Regulatory Impact Statement - Minimum Wage Review 2009
STATUS QUO AND PROBLEM DEFINITION
Overview
The Minister of Labour has a statutory duty to review the minimum wage rates every year. Subsection 5(1) of the Minimum Wage Act 1983 states that "The Minister of Labour shall, in each year ending on the 31st day of December, review any minimum rate prescribed pursuant to section 4 of this Act".
The minimum wage sets 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. It is part of the Government's general responsibility to prescribe socially acceptable minimum employment standards. It exists within the wider context of the range of policy measures and tools to support higher quality working lives, productive workplaces and income adequacy. These include the ReStart package, active labour market policies, the income tax system, the Working for Families package, the Youth Guarantee programme, employment legislation and sector specific initiatives.
Benefit rates are indexed to the Consumers Price Index and are likely to increase from 1 April 2010. This increase may reduce some people's incentives to work if the minimum wage is unchanged and impact on the alignment with the direction of proposed benefit reforms to encourage people into work.
There are formal international commitments that establish an explicit obligation on the Government to ensure an adequate minimum wage, including under the International Labour Organisation 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", and recommends that minimum wages should be set according to the "general level of wages prevailing in the country".
Current minimum wage rates
The current minimum wage rates are as follows:
- The adult minimum wage is $12.50 an hour. It applies to all employees aged 16 years and over who are not new entrants or trainees.
- The new entrants' minimum wage is $10.00 an hour. It applies to 16 and 17 year olds except for those employees who have completed 200 hours or three months of employment, whichever is shorter; or who are supervising or training other workers; or who are subject to the training minimum wage.
- The training minimum wage is $10.00 an hour. It applies to those employees aged 16 years and over who are undertaking at least 60 credits a year in a registered training programme.
Past minimum wage rates
Figure 1 shows the adult minimum wage rates since 2003.
Figure 1: Adult minimum wage rates 2003 to 2009
Figure 2 illustrates how the adult minimum wage has been tracking against three benchmarks since 1997/98: average wages, the Producers Price Index and the Consumers Price Index. In recent years the minimum wage has been increasing at a faster rate than these benchmarks. This followed a period over the 1990s where there were small or no changes to the minimum wage. Between 1997 and 2000 the three benchmarks increased at a faster rate than that of the minimum wage.
Figure 2: Average wage, Producers Price Index, Consumers Price Index and the minimum wage (2000/01=100)
Comparisons with income and international benchmarks
The minimum wage was last increased on 1 April 2009 by 4%, based on the change in consumer prices. Since then, consumer prices have increased by 1.9% (for the year to June 2009) and average total hourly earnings have increased by 4.5% (for the year to June 2009) resulting in a decrease in the real value of the minimum wage.
The current adult minimum wage of $12.50 an hour is significantly higher than the unemployment benefit for a single adult aged 18 to 24 years. The adult minimum wage is around two times higher than the benefit for a single adult aged 25 years or over (with no supplementary assistance such as the accommodation supplement[5]). Benefit rates are indexed to the Consumers Price Index and are likely to increase from 1 April 2010.
The current adult minimum wage is around 50.0% of average total hourly earnings ($25.09 an hour in the Quarterly Employment Survey, June 2009) and 64.2% of median total hourly earnings ($19.47 an hour in the New Zealand Income Survey, June 2009)[6].
Figure 3: Current adult minimum wage compared with other income benchmarks[7]
Internationally, minimum wage levels vary greatly. In many countries, despite the economic crisis, 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[8].
There are a number of factors that might contribute towards cross-country differences in minimum wage levels. Australia provides a useful comparison due to its close economic connections to New Zealand and the relatively free movement of labour between the two countries.
The current Australian federal minimum wage is AU$14.31 (which equates to NZ$17.86 on 14 January 2010[9]). The ratio of the minimum wage to median full-time wages is 54.4% for Australia[10] and 64.2% for New Zealand[11]. There was no change to the Australian federal minimum wage following their 2009 review.
