Regulatory Impact Statement - Minimum wage review 2010
Agency Disclosure Statement
This Regulatory Impact Statement has been prepared by the Department of Labour (the Department). It provides an analysis of options for the Minister of Labour's annual statutory review of the minimum wage rates.
The Government's agreed objective for the minimum wage, assessment criteria and related considerations provides a framework for assessing the specific options considered. The Department provides Ministers with analysis based on available data, which can be limited.
The Department's analysis incorporates a number of factors, including:
- the numbers and characteristics of workers directly affected. There is no robust data available on some types of workers who are more likely to be on the minimum wage, such as new migrants, temporary workers and workers with disabilities. Estimates using data from the New Zealand Income Survey do not include workers who report an hourly wage below the minimum[1]
- estimates of the impact on employment growth and wage earnings/costs. The estimates of the potential impacts on job growth use a range of employment adjustment factors (elasticities) that are broadly derived from econometric analysis conducted by the Department and elsewhere. The estimates of impacts on job growth are based on a conventional model of firm decision-making, whereby firms operating in perfectly competitive markets adjust outputs and inputs, including labour, in response to relative prices. This modelling approach does not adequately reflect the dynamic nature of employment responses to changes in minimum wages, and, in particular, any investments that employers may make to increase the productivity of low paid workers
- the types of sectors affected. Data limitations mean that more detailed, lower level (e.g. within sectors or at an individual firm level) analysis is not possible
- an assessment of the labour market conditions, and
- the views of submitters.
We are only able to provide estimates of the direct impacts of minimum wage changes. Indirect impacts, such as changes to wage relativities or changes in consumer spending, are unable to be accurately estimated. The Department does not have adequate information to assess the potential impact of the minimum wage options on productivity.
Some of our estimates assume that all 16 and 17 year olds are eligible to earn (at least) the adult minimum wage. This assumption is made because the Department is unable to estimate how many 16 and 17 year olds may be eligible for the new entrants' minimum wage. The data suggests that the majority are on at least the adult minimum wage.
The Ministries of Health, Education, and Social Development and the Accident Compensation Corporation have provided estimates of the direct costs for some state sector employers and state sector-funded employers. The estimates do not include indirect costs (e.g. if other workers' wages are increased to maintain wage relativities). The Department is also unable to provide an estimate of other fiscal impacts, such as changes to social assistance and taxation. As the modelling sample is relatively small, the Department did not assess the impact on the Working for Families Scheme, which is targeted at low to middle income families with dependent children.
Data for the year ending June 2010 is used to calculate Option 2, which is in line with changes in the Consumers Price Index and average wages. It is possible that the actual change in consumer prices and average wages may be higher or lower on 1 April 2011. For example, the changes in the GST rate in October 2010 will not be included in the June 2010 CPI change.
The relativities for the new entrants' and training minimum wages have not been reviewed in this minimum wage review process. By law, the new entrants' minimum wage cannot be set at less than 80% of the adult minimum wage.
An increase in the minimum wage will impose additional wage costs on businesses employing staff on the minimum wage and, possibly, those with workers paid near the minimum wage.
