Regulatory Impact Statement - Minimum Wage Review 2009
Options
Five options have been considered and assessed for this year's review. These options are set out in Table 2 below.
| Option | Adult minimum wage (an hour) | New entrants' minimum wage & Training minimum wage (an hour) |
|---|---|---|
| Option 1 | $12.50 (status quo) | $10.00 |
| Option 2 | $12.75 (2.0% increase)[17] | $10.20 |
| Option 3 | $13.10 (4.8% increase)[18] | $10.50 |
| Option 4 | $15.00 (20.0% increase)[19] | $12.00 |
| Option 5 | $16.75 (34.0% increase)[20] | $13.40 |
The options considered are broadly consistent with the options considered in last year's minimum wage review.
Option 2 is based on an increase in line with the change in consumer prices. It seeks to maintain the real value of the minimum wage and its relativity with benefits. Option 3 is based on an increase in line with the change in average wages. It seeks to maintain relativity with workers who have experienced average wage increases.
Option 4 was suggested by some submitters. It also provides a mid-point between options 3 and 5. Option 5 is two-thirds of average wages. This has been the recommended option by unions in previous reviews.
No other feasible options were raised in submissions. Some unions suggested $16.87 an hour, however, this option was not considered. It is likely to have similar impacts as option 5.
Overall assessment of the options
Impact on employment
Empirical evidence of the impact of minimum wage increases on employment, unemployment and hours of work is mixed. Research suggests that modest increases in the minimum wage may improve the livelihoods of low wage workers without adverse consequences[21]. However, employment can be reduced if minimum wages are set at too high a level[22].
There is a mix of views on the effects of the minimum wage on employment levels. The ILO has found that whether a minimum wage has a negative or a positive effect on employment depends on many factors such as, its relative level, the structure of the labour market and the country concerned[23].
Australian research indicates that the burden of increased unemployment falls disproportionately on identifiable demographic groups, especially those attempting to gain a foothold in the labour market and to maintain that position. These groups include young people, low skilled workers, and migrants from non-English speaking backgrounds. All these demographic groups have been identified as being more likely to be on minimum wages and at higher risk of unemployment[24].
Comprehensive research in the United Kingdom found little evidence to suggest that the increases in the minimum wage had led to reductions in employment or hours worked[25].
New Zealand research shows that firms may respond in a range of ways to minimum wage increases, for example, reducing wage relativities across staff, reducing paid hours per employee, tightening weekly rosters and not replacing workers who resign[26].
The Department of Labour is projecting job growth for the year to March 2011 to be 19,200 jobs (0.9%)[27]. This is an estimate of the number of extra jobs created in the economy. The Department has analysed the potential constraints on the projected job growth for the options considered (i.e. by how much job growth may be lower by under each option). The Department estimates that options 1 ($12.50) and 2 ($12.75) will have no constraint on employment growth. Option 3 ($13.10) may have a small constraint on employment growth (of between 400 and 900 jobs, or 0.02% to 0.04%). Options 4 ($15.00) and 5 ($16.75) will have more significant constraints on employment growth (between 5,400 and 8,100 jobs (0.3% to 0.4%) and between 10,100 and 14,800 jobs (0.5% to 0.7%) respectively).
Impact on low paid workers
Women, Maori, Pacific peoples and youth are more likely to be low paid workers. A modest increase in the minimum wage could have a positive economic and social impact for low paid workers through an increase in their income. The minimum wage can play an important role in maintaining income equity for low paid workers, who tend to have lower bargaining power and may only receive pay rises through increases in the minimum wage.
However, low paid workers may also be the first to experience any negative impacts that could result from a change in the minimum wage (e.g. reduced hours offered or substitution of some groups of workers for others).
The impact of a minimum wage increase on the gender pay gap would be minimal. If for instance the minimum wage was raised to $13.10 (option 3), then the gender pay gap narrows by a negligible amount from 85.6% to 85.7%. The level of potential impacts is similar to that of previous years.