One way of comparing minimum wages across countries is to convert their values to a common currency using nominal exchange rates (ERs) or purchasing power parity (PPP) exchange rates[12]. The following table from the Australian Fair Pay Commission compares the hourly value of minimum wages across 13 OECD countries using these methods[13].
| Country | National currency | Hourly rate AUD (ER) | Hourly rate AUD (PPP) | Date of last change |
|---|---|---|---|---|
| Australia | AUD 14.31 | 14.31 | 14.31 | Oct-2008 |
| Luxembourg | EUR 9.47 | 17.79 | 14.12 | Jan-2009 |
| France | EUR 8.71 | 16.37 | 13.75 | Jul-2008 |
| Netherlands | EUR 8.39 | 15.76 | 13.59 | Jan-2009 |
| Belgium | EUR 8.00 | 15.04 | 12.53 | Oct-2008 |
| UK | GBP 5.73 | 11.87 | 12.37 | Oct-2008 |
| New Zealand | NZD 12.50 | 10.11 | 11.76 | Apr-2009 |
| Ireland | EUR 8.65 | 16.25 | 11.53 | Jul-2007 |
| Canada | CAD 8.80 | 10.09 | 9.99 | - |
| US | USD 6.55 | 9.26 | 9.08 | Jul-2008 |
| Spain | EUR 4.20 | 7.89 | 7.59 | Jan-2009 |
| Greece | EUR 4.05 | 7.60 | 7.53 | Sep-2008 |
| Portugal | EUR 2.60 | 4.88 | 5.13 | Jan-2009 |
Source: Fair Pay Australia, Minimum Wage Decision No 2/2009 and Reasons for Decision July 2009. Available at www.fairpay.gov.au[14]
Note: AFPC calculations based on nominal exchange rates (ER) and purchasing power parity (PPP) exchange rates. For countries that do not have an hourly rate, the minimum rate has been converted to an hourly basis assuming a working time of 8 hours per day, 40 hours per week. Average exchange rate over the month to 22 April 2009. PPPs are derived from the OECD Comparative Price Levels for February 2009. The hourly rate for Canada is the weighted average of the provincial/territorial rates. Date of last change varies between areas. The hourly rate for Spain, Greece and Portugal does not include annual supplementary pay of two additional months of salary for full-time workers.
Labour market conditions and outlook
This minimum wage review takes place amid an easing labour market and the beginning of an economic recovery following five quarters of recession. This outlook is based on the most up-to-date data available in January 2010 (including data from the September Household Labour Force Survey, business surveys and the commentary of economic analysts).
The New Zealand economy experienced a downturn over the five quarters to March 2009. The downturn was originally caused by domestic factors and then exacerbated by the onset of the global financial crisis in September 2008. This saw sharp falls in real Gross Domestic Product (GDP) in the December 2008 and March 2009 quarters. From its peak, economic activity fell 3.3% over five quarters. However, in the June 2009 quarter, the economy grew by 0.2% ending the longest recession for thirty years, making the recession both shorter and shallower than most forecasters had previously expected. Economic activity increased by 0.2% in the September 2009 quarter, confirming that the economy is continuing to recover, but in a subdued manner.
The downturn in the New Zealand economy has led to an easing labour market over the past two years. Since December 2007, employment has fallen by 1.6% and the unemployment rate has risen to a nine year high of 6.5%. Youth, Maori and Pacific peoples have been particularly affected by the rise in unemployment. The unemployment rate for Maori was 11.2% for the year to September 2009. This was considerably higher than the 8.0% of Maori who were unemployed in the year to September 2008. The unemployment rate for youth[15] increased to 14.9% for the year to September 2009, up from 10.5% recorded for the year to September 2008.
The outlook has improved significantly over recent months and there are clear signs of a rebound in the New Zealand economy. A number of leading indicators have continued to improve over recent months and point to further growth over the second half of 2009. Business confidence, as measured by both the National Bank Business Outlook and the Quarterly Survey of Business Opinion, is at the highest levels since 1999 when the economy was recovering from the Asian Financial Crisis. Rising net migration, increased activity in the housing market and a brighter global outlook all point to signs of recovery.
