Home > Employment Relations > Pay > Minimum wage background papers

Other considerations

Consistency with the principles of fairness, protection, income distribution and work incentives

Table 13 shows the options assessed against the principles of fairness, protection, income distribution and work incentives. These principles are not weighted and the assessment does not take account of other impacts. An explanation of these principles and the benchmarks used to assess them is in Appendix 1. It is important to note that the principles do not include measures such as “forecast of constraint on job growth”.

Table 13: Options assessed against the principles of fairness, protection, income distribution and work incentives
Option Assessment against the principles[30]
$12.75 This option would erode existing levels of fairness for minimum wage workers when compared with other workers who are experiencing changes in average wages and protection for minimum wage workers who tend to have a relative lack of bargaining power to negotiate higher wages. Income distribution reduces relative to other workers whose income increases. Work incentives are impacted as there is an erosion of the difference between the minimum wage rate and benefit levels (which are adjusted annually in line with the CPI).
$13.00 This option will maintain current levels of fairness and income distribution and existing work incentives as it is an increase in line with the change in consumer prices and average wages. It may erode existing levels of protection.
$13.50 This option will increase existing levels of fairness and income distribution. It may increase or maintain work incentives, as it is likely to have a higher percentage increase than benefits. The size of the increase is greater than movements in average minimum wages in collective agreements so it is likely to improve current level of protection.
$15.00 This option will strongly improve relative levels of fairness, protection, income distribution and work incentives as the increase is higher than the benchmarks used for comparison.

Comparison with international benchmarks

Internationally, minimum wage levels vary. There are a number of factors that might contribute towards cross-country differences in minimum wage levels. In many countries, despite the economic recession, minimum wages have continued to increase, either as the result of long-term adjustment plans or reviews of their domestic economic and labour market situations[31]. This year developed countries, such as the United Kingdom, Australia, Canada, Turkey, and Poland, increased their minimum wage rate.

Among the 21 OECD countries, seven countries (Australia, Belgium, France, Ireland, Luxembourg, Netherlands, and the United Kingdom) have higher minimum wage rates than New Zealand. If we compare the monetary value of the minimum wage across countries by using purchasing power parity (PPP)[32], New Zealand’s minimum wage ranks seventh amongst the OECD countries.

Table 14: Comparison of minimum wage levels, by country, 2009
  Hourly rate in local currency Hourly rate in NZ$[33] In NZ$ using PPPs Date of last up rating Age full minimum wage usually applies
France € 8.82 $19.44 $15.90 Jul 09 18
Australia AU$14.31 $17.85 $15.63 Oct 08 21
Belgium € 8.41 $18.54 $15.16 Oct 09 21
Netherlands €8.07l $17.79 $15.03 Jul 09 23
United Kingdom £5.80 $14.35 $14.41 Oct 09 22
Ireland € 8.65 $19.07 $13.49 Jul 07 20
New Zealand NZ$12.50 $12.50 $12.50 Apr 09 16
Canada[34] C$9.08 $12.63 $12.18   16
United States US$7.25 $11.43 $11.85 Jul 09 20
Spain € 4.89 $10.78 $10.14 Jan 09 16
Japan JPY713 $12.04 $9.00 Oct 09 15/18
Greece € 4.13 $9.10 $8.65 May 09 15
Portugal € 2.59 $5.71 $5.91 Jan 09 16

Source: The UK Low Pay Commission Report on minimum wage 2010[35]

As a proportion of the average wage, New Zealand’s minimum wage is high compared to other OECD countries. As at 2008, New Zealand’s minimum wage was the second highest of 21 OECD countries with available data, second only to France.

The Department considers that a comparison with Australia is useful due to its close economic connections to New Zealand and the relatively free movement of labour between the two countries. The Australian Federal minimum wage increased by 4.8% from AU$14.31 to AUS$15.00 following the 2009-2010 review. This equates to NZ$19.31 on 1 November 2010[36]. According to the Australian Bureau of Statistics, the average wage in Australia in 2010 is AU$64,641, making its minimum wage about 45.2% of the average wage. The New Zealand minimum wage is 49.5% of the hourly average wage.

Submitters’ views on minimum wage levels compared with international benchmarks

Submitters expressed a variety of opinions on the appropriate level and setting for the minimum wage in relation to other countries’ minimum wages. The NZCTU states that Australia’s minimum wage is considerably higher than New Zealand’s in whatever terms it is compared; and this is damaging to the New Zealand economy as it results in net outflows of people to Australia. The New Zealand Nurses Organisation submits that the minimum wage is the only factor protecting New Zealand’s labour market from further disparity with comparable OECD countries, particularly Australia. The Mayors’ Taskforce for Jobs commented that continued minimum wage protection is necessary to avoid increasing wage disparities between Australia and New Zealand.

Federated Farmers considers that further increases in the minimum wage will hinder productivity growth and work against the Government’s goal of closing the income gap with Australia.

