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Background and context

This section sets out the current minimum wage rates, the legislative background, international obligations, the Government’s objective for the minimum wage, the economic context in which this review occurs, and labour market conditions.

Current minimum wage rates

The current minimum wage rates, which are prescribed in the Minimum Wage Order 2010 and took effect from 1 April 2010, are set out below:

Under legislation, the new entrants’ minimum wage cannot be set at less than 80% of the adult minimum wage.

The legal framework of the minimum wage review

The Minimum Wage Act 1983

Minimum wages are set through an Order in Council made under Section 4 of the Minimum Wage Act 1983 (the Act). The minimum wage provides a floor for wages paid to employees. It is an offence to pay less than the minimum wage.

Where a minimum wage is set, the Minister of Labour has a statutory obligation under Section 5 of the Act to review the level of the minimum wage by 31 December each year.

By convention, the Minister of Labour makes a recommendation to Cabinet based on the Department’s advice. Should Cabinet decide to increase the minimum wage rates, the Governor-General will give effect to the changes through an Order in Council. Historically, any increases come into effect on or before 1 April.

International obligations

The minimum wage is part of the Government’s general responsibility to ensure socially acceptable employment standards that are prescribed and enforceable. Additionally, there are formal international commitments that establish an explicit obligation on the Government (as a member state) to ensure an adequate minimum wage, including under the Minimum Wage-Fixing Machinery Convention, 1928 (International Labour Organisation (ILO) Convention 26). This convention obliges the Government to create minimum wage-fixing machinery where “no arrangements exist for the effective regulation of wages … and wages are exceptionally low”. It also recommends that minimum wages should be set according to the general level of wages prevailing in the country, taking account of the necessity to enable the workers concerned to maintain a suitable standard of living. According to the ILO, “The ultimate test of any minimum wage system is its acceptability and effectiveness at a given period of time and its ability to meet the different needs of all parties concerned” [5].

The Government’s objective for the minimum wage

The Government’s objective for the minimum wage is: “to set a wage floor that balances the protection of the lowest paid with employment impacts, in the context of current and forecast labour market and economic conditions and social impacts” [CAB Min (08) 35/4 refers]. The minimum wage objective and related criteria provide a framework for assessing the options for the minimum wage (see Appendix 1).

Level of the current minimum wage relative to other benchmarks

The current adult minimum wage of $12.75 an hour is significantly higher than the unemployment benefit for a single adult aged 18 to 24 years ($4.60[6] an hour based on a 40 hour week). The benefit for a single adult aged 25 years or over is $5.52 an hour (based on a 40 hour week). These benefit amounts do not include any supplementary assistance, such as the accommodation supplement or temporary GST assistance.

The current adult minimum wage is around 49.5% of average total hourly earnings ($25.75 an hour in the Quarterly Employment Survey, September 2010) and 63.75% of median total hourly earnings ($20.00 an hour in the New Zealand Income Survey, June 2010).

The current adult minimum wage is lower than the average minimum weekly adult wage in collective agreements. According to the Industrial Relations Centre at Victoria University, the average minimum weekly wage in collective agreements is $576 a week[7]. This equates to $14.40 an hour for a 40 hour week. See Figure 1 on the following page for a comparison of the minimum wage options against other income benchmarks.


Figure 1: Adult minimum wage options compared with other income benchmarks

Economic context: labour market conditions and outlook, November 2010

The current review of the minimum wage takes place amid a slowly recovering labour market following five quarters of recession in 2008/09. This outlook is based on the most current data available to the Department. The main sources of information are Statistics New Zealand, business surveys, and market views.  

As a result of both domestic and global factors, the New Zealand economy contracted over the five quarters to March 2009 with real GDP falling by a total of 3.5%. This made it both the longest and deepest recession for thirty years. However, while the impact of the global financial crisis on New Zealand was significant, it was smaller than for most developed nations. New Zealand’s performance was supported by a sound financial system, growth in key trading partners (particularly China and Australia), high commodity prices, positive net migration, and significant monetary and fiscal stimulus.

These factors also helped pull New Zealand out of recession in the June 2009 quarter although the recovery so far has been mild, particularly compared to previous upturns. Although it has been five quarters since the recession ended, activity remains 1.5% below its pre-recession peak.

The recovery has been led by the export sector aided by strong commodity prices, robust growth from Asia and a favourable exchange rate with Australia. The latter has contributed to stronger than expected performance by some manufacturing industries servicing the Australian market.  

In contrast, domestic demand remains subdued. Households continue to be cautious with growth in consumer spending low and activity in the retail sector weak. Weakness in the housing market, low wage growth and many households choosing to repay debt, or save, is constraining economic activity in sectors such as retail and hospitality. We expect growth in these industries to remain relatively mild with households likely to continue to be cautious over 2011, although the Rugby World Cup in late 2011 will provide a one-off boost to these sectors.

The general view is that inflationary pressures in the economy are low and little pressure is expected from wage cost-push as the labour market remains weak. However, GST and other one-off increases will temporarily boost domestic inflation (as measured by the Consumers Price Index, CPI) towards 4.5% in mid-2011. It is not clear whether the one-off increases in headline inflation will affect price and wage setting behaviour.