The interplay between the minimum wage and the Working for Families package can have a combined impact on household incomes. An increase in the household income of families with children, as a result of an increase in the minimum wage rates, may result in a reduction in the amount of assistance a family may receive. Any reduction depends on current household income, the number and age of children in the household and the number of hours worked. The Department of Labour considered three scenarios that appear to be fairly typical of the groups that would be eligible for Working for Families assistance and likely to involve employment at the minimum wage. In the three scenarios there were increases in net household income the size of which increased as the minimum wage increased. The largest increases in income, and corresponding reductions in assistance, were for a family with one child engaged in seasonal work on the minimum wage.
Impact on youth
Over half of those earning the minimum wage are between 18 and 24 years of age. A high proportion of 16 and 17 year olds are also paid at or near the minimum wage. Therefore, an increase in the minimum wage is likely to affect a very large number of young people already in work. For example if the minimum wage was increased to $12.75, 49.1% of those employees directly affected will be aged between 18 and 24 years. Of those earning more than $16.75, only 8.7% are aged between 18 and 24.
Empirical evidence on the impact of minimum wage increases on youth employment is mixed. In 2004, the New Zealand Institute of Economic Research (NZIER) carried out a literature review on the youth minimum wage[28], which included four studies based in New Zealand[29]. The review says that, in general, no evidence was found of negative employment effects from minimum wage changes (with one exception[30]). However, it is important to note that there are a number of possible reasons why no evidence presents itself (e.g. data limitations or omitted variables problems)[31].
Examining the impacts of the changes to the youth minimum wage in 2001 and 2002, Hyslop and Stillman found a significant increase in the number of hours worked by 16 and 17 year olds but little impact on the hours worked by 18 and 19 year olds[32].
It is possible that increasing the minimum wage will increase the incentives for some young people to choose employment over continuing with secondary school education. New Zealand research on the impacts of changes in the minimum wage has found some evidence of a small decline in the educational enrolments of 16 to 19 year olds in the early 2000s[33]. Research has not been carried out on what effect more recent increases in the minimum wage may have had on enrolment rates. Figures from the Ministry of Education show that more domestic students studied at higher levels and in longer qualifications in April 2009 compared with April 2008[34]. This outcome is likely to have been significantly influenced by the wider economic climate and initiatives to encourage young people to continue in education, such as interest free student loans. The recently introduced Youth Guarantee programme is intended to encourage more young people to continue their education in a non-school setting or to undertake an apprenticeship.
Impact on industry sectors and firms
An increase in the minimum wage is likely to increase the wage bill for employers of minimum wage workers. The impact of minimum wage increases varies across industry sectors. Industries and firms that employ a large proportion of low paid workers will experience larger increases in their wage bill than other firms.
An increased minimum wage is likely to impact more on the retail and hospitality sectors and small and medium-sized enterprises. For example, if the minimum wage was increased to $13.10 (option 3) this could affect nearly a third of workers in the hospitality sector.
Options 2 ($12.75) and 3 ($13.10) are estimated to increase the weekly wage bill by 0.04% and 0.10% respectively. Options 4 ($15.00) and 5 ($16.75) will have a more significant impact on the weekly wage bill, increasing it by 0.96% and 2.55% respectively.
New Zealand research indicates the ways that firms may respond to minimum wage increases[35]. The most common response was to reduce wage relativities across their staff. Other responses included reducing the number of hours of work offered to staff, tightening employment policy, not replacing workers who resign, attempting to increase productivity, attempting to reduce costs, raising prices where possible, reducing profits and business closure. The response may also vary depending on the type of sector. For instance, service firms may not see any opportunity for offsetting reductions in other costs of their business, as most of their expenses are labour-related.
More generally, firms' responses were based on supply and demand variables. 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.
The research also found that firms regarded an increase higher than the rate of inflation as an adverse shock that needed to be managed.
Research from overseas suggests that increases may have a small negative impact on profitability, but found no evidence of it increasing the probability of firm closure[36].
