Agency Disclosure Statement

This Regulatory Impact Statement has been prepared by the Department of Labour. 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 (outlined at paragraph 40) provide a framework for assessing the specific options considered. There is a range of different economic theories on the minimum wage and its impacts on the economy and other factors. The Department does not prescribe to any one economic theory. We provide Ministers with analysis based on what robust data is available, which can be limited.

The Department of Labour's analysis incorporates a number of factors including the numbers and characteristics of workers directly affected; the impact on employment growth and wage earnings/costs; the types of sectors affected; an assessment of the labour market conditions; and the views of submitters.

The options based on changes in consumer prices and average wages use data for the year ending June 2009. This is in line with the data used in our analysis which is also based on the June year. The indicators used provide a proxy for the actual changes in prices and wages at the time when any change to the minimum wage is implemented. It is possible that the actual change in consumer prices and average wages may be higher or lower on 1 April 2010^[1].

We are only able to provide robust 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. 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 and disabled people.

Estimates using data from the New Zealand Income Survey do not include workers who report an hourly wage below the minimum^[2]. It is likely that this group is a mix of trainees, people with minimum wage exemptions, non-compliance and reporting error.

Data limitations also mean that more detailed, lower level (e.g. within sectors or at an individual firm level) analysis is not possible. Assessing the impacts of increases to the minimum wage on firms involves trying to isolate the nature of the employment impacts due to minimum wages from other employment changes occurring in the economy. It is difficult do this with the level of certainty that would be preferable in a review of this type. Empirical research from New Zealand and overseas is included in the review. Submitters' views on the impacts of increases to the minimum wage on firm behaviour vary according to whether they represent employer or employee perspectives, but they are nevertheless firmly held by the different groups.

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. It assumes that everything else remains the same and it does not specifically deal with important economy-wide and other feedback effects, some of which may have a positive impact (such as productivity, demand and fiscal effects), while others may be negative (international competition)^[3]. The timing of the adjustment is also simplified and a one year adjustment period is assumed. The estimates of constraint on job growth are based on a neo-classical model of firm decision-making, whereby firms operating in perfectly competitive markets adjust output 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. One consideration for the impact on the demand for low wage workers is how minimum wages change relative to average wages. If minimum wages keep pace with average wages then we would expect to see little change in the relative demand for low wage workers or low wage jobs.

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 we are 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.

Much of the recent empirical research was undertaken when economic growth was higher than now. It is uncertain whether similar results would be replicated in different economic circumstances.

Apart from previous empirical research on the youth minimum wage (e.g. the impact on firms employing teenage workers), there is uncertainty around the impact of previous changes in the minimum wage. This is because the data used in the Department's analysis is cross-sectional and no robust longitudinal data is available. Submitters' views on the impacts of the 2008 increase to the minimum wage varied according to whether they represented employer or employee perspectives.

The Ministries of Health, Education and Social Development have provided estimates of the direct costs for some state sector employers and state sector-funded employers. ACC was unable to provide estimates of the direct costs in the timeframe provided. The estimates do not include indirect costs (e.g. if other workers' wages are increased to maintain wage relativities). We are also unable to provide an estimate of other fiscal impacts, such as changes to social assistance and taxation.

Apart from the analysis provided to the Minister of Labour and in the Regulatory Impact Statement, there are some gaps and uncertainties around the impacts of any change in the minimum wage, the distribution of these impacts and the impacts of past changes in the minimum wage, as outlined above.

Those policy options considered in this Regulatory Impact Statement that result in an increase in the minimum wage are likely to have an effect that the Government has said will require a particularly strong case before regulation is considered, as they may impose additional wage costs on businesses employing staff on the minimum wage and, possibly, those with workers earning near the minimum wage. Any increase in the minimum wage seeks to balance increased wage costs with the benefits to workers from increased incomes and the other considerations identified in the minimum wage objective. Increasing the minimum wage from $12.50 to $15.00 or $16.75 an hour will significantly increase the wage bill/costs for employers.

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Footnotes

^[1] For instance, the Treasury are forecasting that consumer prices will rise by 2.5% in the year ending March 2010 (compared with the actual change of 1.9% for the June 2009 year) and nominal wages are forecast to rise by 2.8% (compared with the actual change of 4.5% for the June 2009 year).

^[2] In the 2009 New Zealand Income Survey, 4.2% of 18-64 year olds reported wages below the adult minimum wage.

^[3] One could argue that all these effects are “loaded” into the econometric estimates but they are not explicit.