The downturn in the New Zealand economy led to an easing in the labour market during 2008 and 2009 with employment falling by 2.4% from peak to trough and the unemployment rate rising to a ten year high of 7.1% in the December 2009 quarter. While the rise in unemployment was strong, it was from a position of a 22-year low of 3.5% before the recession hit. Therefore, despite the unemployment rate more than doubling, it remains below the 7.9% peak recorded in the 1997/98 recession and the 11.2% peak recorded in the early 1990s.

The labour market appeared to turn the corner in late 2009/early 2010. Although labour market data has been volatile recently, the unemployment rate has gradually fallen from 7.1% in the December 2009 quarter to 6.4% in the September 2010 quarter. Employment on the other hand has risen by 1.8% over the year to September 2010. This confirms that the labour market recovery is well under way.

Economic growth is expected to remain relatively weak in the September 2010 quarter, with the average prediction in New Zealand Institute of Economic Research (NZIER) Consensus Forecasts for a 0.7% increase. A number of forward-looking indicators, such as business confidence, eased over the September 2010 quarter suggesting economic growth was low over this period. Furthermore, disruptions from the Canterbury earthquake will act as a drag on growth, with initial estimates from the Treasury estimating it could take 0.4 percentage points off economic growth in the September 2010 quarter.

However, economic growth is expected to pick up over 2011 on the back of robust trading partner growth, high commodity prices, and reconstruction activity in Canterbury. The 2011 Rugby World Cup will also support activity over the next year. These factors are expected to see the economy grow by more than 3% over 2011.

Further, the Department expects the labour market to continue to slowly improve over the next year. The November National Bank Business Outlook showed a net 11.5% of firms intend to increase staffing levels over the next year. This is above the long-term average of a net 6.0% and points to above average employment growth. This is expected to see the unemployment rate trend down gradually over the next year, falling to around 6.0% in mid-2011. An unemployment rate of below 6.0% is historically low and highlights that despite the rise in unemployment over recent years, we predict there will be little spare capacity in the labour market by the end of 2011.

Impact on employers of the 1 April 2010 minimum wage increase

From 1 July to 6 August 2010, the Department of Labour conducted a survey of 1,766 employers on their attitudes and practices around the change to minimum wage rates in 2010[8]. The survey results were scaled up to represent the entire New Zealand employer population with the exception of Agriculture, Horticulture, and Fisheries industry.

The survey found that 94% of employers were aware of the April 2010 changes to minimum wage rates and that 20% of employers had paid someone at the minimum wage in the past year. When asked if the 2010 changes had impacted upon their business just under 88% of employers indicated that their business was not affected by the changes (other than increasing the wages of those on the minimum wage)[9].

Employers who reported hiring at the minimum wage in the past year were more likely to report being affected by the changes. Of the total of all businesses, 20% of employers who had in the past 12 months hired someone at the minimum wage a total 7.3% reported an impact. A total 4.4% of non-minimum wage employers reported being impacted. Chart 1 below summarises this.

Of the 12% of businesses that reported that their business was affected by the 2010 changes; a number of them reported multiple impacts. A total of 7.7% reported absorbing the additional costs. Just over a total of 4.2% of businesses said that they increased the wages of other staff not on the minimum wage as a result of the changes. Very few employers, at around a total of 1% reported passing costs onto the consumer while a total of 1% reported changing their hiring practice, either recruiting fewer staff or hiring more experienced staff. No-one reported redundancies. Table Two, below, summarises these findings[10].

Table 2: Responses of businesses which reported being affected by the minimum wage changes in 2010
Responses Total % of all NZ employers Minimum wage employers Non minimum wage employers
Absorb costs 7.7 5.7 1.9
Increase the wages of staff not on the minimum wage 4.2 1.8 2.4
Pass costs onto the consumer 1.4 0.8 0.6
Recruit fewer or hire more experienced staff 1.2 0.5 0.7
Tighten costs in other ways 0.7 0.4 0.4
Reduce hours of some employees 0.2 0.2 0
Raise productivity to offset costs 0.1 0.1 0
Redundancy 0 0 0

Chart 1 Proportion of all New Zealand employers reporting on the impact of the minimum wage[11]


Footnotes

[5] International Labour Organisation (1998) “Minimum Wage Fixing: A Summary of Selected Issues”, Briefing Note No.14.

[6] This conversion is only provided for comparative purposes and does not reflect any policy position or view.

[7] Stephen Blumenfeld and Peter Kiely (2010) “Employment Agreements: Bargaining Trends & Employment Law Update 2008/2009”, Wellington.

[8] This survey had a total sample of 1,766 employers, with a weighted sample of 1,762 employers. It represents the range of industries in the New Zealand economy with the exception of the Agriculture, Horticulture and Fisheries industry.

[9] Please note this is because they replied no to the question: Did this rise have an effect on your business? In other words, it is the perceptions of the effect of the changes, not actual, verifiable changes.

[10] Note that this is a weighted sample and that affected businesses could give more than one response when asked about the effects of minimum wage changes on their business.

[11] The range of industries in the New Zealand economy with the exception of the Agriculture, Horticulture, and Fisheries industry.