Research has been undertaken into the patterns of firm-level teenage (16 to 19 years) employment in New Zealand between 1999 and 2007[37]. While teenage workers account for 7-8% of overall employment, they account for about twice that proportion in the four main teen employing industries: agriculture, forestry and fishing; construction; retail trade; and accommodation, cafes and restaurants. The research finds that the average effect of minimum wage increases for young workers on the typical firms' wage bills is likely to be small (0.5%) and about 1.5% for firms in the main teen-employing industries. However, for firms with teen-employment shares of at least 30%, the estimated impact on their wage bill may be around 4-5%.
Increasing the minimum wage could potentially impose compliance costs on employers, beyond the impacts already described, in adjusting payroll systems to meet the effects of an increase in the minimum wage.
Fiscal impact
There are a number of state sector employees and contractors on low wages, particularly in the public health and compulsory education sectors. Increases in the minimum wage are therefore likely to have direct (and possibly also indirect or "flow-on") costs for some state sector employers and state sector-funded employers. The Ministries of Health, Social Development and Education and the Accident Compensation Corporation have identified areas which are more likely to be impacted by changes in the minimum wage.
As well as impacting on wage costs, increasing the minimum wage might have other fiscal impacts. It is difficult, however, to assess the net effect of these impacts.
Social assistance costs through benefit payments may rise, if an increase in the minimum wage increases unemployment. Alternatively, higher incomes can increase the amount of income tax received and lead to the abatement of social assistance, such as Working for Families. In this situation, the "cost" is shifted from the Government to employers. There will be overall revenue implications, from both pay as you earn (PAYE) and businesses.
No change to the minimum wage may also have fiscal impacts, for instance, if it increases tertiary benefit support because the minimum wage does not meet living costs.
Ministry of Health
The Ministry of Health has identified two areas which rely heavily on minimum wage workers and which will therefore be most affected by an increase in minimum wage rates. These are disability support workers and aged care workers. In addition, minimum wage rises are likely to indirectly affect the mental health support workforce.
While workers in the mental health community support workforce are generally paid above the minimum wage, any rise in the minimum wage would put pressure on providers to maintain wage relativity between the community support workforce and minimum wage staff. The estimated 4,000 workers in the community support workforce are employed by NGOs, many of whom are contracted by DHBs. If the NGOs could not absorb an increase, this would, in turn, place pressure on the DHBs to provide the additional funding required. While this situation would have arisen in previous years due to increases in the minimum wage, this year NGOs may have less ability to absorb increases as many DHBs will constrain price increases to their NGO providers.
In the non-DHB health and disability sector, the Employment Court (the Court) has recently released a partial judgment that sleepovers performed by support workers in disability residential care facilities constitute 'work' for the purpose of the Minimum Wage Act 1983. Mitigating arguments around averaging of pay over a pay period have not been accepted by a subsequent majority decision of the Court. The decisions are likely to be appealed.
Dependent on any future appeals, any rise in the minimum wage is likely to affect the cost of sleepovers. This will increase the level of financial risk to the sector (especially if the Court rules that payment for sleepovers must be backdated six years as allowed by the statute of limitations). Also, any rise in the minimum wage may add to the financial impact of providing sleepovers where residential care providers are paying at or near the minimum wage for ordinary hours of work.
Ministry of Social Development
The Ministry of Social Development (MSD) advises that any increase in the minimum wage will impact on the Home Help programme (a non-taxable payment that provides financial assistance to people who require temporary part-time home help to complete tasks normally performed in the home such as laundry, housework and food preparation). An increase in the minimum wage to $12.75 an hour would add approximately $45,000 per annum to the costs of the Home Help programme while an increase to $13.10 an hour would add approximately $110,000 per annum to the costs of the Home Help programme.
An increase in the minimum wage will have fiscal implications for the Community Max and Job Support Scheme initiatives as these programmes provide assistance based on the minimum wage of $12.50 an hour.
Community Max
Any increase in the minimum wage will have an impact on Community Max because the Community Max wage subsidy is paid at the adult minimum wage rate. Any increase in the minimum wage rate therefore means that the total cost of providing 3,000 places would increase.
However, at this stage MSD considers that there may be sufficient funding available within the appropriation (from funding allocated for training and supervision expenses) to allow the original 3,000 Community Max places to be provided if the minimum wage increases to either $12.75 or $13.10. An increase to either $15.00 or $16.75 would either require additional funding to cover the cost of the 3,000 places or a reduction in the number of Community Max places.