There is some uncertainty, however, about the shape of the economic recovery in New Zealand and globally. Most expectations are for a modest and gradual recovery in the New Zealand economy. Households accumulated significant debt over the last economic expansion and are attempting to reduce their debt by lowering their discretionary spending, which will delay significant boosts to domestic spending. Furthermore, weak global demand and the strong exchange rate are hindering the ability of the export sector to drive growth and compensate for a weak domestic sector. As a result, the economic recovery is not expected to be the classic "V" shaped recovery that has been seen in previous recessions where growth rebounded strongly.
Over the next two years, economic growth is expected to be positive but relatively subdued. The Treasury's December 2009 Half Year Economic and Fiscal Update also pointed towards a stronger fiscal and economic outlook than anticipated, with a gradual economic recovery led initially by domestic demand rather than by export volume. Real GDP is forecast by Treasury to rise 2.4% in the March 2011 year owing to higher consumer spending and a recovery in residential investment. Growth is forecast to accelerate to 3.2% in the March 2012 year owing to higher export volumes, and the Rugby World Cup and stronger world growth boost tourism. These growth projections are in line with NZIER's Consensus Forecasts. Most commentators now expect unemployment to peak at around 7% in mid 2010, a rate well below that of most of our trading partners and OECD averages.
Minimum wage impacts
As discussed more fully in the following sections, the minimum wage review is more likely to directly impact on:
- low paid workers particularly women (who make up 52.4% of minimum wage workers), Maori (15.8%), Pacific peoples (8.1%) and youth (51.7% of 18 to 24 year olds are on the adult minimum wage)
- the hospitality sector (32.7% of workers in this sector would be directly affected by an increase in the minimum wage to $13.10 an hour), retail trade (22.7%) and agriculture (9.6%), and
- small and medium-sized businesses.
There may be indirect impacts if employers pass on wage increases to other workers to maintain relativities with minimum wage workers. Research indicates that firms will respond in a number of ways to minimum wage increases. The most common response is to reduce wage relativities across staff[16]. The sectors most affected by minimum wage increases (the retail and hospitality sectors) had more scope to raise prices, as they supply non-tradable products to the domestic market, and so can do this to offset an increased wage bill.
Footnotes
[5] Those on the unemployment benefit may receive an accommodation supplement, the amount of which depends on the level of rent, board or mortgage they pay. Depending on location, some people will receive a significantly higher accommodation supplement than others. People on minimum wages or low incomes may also receive an accommodation supplement.
[6] The QES average and the New Zealand Income Survey (NZIS) average differ because of the relative weight given to part-time and full-time wages. The NZIS mean is an average of average wages over all workers and both part- and full-time workers (and their wages) carry equal weighting in that average. The QES is effectively the average of all wages paid over total hours worked, so full-time workers, who work more hours and are higher paid, are more heavily weighted in the average. The QES average also excludes the agriculture and fishing sectors that generally pay a lower than average wage, thereby lifting the average measured in that survey.
[7] UB stands for unemployment benefit.
[8] International Labour Organisation (2009) Global Wage Report Update 2009.
[9] Based on an exchange rate of 0.8012 from New Zealand Reserve Bank.
[10] Source: Employee Earnings, Benefits and Trade Union Membership, Australia, Aug 2008, using median full-time weekly earnings. Calculation is based on a 38 hour week for the minimum wage.
[11] Using the New Zealand Income Survey, June 2009
[12] Purchasing power parity calculations attempt to compensate for differences in the cost of living across countries.
[13] http://www.fairpay.gov.au/
[14] Sources: Wage rates
- The Federation of European Employers [external link]
- Department of Labour, New Zealand
- Canada [external link]
- Department of Labour, USA [external link]
- Low Pay Commission, UK [external link]
- Ministry of Social Affairs and Employment, The Netherlands [external link]
- ER Reserve Bank of Australia [external link, excel spreadsheet]
- PPP Organisation for Economic Co-operation and Development [external link, pdf file 50KB, 2 pages]
[15] Aged 15 to 24 years
[16] Dalziel P. et al. (2006) Firm Responses to Changes in the Minimum Wage AERU Research Unit, Lincoln University. Available from the Department of Labour on request.