| Assessment criteria/ consideration |
Option 1: $12.75 |
Option 2: $13.00 |
Option 3: $13.50 |
Option 4: $15.00 |
|---|---|---|---|---|
| Percentage increase in minimum wage | 0% | 2.0% | 5.9% | 17.6% |
| Workers directly affected (18-64 years) |
34,600 2.0% |
41,300 2.4% |
92,000 5.4% |
252,800 14.8% |
| Number of workers directly affected (16-17 years)[2] | 11,100 | 11,700 | 16,100 | 22,100 |
| Assessment against the principles of: | ||||
| - fairness[3] | Erodes | Maintains | Improves | Strongly improves |
| - protection[4] | Erodes | May erode | Improves | Strongly improves |
| - income distribution[5] | Reduces | Maintains | Improves | Strongly improves |
| - work incentives[6] | Reduces | Maintains | May increase | Strongly improves |
| Comparisons:[7] | ||||
| - International gross MW in NZ$ using PPP (2009) | 7th of 13 OECD, High among all 21 OECD |
7th of 13 OECD, High among all 21 OECD |
6th of 13 OECD, High among all 21 OECD |
5th of 13 OECD, High among all 21 OECD |
| - International relative to Median Wage (2008) | 2nd in OECD | Very high | Very high | Very high |
| Other income benchmarks - unemployment benefit | Significantly higher |
Significantly higher |
Significantly higher |
Significantly higher |
| Other income benchmarks - average total hourly earnings | 50% | 50% | 52% | 58% |
| Other income benchmarks - median total hourly earnings | 64% | 65% | 68% | 75% |
| Other income benchmarks - minimum wage in collective agreements | Lower | Lower | Lower | Slightly higher |
| Impact on low paid workers | Women, Māori, Pacific peoples, disabled people and youth are more likely to be low paid workers. A modest increase in the minimum wage can have a positive impact on low paid workers. However, low paid workers may also be the first to experience any negative impacts that could result from a change in the minimum wage. |
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| Gender pay gap | Increasing minimum wage rates is likely to have a small, positive outcome on the gender pay gap. |
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| Increase in economy-wide annual earnings (%) | N/A | 0.02% | 0.09% | 0.62% |
| Annual Wage increase (millions) | N/A | $15.0m | $75.7m | $517.7m |
|
Increase in inflation (% points) |
N/A | 0.01 | 0.04 | 0.26 |
| Projected job growth | 23,510 - 24,100 | 22,910 - 23,230 | 21,490 - 21,690 | 16,260 - 18,040 |
| Potential impact on job growth (absolute change) | 1,360 - 1,960 | 760 - 1,080 | -660 - -460 | -5,890 - -4,100 |
| Potential impact on job growth (relative change) | 0.06% - 0.09% | 0.03% - 0.05% | -0.03% - -0.02% | -0.27% - -0.19% |
| Industries | Hospitality and retail industries are most likely to be affected by a minimum wage increase. | |||
| State Sector(fiscal impacts - direct wage costs rounded to million) | N/A | $6m | $30m | $119m |
| Productivity | There is little existing empirical evidence on the impact of minimum wages on productivity. The OECD Employment Outlook for 2007 found that minimum wages were estimated to have a positive impact on labour productivity[8]. If minimum wage increases encourage better workplace practices, including increased training or investment in technical innovations, it can lead to productivity improvements. There may also be longer-term negative impacts on labour productivity emanating from increases in the minimum wage if it encourages young workers to work more and study less[9]. |
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| Other government interventions -Taxation |
The rates of tax on individual incomes recently decreased while the GST rate increased from October 2010. The net result from these two changes for those earning around the minimum wage is expected to be a small increase in disposable income[10]. There are also a range of tax credits for families to assist them to meet the costs of raising a family, or ensure that families in work are better off than comparable families receiving a social security benefit. Additionally, the independent earner tax credit is available to some people. A decrease in company tax rates (from 30% to 28%, effective from 1 April 2011) may improve companies' ability to cover an increase in the minimum wage. The Department recognises that these interventions and initiatives (including Working for Families) 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. |
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| Non-compliance | Increasing the minimum wage may increase non-compliance with the minimum wage legislation. However, 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 from the minimum wage, measurement error or non-compliance. |
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[1] In the 2010 New Zealand Income Survey, 5.5% of 18-64 year olds reported wages below the adult minimum wage.
[2] Assuming that all 16 and 17 year olds are eligible for the adult minimum wage.
[3] To ensure that wages paid are not lower than a socially acceptable minimum as a proportion of how much other workers earn or the amount needed to maintain a set standard of living, adjusted for inflation. Benchmarks: average wages, CPI.
[4] To offer wage protection to workers who are disadvantaged in the labour market so that workers are paid wages that reflect their worth or productivity. Benchmarks: minimum wages paid under collective agreements.
[5] To ensure that earnings of people on low incomes do not deteriorate relative to those of other workers. Benchmarks: changes in average and median wages.
[6] To increase the incentives to work, for people considering work. Benchmarks: benefit levels and costs associated with working.
[7] Note that this comparison uses figures as at 2009 and other countries may have, or be in the process of, changing their minimum wage rates so relativities may have changed.
[8] OECD (2007) OECD Employment Outlook 2007. Available.
[9] 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. 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.
[10] There is a rough calculator at www.taxguide.govt.nz which could be used to run some scenarios. 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.