Changes in the minimum wage compared against the CPI and PPI 

Figure 2 illustrates how changes in the adult minimum wage have been tracking against three other benchmarks since 1997/98: average wages, PPI and CPI. The minimum wage had been increasing at a faster rate than those benchmarks shown until 2008. Over 2006-2008, the minimum wage rates rose sharply as the Government made increases to reach an adult minimum wage of $12.00 an hour in 2008. The increases were higher than changes in inflation and average wages. This was in part seen as “catching up” following little change to the minimum wage rates over the 1990s.

Since 2008, the Government has made modest increases to the minimum wage in line with changes in the CPI. The increases have been lower than increases in the average wage.
Figure 2: Average wage, Producers Price Index (outputs), Consumers Price Index and the adult minimum wage (2000/01=100)

 

Source: Statistics New Zealand

Impact on the rate of non-compliance

It is possible that increasing the minimum wage may increase non-compliance with the minimum wage legislation.

Over the last ten years there has been an increase in the proportion of individuals reporting below minimum wages in the New Zealand Income Survey. For example, the share of 16 and 17 year olds below the minimum wage increased from around 5% in 1999 to 16% in 2004; 18 and 19 year olds below minimum wage increased by over 20 percentage points between 2000 and 2006; and between 2004 and 2006, 20 to 24 year olds paid below minimum wage increased by 4 percentage points and 25 to 64 year olds by 2 percentage points.

Using existing data sources it is not possible to identify whether an increase in the share of workers reporting below minimum wages is caused by an increase in exemptions of the minimum wage, measurement error or non-compliance. The Department considers that growth in the proportion of below minimum wage workers appears to be short-lived and is related to when the minimum wage increase impacts a relatively large share of the workforce.

A rise in the proportions of workers below minimum wages can be expected with high increases in the minimum wage. However, over the last couple of years the increases in the minimum wage have slowed while the proportion of workers below the minimum wage continue to rise at an accelerated pace.

The Department will continue monitoring the proportion of workers reporting below minimum wage rates in case this does not decline as expected.

Assessment criterion 2: Other income and employment-related interventions

Assessment criterion 2 considers changes in the minimum wage as part of the broader package of income and employment-related interventions. For this assessment criterion, the Department has considered various government interventions and their effects.

Interface with other government interventions

There are a range of government interventions and initiatives aimed at protecting employment and increasing incomes. These interventions encompass labour market policies, the taxation system, and education and training policies, among which taxation generally has a more direct impact on low paid people.   

Taxation

The progressive nature of the individual income tax system in New Zealand generally ensures that those on the lowest incomes pay a smaller proportion of their income in tax than individuals on higher incomes. Furthermore, families with dependent children on low to middle incomes can receive tax credits to boost their net family income to help meet the costs of raising a family. Individuals who do not qualify for the Working for Families tax credits, or for New Zealand Superannuation or an income-tested benefit, may qualify for the independent earner tax credit. The independent earner tax credit is $10 a week for individuals earning between $24,000 and $44,000 a year. The credit abates at 13% for income over $44,000. Individuals with a student loan are required to pay 10% of their income over $19,084 towards repaying their loan.

The rates of tax on individual incomes recently decreased. The rates for those on low incomes dropped from 12.5% to 10.5% for income up to $14,000 a year and from 21% to 17.5% for income between $14,000 and $48,000 a year. The decrease in individual income tax came into effect from 1 October 2010. At the same time the rate of GST payable on goods and services increased from 12.5% to 15%. The net result from these two changes for those earning around the minimum wage is expected to be a small increase in disposable income[37].

To compensate for the expected impact on living expenses of the increase in the GST rate, from 1 October 2010 the rates of the family tax credit were increased by 2%. From 1 April 2011 the rate of the minimum family tax credit will be increased to reflect inflation in the 2010 calendar year. Working families with dependent children will have their net family income topped up to $427 (equivalent to a gross weekly income of $495).

The Department recognises that these interventions and initiatives play an important role in supporting New Zealanders, especially those in need. However, the Department considers that because minimum wage increases benefit all minimum wage earners, irrespective of their family status, the minimum wage continues to usefully complement other instruments to improve the income levels of low income workers and households.

 


Footnotes

[30] The principles do not include other impacts such as “forecast of constraint on job growth”. (Please see Table 1 for this information).

[31] ILO (2009) Global Wage Report.

[32] PPP measures the monetary amount needed to buy the same representative basket of consumer goods and services in each country and allows a more accurate comparison of standards of living across countries than exchange rates.

[33] Exchange rate source Reserve Bank New Zealand average rates for 2009

[34] Operative date varies by province.

[35] Information can be accessed at www.lowpay.gov.uk

[36] Based on an exchange rate of 0.7769 from New Zealand Reserve Bank.

[37]  Someone on a minimum wage might be better off by around $2 - $6 a week depending on how much of their income is spent on rent.