for instance to study or look after children, are not counted as unemployed. To be counted as unemployed, a person must be actively seeking work. On the other hand, an increase in employment growth may attract people into the labour market. This may not alter the number of people who are unemployed as the increased number of jobs may be filled by people who are not currently in the labour force. The Department assumes that there are no changes to people’s preferences to be in the labour market for these estimates.
Based on the Reserve Bank forecasts of the unemployment rate of 6% for March 2011 and 5.5% for March 2012, it is estimated that the unemployment rate would not rise under Option 1 ($12.75 an hour), Option 2 ($13.00 an hour) or Option 3 ($13.50 an hour) for the March 2012 quarter but would increase to 5.7% for the same quarter for Option 4 ($15.00 an hour).
Impact on low paid workers
Youth, women, Māori, Pacific people and part-time workers are more likely to be low paid workers and they are more likely to benefit from any increase in the minimum wage. However, they may also be the first to experience any negative impacts that could result from a change in the minimum wage (e.g. reduced hours offered or substitution of some groups of workers for others). Table 6 shows the demographic and job characteristics for workers paid at the minimum wage rate.
|Demographic group||Percent of workers|
|Post school qualification||37.2%|
Source: 2010 New Zealand Income Survey, Statistics New Zealand
Over half of those earning the minimum wage are between 18 and 24 years of age. A high proportion of 16 and 17 year olds are also paid at or near the minimum wage. Therefore, an increase in the minimum wage is likely to affect a very large number of young people already in work.
In a survey carried out by the Department in 2010, 10% of employers reported employing a young person aged 16 or 17 years in the past three months. Of these employers, only a third said that they used the new entrants’ minimum wage. The most common reasons for not paying the new entrants’ minimum wage was that the rate was too low or not fair, or that the job was skilled.
In its submission the NZCTU states that it is unfair to reward young workers less for the same work as an older or more experienced employee. The NZCTU also states that there is no evidence to support that work done by younger and new workers is inherently of lesser value than the work done by others.
The Mayors’ Taskforce for Jobs submitted that continued minimum wage protection was necessary for young people to encourage employers and others to invest in skill development, particularly in the trades, and to avoid increasing the disparity in wage levels between Australia and New Zealand. Where young people are working alongside others doing the same work, there seems no justification for lower wages on the grounds of age. Information from Mayors around the country suggests that the level of wages and any increases have not resulted in constraints on job creation or fewer opportunities for young people. There is no evidence that raising wages has resulted in young people leaving school early.
Hospitality Association of New Zealand and NARGON are concerned that continued increases in the minimum wage could send a signal to some younger people that further formal education and training is not warranted. They claimed that increases in minimum wage rates for those undertaking training, including on-the-job training, would deter many employers from offering training opportunities to young people.
Women tend to be highly represented in a number of demographic characteristics associated with low pay (for example, those working part-time, in service occupations). Table 6 shows that of those currently earning the minimum wage, 57.1% are women.
The Department calculates that among the population aged 18 to 64 years the average hourly wage for females is 85.8% of the average hourly wage for males. Thus, female wage and salary workers earn 14.2% less than males per hour. We estimate that this would not change significantly under Options 2 and 3. This is in line with previous impacts estimated by the Department.
In its submission the National Advisory Committee on the Employment of Women said that even a moderate increase to the minimum wage will have a direct positive impact on women’s economic conditions and their families. The majority of members strongly endorse an increase in the minimum wage as part of a range of mechanisms that increase the likelihood of women achieving financial security and independence.
Māori and Pacific people
Māori and Pacific people are overrepresented amongst those in low paid employment and are more likely to benefit from an increase in the minimum wage, compared with people of European descent.
NZCTU, SFWU and NACEW believe the minimum wage is an essential mechanism to close the pay gap for Māori, Pacific, and female workers.
Part-time workers are more likely to be low paid. Table 6 shows that 56% of people paid at the minimum wage work part-time. Therefore, any increase in the minimum wage will directly benefit a large proportion of low paid, part-time workers.
Post school qualifications
Only 37.2% of workers earning $12.75 an hour have a post school qualification, which is below the labour force average. Therefore, workers with a post school qualification are less likely to be affected by a modest minimum wage change.
Impact on wage earnings, nominal Gross Domestic Product and inflation
Table 7 examines the impacts of each option in terms of the numbers of workers affected, the estimated increase in weekly wage earnings, the potential inflationary impact, and economy wide increase in wages.
|Options||Workers between current and new minimum wage||Wage earnings increase (weekly, '000)||Economy-wide increase in wages
|Increase in economy wide weekly wage earnings
(%, including wage earnings of self-employment)
|Increase in nominal GDP / inflation
Source: New Zealand Income Survey June 2010, Statistics New Zealand and Department of Labour calculations.
