Wednesday, 7 May 2014

Should we jack up the minimum wage?

I was reading an article in the always interesting Slate magazine - it's been published under various titles, but the one I like best is 'Jobless in Seattle' - about plans by the current Seattle mayor to raise the minimum wage in the city to US$15 an hour, when I came across the graph shown below. It shows that New Zealand has a relatively high real minimum hourly wage* by OECD standards, which is partly to be expected as we are down the wealthier end of this group (you'd expect our minimum wage to be well above that in the likes of Mexico and Turkey), and party a bit of a surprise, as you might wonder why ours is higher than the UK's or Canada's. The Slate article helpfully included a link to the source OECD data if you'd like to have a hands-on look for yourself (if you go there, you might have to change the display from 'annual' to 'hourly' to get the data graphed below).


I'm sympathetic to poverty and inequality reduction objectives, but even so this graph left me with the impression that we ought to be a bit careful about pushing on with further substantial rises in the minimum wage as a way to achieve them, and more careful still about introducing the 'living wage', which on the calculation by Living Wage Aotearoa New Zealand is $18.80 an hour and which Wellington City Council has already adopted. As Treasury noted in a report on the living wage last year, the minimum wage has been rising fairly rapidly (first graph below), and the living wage proposal would be very much at the high end of similar initiatives overseas (second graph below). In the second graph, in the left hand box Treasury uses spot exchange rates to make the comparison, which is conceptually not the best thing to do, so the right hand box is a better guide.



Whether to press the minimum wage button harder or not is currently one of the livelier topics in policy circles, as the two excellent articles cited in the Slate piece explain - "Should We Raise the Minimum Wage? 11 Questions and Answers", and "Liberals Need to Think Beyond the Minimum Wage", both from the online version of The Atlantic magazine. I'm down the mildly sceptical end of the spectrum of views myself, partly because I'm not sure all the downsides of high minimum wages have been counted, over and above the obvious one of shutting some lower-paid out of employment.
But more importantly I'm not sure interventions in the labour market are the best way to achieve these kinds of social objectives. I don't mind some minimum standards to prevent opportunities for ratbag exploitation, but I think we're better off letting the labour market work on its own, and then try and fix any resulting problems through the tax system, as we do with the likes of Working for Families. And I'd be loath to introduce any more distortions to the labour market, when we're starting from such a good starting position of a clean, undistorted system.
Here is the OECD's recent calculation of the 'tax wedge', which is "a measure of the difference between labour costs to the employer and the corresponding net take-home pay of the employee". For example, an employer might offer a job on a salary of $60K a year, and a jobseeker might take it, but the employer's cost could be $70K after adding in the likes of payroll taxes or social security contributions, and the employee's take-home will certainly be less, mainly through income tax but also possibly through social security deductions. Ideally, smaller tax wedges are better than larger.
Here's how New Zealand stacks up.


So far we've done a very nice job, relatively speaking, of leaving the labour market alone, and not making it serve a dual purpose as a social policy instrument by loading it with assorted levies. And I think we should keep it that way.

*These are 'real' minimum wages, deflated by each country's CPI and then converted into US$ at purchasing power parity rates (I've had my doubts about these PPP rates before, but they're still the best available tool for making these sorts of comparisons). I mention this in case you're trying (as I initially did) to line up the US$8.60 shown in the graph for us, with the actual minimum wage in New Zealand. At the OECD's PPP rate for 2013 of NZ$1.46/US$ (or 68.5 US cents the way we usually quote exchange rates in our part of the world), the US$8.60 translates into NZ$12.55. This is lower than the actual minimum wage in 2103 (NZ$13.50 to March 31, NZ$13.75 for the rest of the year), because of that deflation to 2012 prices.

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