Tuesday, 21 November 2017

Raising the minimum wage to $20

The new New Zealand government has proposed raising the minimum wage from $15.75 to $16.50 next April, and eventually to $20 by 2021. Eric Crampton at Offsetting Behaviour covered the main points on this last month:
This isn't an end of the world bad idea, but it isn't a good idea.
The government has been targeting a minimum wage of about 66.7% of the median wage. That's already very high by international standards. If we assume median hourly wage growth continues at 3.4%, then the median wage in 2021 would be $27.43. A $20 minimum wage in 2021 would be 72.9% of the median wage...
That would put New Zealand way out in front in the OECD in terms of the ratio of minimum wage to median wage. Crampton argues that Working for Families is a better option as it is better targeted at those in need (to which I would add that there are a whole lot of middle class teen hospitality workers who will benefit from the higher minimum wage, but I don't think that's who the government really wants to benefit), and it is better supported. On the latter point, Crampton explains:
The burden of minimum wage increases is shared among disemployed workers, purchasers of the goods and services produced by minimum wage workers, and owners of firms employing minimum wage workers. The burden of WFF falls heavily on households in the 8th, 9th and 10th deciles. Both versions will have negative effects on the overall economy, but spreading it through the tax system at least tries to minimise the overall deadweight costs of raising that next dollar of wage subsidy.
A higher minimum wage isn't going to result in Armageddon (but equally, in contrast to Branko Marcetic's take, it won't be all unicorns and rainbows either). I'll be interested to see how it plays out. However, I will reiterate that the latest international research (including research on youth minimum wages in Denmark, and the recent increase in the minimum wage in Seattle) suggests that minimum wages do lead to decreases in employment (see here and here). That contrasts a lot of earlier work that called into question the simple labour market supply-and-demand model.

At least though, there is some policy consistency. If you believe that higher minimum wages are a good thing (because presumably you believe that any resulting decrease in employment will be small), you should also be in favour of reducing immigration to boost the wages of unskilled or semi-skilled workers (see my post on that point here). And on that score, the new government is making the right noises (albeit with inconsistency between the Labour and New Zealand First party positions).

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  1. Replies
    1. Thanks Jim. Incidentally, your report on the living wage is on my must-read-soon list, so I hope to blog on that soon.