Impact on industry sectors
The impact of a minimum wage increase varies across sectors. To illustrate this, Table 8 shows the estimated number of workers by sector that would be subject to a minimum wage of $13.00 per hour (Option 2).
|Subject to a minimum wage of $13.00 per hour|
|Industry||Percentage of workers||Number of workers||Percentage of weekly hours||Percentage of weekly earnings|
|Administration and Support Services||3.6||1,600||2.9||1.7|
|Media and Communications||3.1||1,100||1.9||0.8|
|Rental, Hiring and Real Estate||3.0||600||1.9||0.9|
|Transport and Storage||2.2||1,600||1.4||0.8|
|Health Care and Social Assistance||1.7||3,400||1.3||0.6|
|Arts, Recreation and Other Services||1.1||300||1.2||0.6|
|Professional, Scientific and Technical||0.7||900||0.3||0.1|
Source: Statistics New Zealand
This table shows that if the minimum wage was increased to $13.00 an hour, hospitality is likely to be the sector most affected, with around 10.8% of its workers currently paid at or below this level, followed by retail trade (9.1%) and agriculture (4.4%).
The Department’s survey of employers in 2010 showed that 19% of employers paid someone at the minimum wage in the past year. Large businesses with more employees were more likely to have hired someone on the minimum wage in the past year. While over one third of large (20 to 49 employees) and very large (more than 50 employees) businesses had hired at least one person on the minimum wage, only 13.0% of small business and a quarter of medium-sized businesses from the sample had done so.
New Zealand research found that firms respond in a number of ways to minimum wage increases. The most common response was to reduce wage relativities across their staff. Other responses include reducing the number of hours of work offered to staff, tightening employment policy, not replacing workers who resign, attempting to increase productivity, attempting to reduce costs, raising prices where possible, reducing profits and business closure. More generally, firms’ responses were based on supply and demand variables. The sectors most affected by minimum wage increases (the retail and hospitality sectors) had more scope to raise prices, as they supply non-tradable products to the domestic market.
Research from overseas suggests that increases in the minimum wage may have a small negative impact on profitability, but finds no evidence of this increasing the probability of firm closure.
NARGON submits that minimum wage increases will increase the costs of goods and services and reduce the employment opportunities.
The National Distribution Union submits low pay is prevalent in the retail sector and impacts negatively on most retail workers. Pay rises in retail, fast food and similar customer services industries have become increasingly dependent on increases in the minimum wage. An increase in the minimum wage is a very effective means of delivering a fiscal stimulus to an economy in recession, as those on low incomes are more likely to spend any additional income. Minimum wage increases are affordable for retail employers as the retail sector has experienced enormous growth for more than 10 years until the onset of the recession.
Impact on the state sector
There are a number of state sector employees and contractors on low wages, particularly in the public health and compulsory education sectors. Increases in the minimum wage are therefore likely to have direct (and possibly also indirect or ‘flow-on’) costs for some state sector employers. The Department considers that it is likely that organisations will seek additional funding to compensate for higher wage costs. It is also possible that, following a minimum wage increase, state sector employees may bargain with their employers to retain relativities and this may also increase the costs to government.
In Table 8, government employees are included in the education, business services, government and health and community services sectors. However, it is difficult to isolate the impact on public sector employees as these categories will also include private sector employees. The Ministries of Health, Social Development and Education and the Accident Compensation Corporation have identified areas which are more likely to be impacted by changes in the minimum wage. There might be other government agencies, crown entities, or state sector organisations which may be affected by a change in the minimum wage, but we do not have valid data to estimate the impacts on them.
Ministry of Health
The Ministry of Health has identified two areas in which workers are paid low wages and will therefore be most affected by an increase in minimum wage rates. These are aged care workers and disability support workers. In addition, minimum wage rises are likely to indirectly affect the mental health support workforce. The fiscal impact of an increase in the minimum wage for the health of older people services and disability support services is outlined in the following table:
|Option||Impact on all health of older people services||Impact on disability support services|
|Option 1 $12.50||No change||No change|
|Option 2. $13.00||$0.62m||$2.91m|
|Option 3. $13.50||$12.93m||$8.94m|
|Option 4. $15.00||$62.54m||$30.31m|
While the estimated 4,000 workers in the mental health community support workforce are generally paid above the minimum wage, any rise in the minimum wage would put pressure on providers to maintain wage relativity between the community support workforce and minimum wage workers.
Ministry of Social Development
The Ministry of Social Development (MSD) advises that there will be a number of impacts on them from any change to the minimum wage. The most direct effects are expected to be felt on the Ministry’s Home Help programme and on the Community Max programme.
The purpose of the Home Help programme is to provide financial assistance to certain people who require temporary part-time help to complete domestic tasks normally performed in their homes. Under the programme, the hourly rate that may be paid for a home helper is $13.42 plus 8% for holiday pay. The Government, by convention, increases the home help hourly rate by the same percentage as any increase in the minimum wage. This ensures that the amount paid for home help workers does not fall below the minimum wage. The expected increase in Home Help’s fiscal costs related to an increase in the minimum wage are outlined in the following table:
$13.00 an hour
$13.50 an hour
$15.00 an hour
Any increase in the minimum wage will have an impact on the Community Max programme because the Community Max wage subsidy is paid at the adult minimum wage rate. Expected increases in Community Max’s fiscal costs related to an increase in the minimum wage are:
$13.00 an hour
$13.50 an hour
$15.00 an hour
Ministry of Education
The Ministry of Education notes that an increase in the minimum wage to $15.00 an hour would have a fiscal impact on approximately 235 state and integrated school teaching positions (for teachers without any recognised qualifications or training) funded by Vote: Education and on the Early Childhood Education (ECE) Funding Rates.