Job Support Scheme
While an increase in the minimum wage would have an impact on Job Support Scheme funding, there is sufficient funding from the amount originally appropriated for the Job Support Scheme to cover any increased payments that may be required as a result of an increase in the minimum wage.
Ministry of Education
The Ministry of Education estimates that an increase in the minimum wage is unlikely to have a fiscal impact on the approximately 51,000 teaching positions funded by Vote: Education and Early Childhood Education Funding Rates. However, except for option 2 ($12.75 an hour), an increase is likely to have a direct fiscal impact on funding the 27,000 non-teaching positions in state and integrated schools. Increasing the minimum wage to $15.00 or $16.75 is also likely to impact on some Kindergarten teaching positions. There are also likely to be additional fiscal impacts from workers seeking to restore relativities.
Accident Compensation Corporation
Raising the minimum wage to $12.75 or $13.10, will have limited impact for ACC as it provides an entitlement to clients of around $13.82 an hour, for home care and support services. This allows clients to pay carers $12.50 an hour and contribute the remaining $1.32 to other employment entitlements such as annual holidays and sick leave. Any increase to the minimum wage will reduce this contribution towards other employment entitlements. Increases to $15.00 or $16.75 an hour will have a significant impact on the cost of these services.
Footnotes
[17] Based on the movement in consumer prices for the June 2009 year (1.9%), rounded up to the nearest $0.05.
[18] Based on the movement in average total hourly earnings for the June 2009 year (4.5%), as measured by the Quarterly Employment Survey, rounded up to the nearest $0.05.
[19] This option arose from the consultation process.
[20] Based on total average hourly earnings of $25.09 in the Quarterly Employment Survey June 2009, rounded up to the nearest $0.05.
[21] See for example, the Economic Policy Institute Briefing Paper 3178 Minimum Wage Trends: Understanding past and contemporary research. Available at http://www.epi.org/. And International Labour Organisation (2008) Revisiting the minimum wage in the enlarged European Union. Available at: http://www.ilo.org/.
[22] http://www.oecd.org/ [pdf file 132KB, 13 pages].
[23] Youcef, Ghellab. “Minimum Wages and Youth Unemployment”, ILO, 1998. p.58.
[24] J Healy and S Richardson, A Strategy for Monitoring the Micro-Economic and Social Impacts of the Australian Fair Pay Commission, Research Report No. 4/07, National Institute of Labour Studies, report commissioned by AFPC, 2006, p. 12.
[25] Low Pay Commission Report (2009) National Minimum Wage. Available at www.lowpay.gov.uk
[26] Dalziel, P et al (2006). Firm Responses to Changes in the Minimum Wage, Canterbury, AERU Research Unit, Lincoln University. This is available from the Department on request.
[27] Some commentators are predicting that there will be a "jobless recovery". This is not incompatible with our projection of job growth for the year to March 2011. It depends on what commentators mean by a "jobless recovery". To the Department's knowledge, most commentators use the phrase "jobless recovery" as the Department does, that is that the bulk of recovery (recovery in GDP) will come from increased hours rather than workers, not that employment will not grow. Growth of 19,200 jobs over a year is well below our long-term average of 50,000, and GDP is currently expected (both by the Treasury and Consensus Forecasts) to grow by around 2-3% over this period. The Leading Indicator of Employment is predicting that employment will commence growth in the June 2010 quarter.
[28] NZIER (2004) The Youth Minimum Wage: a literature review and analysis.
[29] References for these papers are: Maloney T. (1994) Does the Adult Minimum Wage Affect Employment and Unemployment in New Zealand? University of Auckland Working Papers in Economics 137. Chapple S. (1997) Do Minimum Wages Have an Adverse Impact on Employment? Evidence from New Zealand. Labour Market Bulletin 1997(2), 25-50. Pacheco G. A. and T. Maloney (1991) Does the Minimum Wage Reduce the employment prospects of unqualified New Zealand women?" Labour Market Bulletin 1999, 15-69. Hyslop D. and S. Stillman (2004) Youth Minimum Wage Reform and the Labour Market. New Zealand Treasury Working Paper.
