The minimum wage increase and the 'right' measure of inflation

The minimum wage increases to $15.75 per hour on 1 April. The New Zealand Herald had an interesting article yesterday on this:

It will deliver $65m a year in higher wages for the 119,500 people now earning below $15.75 an hour - implying that private employers will have to pay about $35.6m extra on top of the extra cost to taxpayers.

The 3.3 per cent increase from the current minimum of $15.25 a year is at the high end of expectations, considering that consumer prices rose by only 0.4 per cent in the year to last September.

Business NZ urged the Government to keep increases to "no greater than inflation as measured by the consumers price index" until a full review of the minimum wage policy.

Should we be comparing the 3.3 per cent increase in the minimum wage to the 0.4 per cent increase in consumer prices? I argue not, for three reasons.

First, and most obviously, new inflation data out today shows that the annual rate of inflation in the December year was actually 1.3 per cent. But this is far from the most important reason.

Second, the CPI measure of inflation does not take into account the (rapidly rising) cost of home ownership, so certainly understates the increase in the cost of living. And as noted by the New Zealand Initiative, reported here:

New Zealand is not really suffering from an "inequality crisis" but instead a crisis of rising housing costs hurting the poor more than the rich...

That's still not the most important reason though, since I imagine that most people earning the minimum wage are not homeowners (at least, not in Auckland given the out-of-control house prices there!). Rents are included in the CPI, so it probably does reflect changes in the cost of living for renters on the minimum wage.

Third, and most important, the CPI measures the level of consumer prices for all consumers on average. And no one is an average consumer. Fortunately, Statistics New Zealand now publishes a series of household living-cost price indexes. The latest data is from the September 2016 quarter (when overall the CPI increased by 0.3 per cent), so we can expect the latest numbers when they are released to be somewhat higher. The great thing about these indexes is that they show the change in prices experienced by different households, including by income level. This is based on the prices most relevant to households within that group (so you can look at a price index for beneficiaries, superannuitants, etc. as well as by income quintile).

Someone on the minimum wage full-time is likely to be in the lowest income quintile (the bottom 20% of income earners). For the September quarter, their price index increased by 0.5 per cent, which was greater than the 0.1 per cent for all households (and the 0.3 per cent for the second quintile). In fact, in almost all quarters going back to the start of that data in 2009, lower income households have experienced a higher rate of price inflation than all households on average.

So, quite apart from arguing that we should be narrowing the gap between the minimum wage and a living wage (however measured), it is appropriate that the minimum wage rises faster than the overall increase in consumer prices, simply because the prices relevant to lower income households generally have been rising faster than the rate of inflation overall.