An increase in the minimum wage is also likely to have a direct fiscal impact on funding the 27,000 non-teaching positions in state and integrated schools. However, the lowest rate in the non-teaching collective agreement that covers about 75% of this workforce is $14.00 an hour, so the impact would be more significant with option 4.
Based on an October 2010 pay period, the cost of increasing the minimum adult rate for the 3,600 full-time equivalents paid under $15.00 an hour in the state compulsory schooling sector is $32,000 per annum for Option 2, $169,000 for Option 3 and $4.463 million for Option 4.
Accident Compensation Corporation
The Accident Compensation Commission (ACC) provides Home and Community Support Services (HCSS) which includes attendant care (i.e. personal care,) home help, and childcare services. Clients can choose to have their HCSS provided by an ACC contracted agency, or they can employ their own carers directly. In the 2009/10 financial year, approximately 21,000 clients received HCSS at an annual cost of $144 million. Increases to the minimum wage would have a corresponding impact on HCSS as shown in the following table.
Minimum wage option
|Option 2: $13.00||$2.3 million|
|Option 3: $13.50||$6.9 million|
|Option 4: $15.00||$20.7 million|
Summary of the impacts on the four agencies
For the above four government agencies, total annual costs directly related to a minimum wage increase could increase by:
- $6 million for Option 2 ($13.00 an hour);
- $30 million for Option 3 ($13.50 an hour); and
- $119 million for Option 4 ($15.00 an hour).
Other fiscal impacts
As well as impacting on wage costs, increasing the minimum wage will have other fiscal impacts. However, it is difficult to assess the net effect of these impacts. Social assistance costs through benefit payments may rise, if a rise in minimum wage increases unemployment. However, higher incomes lead to the abatement of social assistance and can increase the amount of income tax received. For example, the Working for Families Scheme which is targeted at those low-to-middle income families with dependent children will be moderately impacted by an increase in the minimum wage. It is important to take into account that the modelling sample is relatively small and the impact has not been assessed in this year’s review.
 Youcef, Ghellab (1998) “Minimum Wages and Youth Unemployment”, ILO, p.58.
 Freeman, R. (2007) Labour Market Institutions around the World, National Bureau of Economic Research, Cambridge.
 Doucouliangos, Hristos and Stanley, T.D. (2009) “Publication Selection Bias in Minimum-Wage Research? A Meta-Regression Analysis”, British Journal of Industrial relations, 406-428.
 Nelms, Lucy and Dr Constantine Tsingas (2010) Literature review on social inclusion and its relationship to minimum wages and workforce participation, Research Report, Minimum Wage and Research Branch, Fair Work Australia.
 The terms job and employment are used throughout this section to mean the latter; the impact on the number of people employed is estimated rather than the number of jobs available.
 More information on the adjustment factors used is available from the Department of Labour.
 One could argue that all these effects are “loaded” into the econometric estimates but they are not explicit.
 The NZIER consensus forecast is used here and already implicitly assumes impacts on employment due to minimum wage increases, but the magnitude of this impact is unknown.
 This calculation excludes all workers who reported an hourly wage below the adult minimum wage of $12.75.
 Historically, impacts on the gender pay gaps were: in 2006, 87.0% to 87.1%; in 2007, 84.3% to 84.4%; in 2008, 85.0% to 87.6%; and in 2009, 85.6% to 85.7%.
 We have used single estimates for the wages of 16 and 17 year old workers, as the data suggests that the majority are earning the adult minimum wage or more. We are unable to estimate how many 16 and 17 year olds may be eligible for the new entrants’ minimum wage (for example when they will have completed the service requirement under the new entrants’ minimum wage). The data therefore assumes that all 16 and 17 year olds are eligible to earn (at least) the adult minimum wage. The results therefore represent an upper bound estimate.
 Dalziel, P et al (2006). Firm Responses to Changes in the Minimum Wage, Canterbury, AERU Research Unit, Lincoln University. This is available from the Department on request.
 Denvir A. and G. Loukas (2006) The Impact of the National Minimum Wage: Pay Differentials. Available at: www.lowpay.gov.uk/lowpay/rep_research_index.shtml. Draca M., S. Machin and J. Van Reenen (2008) Minimum Wages and Firm Profitability. NBER Working Paper 13966. Available at: www.nber.org/papers/w13996
 These calculations do not include the possible additional costs of sleepovers.
 The calculations for Health of Older People services costs are based on extrapolations of data gathered in a 2009 survey of residential care facilities but this does not take into account any wage relativity costs (this factor could substantially increase the costs).
 This is based on very high level estimates as Disability Support Services does not have detailed wage rate data from providers.