This intervention responds to the 1 April increase in the New Zealand minimum wage, and considers the operation of the minimum wage policy in the wider context of a wages and incomes policy framework aimed at ensuring income adequacy.
Each increase in the New Zealand minimum wage is preceded by a formal, technical, review carried out to estimate the economic impact of an increase with a focus on modelling impacts on employment growth for each of a range of possible minimum wage increases. While there is a widespread assumption that the impact of rising minimum wages on jobs growth is negative, this assumption is, in fact, highly contested in the wider economic research literature on the subject, if not in the estimates presented to the Minister.
These estimates form the basis of recommendations to the responsible Minister about what the new rate should be. Thus, decisions about the extent of the increase, and criticisms of it, are ultimately driven by estimates of, and views about, the extent to which increasing the pay of people at the bottom of the income distribution might result in fewer of them being employed in future. Historically, the rate has not always been increased every year, but has been in recent years and looks set to do so, at least until 1 April 2021.
Any increase to the New Zealand Minimum Wage hourly rate is accompanied by complaints from employers, their representatives, and right wing commentators. The response of low paid workers and their advocates is generally one of qualified support: welcoming the fact of the increase while also noting its insufficiency.
Employers who lament the difficulty they have attracting people to work in the low paid jobs they offer, nonetheless meet the announcement of each legislated minimum wage increase with concerns about the jobs they say will be either lost or not created if they are required to pay people more. A less contradictory, but never stated, employer concern is the limit a legislated minimum wage places on their ability to drive wages down and take advantage of any increase in the unemployed. It was to counter this tendency among employers that minimum wages were established in the first place.
While the discussion and analysis accompanying the formulation and promulgation of minimum wage level adjustments remains at this superficial level, the broader questions of income adequacy, what this would be, and how it might be achieved, escape coherent consideration and discussion. The intention of this intervention is to begin that discussion.
In New Zealand the establishment of legislative frameworks supporting the enactment of minimum wages dates back to the Industrial Conciliation and Arbitration Act 1894, which was enacted to counter moves by employers at the time to drive down wages following the failure of the trans-Tasman Maritime Strike of 1890. Under that Act minimum wages were set on an industry-by-industry basis within a system of industrial conciliation and arbitration.
Subsequently, the setting of minimum wages in New Zealand has moved through a number of legislative iterations with the current being the Minimum Wage Act 1983. This sets national minimum hourly wage rates with the aim of establishing a floor for wages paid to employees. Minimum wage rates are set through an Order in Council made under section 4 of the Act. The Act requires the Minister for Workplace Relations and Safety to review the minimum wage rates by 31 December each year. Currently there is a minimum wage for adult workers (those aged 16 and above), and a lower rate for young people entering the workforce for the first time and others engaged in industry training.
The present Labour-led Government has a commitment to increase the adult minimum wage to $20 per hour by 1 April 2021, starting with the current increase of the minimum wage from $16.50 to $17.70 from 1 April 2019. When announced in 2017 the $20 target was higher than the NZ living wage level of $19.80 for the 2017-2018 year. But subsequent annual adjustments of the living wage have taken it past the minimum wage $20 target for 2021. For the current 2019-2020 year the living wage rate is $21.15, and on the basis of previous wage movement related annual increases the rate for the 2020-2021 year is likely to be in the region of $21.80, when the minimum wage will have reached its $20 target.
While the gap is narrowing between the minimum wage, as a wage floor to control downward pressure on wages, and the living wage, as a wage that meets minimum household spending needs, the relationship between a minimum wage and a living wage has not been clearly established or articulated in any coherent wages and incomes policy framework in this country.
The minimum wage and income adequacy
Minimum wage laws are in force in most OECD countries in line with the Industrial Labour Organisation’s Minimum Wage-Fixing Machinery Convention of 1928, which includes a requirement for an adequate minimum wage rate. However, the minimum wage laws of OECD countries vary in terms of levels, criteria, indexing and updating. The minimum wage levels of different countries are compared with reference to the minimum wage expressed as percentages of the countries’ gross mean and/or median wages. While there is no clear basis for establishing what an adequate wage rate would be, there is an implication that the minimum wage will have a poverty-reducing effect. However, when considering poverty and its reduction, the focus on a gross wage is unhelpful because the key income metric for defining poverty is disposable income.
Disposable income is the income remaining from gross income after the payment of taxes and receipt of any state or private transfers. This is the income that households and individuals have available to fund their consumption of goods and services and determines whether or not they can meet the costs of the basic necessities of life, live with dignity and participate as active citizens in society (to paraphrase the living wage criterion).
The relationship between gross and disposable income is mediated by the system of taxation and transfer payments by which income earners contribute to the common good by paying tax on their incomes and the incomes of low-income households are supplemented by means tested income transfers or tax credits. This mediation underlines the complementary roles of employers and the state in determining disposable income levels and adequacy.
If it is the case that a government defined and legislated minimum wage level is intended to be part of a wider incomes policy framework, the minimum wage and any increases should be set with reference to the tax and transfers levels, and vice versa. The fact that this is not presently the case in New Zealand is illustrated by the impact of the latest minimum wage increase on Working for Families tax credits eligibility. While minimum-wage earners without dependent children receive the full benefit of the $1.20 per hour increase, earners with dependent children do not, if their Working for Families tax credit eligibility is taken into account. This can be illustrated with the example of a two adult, two child household in which one adult works full time and the other half time, both in minimum wage jobs.
At the previous minimum wage rate of $16.50 per hour the one and one-half income earners with two children were eligible for annual tax credits of $12,116. After the increase to $17.70 per hour their annual tax credit eligibility falls by $1,092 to $11,024. Converted to an hourly value for a 52-week year and 40-hour working week the $1,092 represents 52.5 cents per hour lost from the tax credit available to the household. Subtracting the $0.525 tax credit loss from the $1.20 wage increase shows that this household type benefits by only 67.5 cents per hour from the minimum wage increase, while the government saves the 52.5 cents per hour equivalent, or $1,092 per year, it would otherwise have paid the household.
One stroke of the legislative pen has changed the income relativity between income earners with dependents and those without that was created by the current coalition government’s Families Package when first introduced. The change has been to the detriment of those with dependents. A coherent incomes policy framework would be designed to maintain such relativities by adjusting tax credit eligibility thresholds in conjunction with increasing minimum wage levels.
Peter King is a Researcher at Economic and Social Research Aotearoa, Principal Researcher at Parallax Research, and has carried out research for the New Zealand Living Wage Campaign to identify an appropriate living wage level.