Raising minimum wage a ‘blunt’ tool
Is increasing minimum wage all it’s cracked up to be in combating income inequality? Julie Iles reports.
Promises to combat inequality were big this election cycle, yet the reality of household income and wage inequality in New Zealand will not be a singlepolicy fix.
New Zealand Initiative chief economist Dr Eric Crampton, says what drives wages is productivity, and that’s something the entire employment ecosystem has a role in.
The minimum wage starts to threaten jobs when it is high enough to be ‘‘severely binding’’, Crampton said.
‘‘When you make it too expensive to hire people that are lower productivity, then they just don’t get hired,’’ he said.
But Council of Trade Unions director of policy Bill Rosenberg, said the minimum wage increases were an important force and ‘‘blunt instrument’’ in wage growth for the lowest earners.
A new study by the New Zealand Council of Trade Unions found wages before tax grew 40 per cent for the highest and lowest 10 per cent of earners from 1998 to 2015.
But for those in the middle, wage growth was much less. Lower-middle earners saw increases in the range of 18 to 20 per cent.
‘‘It is surprising that the minimum wage does not support a greater ripple effect up the wage scale,’’ Rosenberg said.
The study also found lower incomes rose faster during a Labour-led government in the early 2000s than in previous or subsequent National-led governments, and there was a faster rise in hours worked under National.
Wage inequality rose under both governments, though there was a suggestion of a pause towards the end of Labour-led government, Rosenberg said.
There was less inequality among weekly wages, but this was attributed to workers on lower wages working increasingly longer hours, and higher wage earners working less.
The study also found many workers were being paid below the adult minimum wage.
Rosenberg said this called for more labour inspectors to enforce minimum conditions.
Crampton said he was nervous ‘‘crackdowns’’ like that did more harm then good. ’’Those are jobs that you’d be especially worried about disappearing or folks being thrown out of work that they need.’’
Crampton said minimum wage increases ‘‘poorly target’’ the lowest earners, and raise the cost of living, especially for poorer families. He said a lot of minimum wage jobs are held by second earners in a higher income family.
‘‘[Second earner] workers are less likely to be unemployed by minimum wage hikes because they’re coming in with higher skills anyway.’’
Crampton said taxes and
When you make it too expensive to hire people that are lower productivity, then they just don't get hired. Economist Dr Eric Crampton
benefits were better at redistributing income to those that needed it most.
New Zealand’s minimum wage is 60 per cent of its median wage, the seventh highest ratio in the OECD. The living wage is currently 85 per cent of the median wage, at $20.20.
The minimum wage has gone from $12 in 2008 to $15.75, a point Bill English was challenged on the campaign trail by Gisborne fruit worker Robin Lane.
‘‘You’ve raised it $3.75 over nine years,’’ she said. ‘‘Now, how would you like it if your hourly rate went up $3.75 over a period of nine years?’’
English said ‘‘consistent moderate increases’’ was ‘‘how the floor rises’’.
Should low wages be forced to rise? Two economists disagree on the answer.