Home > Employment Relations > Pay > Minimum wage background papers > 2010

Appendix 1:  Cabinet approved objective and assessment criteria

Background

In December 2007, Cabinet directed the Department to undertake a further examination of the objectives for the minimum wage, to ensure they remain applicable and supportive of the Government’s goals [POL MIN (07) 28/24 refers].

In September 2008, Cabinet agreed to a new overarching objective for the annual minimum wage review [POL MIN (08) 16/21 refers].

Overarching objective

“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”

Assessment criteria

  1. “the extent to which any change to the minimum wage would produce gains that are more significant than any losses”
  2. “consideration of whether a change to the minimum wage would be the best way to protect the lowest paid in the context of the broader package of income and employment-related interventions, and would meet the broader objectives of government”

Factors to be considered in relation to the first assessment criterion

  1. consistency with the principles of fairness, protection, income distribution, and work incentives
  2. comparison against international/OECD benchmarks
  3. comparison of the level of the minimum wage, and any proposals to change that level, against other income benchmarks (benefit rates, the minimum rate of wage averaged across collective agreements, the producers price index, median wages, and average wages).  This analysis can also provide a measure of any changes in income inequality
  4. consideration of forecast social and economic impacts relevant to changing the level of the minimum wage including:
    1. the positive and negative impacts on those most likely to be low paid including: women, new migrants, Māori, Pacific people, part-time workers, temporary workers, those with a disability, and young people, including any (dis)incentive effects for young people to choose low paid employment or additional education and training
    2. the net effects after corresponding withdrawal of social assistance
    3. impacts on the gender pay gap
  5. consideration of the forecast labour market/economic conditions and impacts (together with a range of possible economic conditions) relevant to changing the minimum wage including:
    1. earnings and the wage bill
    2. employment and unemployment
    3. labour productivity
    4. the number of employees and the hours they work
    5. industry sectors
    6. Gross Domestic Product and inflation
  6. potential impacts on the rate of non-compliance

Explanation of the principles

Fairness

To ensure that wages paid are no lower than a socially acceptable minimum. There are two main views on what constitutes a socially acceptable minimum. The first option is to determine social acceptability as a proportion of how much other workers earn (e.g. average wages). The second option is to view social acceptability through determining the amount needed to maintain a set standard of living, adjusted for inflation. Benchmarks: average wages and CPI.

Protection

To offer wage protection to vulnerable workers so that workers are paid wages that reflect their worth or productivity. Workers may be “underpaid” on this measure when they have a relative lack of bargaining power, such as when they have limited bargaining strength (e.g. are not collectivised and unable to bargain for higher wages), or face risks in leaving and finding another job (e.g. poor English, disability), or have poor income or employment alternatives (e.g. they do not qualify for unemployment benefits). Benchmarks:  minimum wages paid under collective agreements.

Income distribution

To ensure that earnings of people on low incomes do not deteriorate relative to those of other workers. This is likely to reflect a preference that society has for the degree of wage (and income) equality, and this may promote greater social cohesion. The effectiveness of minimum wages to achieve this objective depends on whether employment effects occur, since the income of workers is significantly lowered where they may lose their jobs or have their work hours cut. The current minimum wage is about 50 per cent of average total hourly earnings and 64 per cent of median total hourly earnings (using the Quarterly Employment Survey). Benchmarks: changes in average and median wages.

Work incentives

To increase the incentives to work, for people considering work. Creating the correct incentives requires the minimum wage to be set at a level that makes work attractive compared to not working. The minimum wage needs to be above benefit levels (and associated employment costs such as childcare and transport costs that are payable by a worker). At some point, however, a higher minimum wage can frustrate work incentives through economic effects that restrict job opportunities available to low skilled workers. Benchmarks: benefit levels and costs associated with working.