[30] The exception was the research by Maloney (1994). It found a reduction in employment for 20-24 year olds. The research was based on data from 1985-1993, before the introduction of the youth minimum wage in March 1994.
[31] NZIER (2004) The Youth Minimum Wage: a literature review and analysis. NZIER. p.1.
[32] Hyslop D. and S. Stillman (2004) Youth Minimum Wage Reform and the Labour Market. New Zealand Treasury Working Paper 04/03, Wellington, the Treasury. Available online at http://www.treasury.govt.nz/. The changes resulted in a 69% increase in the minimum wage for 18 and 19 year olds and a 41% increase in the minimum wage for 16 and 17 year olds. Only around 20% of 16-19 year olds reported wage rates below the minimum during the period used by Hyslop and Stillman (2001-2002). Today, that figure is around 80% for 16-17 year olds (due in part to the removal of the youth minimum wage) and 40% for 18-19 year olds.
[33] Hyslop, D. and S. Stillman (2004) Youth Minimum Wage Reform and the Labour Market New Zealand Treasury Working Paper 04/03, Wellington, the Treasury. Available online at http://www.treasury.govt.nz/. This research found a statistically significant fall in the fraction of 16 and 17 year olds studying of about 3-4 percent in each year after the minimum wage increases and a generally smaller drop in study rates for 18 and 19 year olds of 1-2 percent, which were statistically significant, in 2001 and 2002. Pacheco, G. and A. Cruickshank (2007) Minimum Wage Effects on Educational Enrolments in New Zealand. Economics of Education Review, also find a statistically significant negative effect on enrolment levels for 16 to 19 year olds over 1986-2004.
[34] Ministry of Education, April 2009 tertiary education enrolments snapshot.
[31] NZIER (2004) The Youth Minimum Wage: a literature review and analysis. NZIER. p.1.
[32] Hyslop D. and S. Stillman (2004) Youth Minimum Wage Reform and the Labour Market. New Zealand Treasury Working Paper 04/03, Wellington, the Treasury. Available online at http://www.treasury.govt.nz/. The changes resulted in a 69% increase in the minimum wage for 18 and 19 year olds and a 41% increase in the minimum wage for 16 and 17 year olds. Only around 20% of 16-19 year olds reported wage rates below the minimum during the period used by Hyslop and Stillman (2001-2002). Today, that figure is around 80% for 16-17 year olds (due in part to the removal of the youth minimum wage) and 40% for 18-19 year olds.
[33] Hyslop, D. and S. Stillman (2004) Youth Minimum Wage Reform and the Labour Market New Zealand Treasury Working Paper 04/03, Wellington, the Treasury. Available online at http://www.treasury.govt.nz/. This research found a statistically significant fall in the fraction of 16 and 17 year olds studying of about 3-4 percent in each year after the minimum wage increases and a generally smaller drop in study rates for 18 and 19 year olds of 1-2 percent, which were statistically significant, in 2001 and 2002. Pacheco, G. and A. Cruickshank (2007) Minimum Wage Effects on Educational Enrolments in New Zealand. Economics of Education Review, also find a statistically significant negative effect on enrolment levels for 16 to 19 year olds over 1986-2004.
[34] Ministry of Education, April 2009 tertiary education enrolments snapshot.
[35] 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. This analysis was undertaken in different economic circumstances than currently exist. It is uncertain what difference the economic situation may have on firms’ reactions.
[36] Denvir A. and G. Loukas (2006) The Impact of the National Minimum Wage: Pay Differentials. Available at: www.lowpay.gov.uk. Draca M., S. Machin and J. Van Reenen (2008) Minimum Wages and Firm Profitability. NBER Working Paper 13966. Available at: www.nber.org.
[37] Hyslop D., D. Maré, S. Stillman and J. Timmins (2008) An Analysis of Teenage Employment by Firms 1999/00 -2006/07. Statistics New Zealand. Available at: http://www.stats.govt.nz/.