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Wadestown, Wellington
New Zealand

Michael Dunn is the Managing Principal of Economic and Fiscal Consulting Limited (ECOFISC) which he founded in 2008. Michael has more than 20 years of experience in economic analysis and modelling, in revenue and fiscal forecasting, and in advising Governments in New Zealand and globally. 

Blog

Blog for "ecofisc" as the trading name of Economic and Fisacl Consulting Limited, Wellington, New Zealand. Pricipal author Dr.Michael Dunn.

 

Fiscal impact of a rapid escalation in the minimum wage in New Zealand

Michael Dunn

During the recent election campaign, we published our analyses of the proposals by the Green Party and the Labour Party for rapid increases in the minimum wage rate, from the current level of $14.25 per hour to $16 or $16.25 per hour from 1 April 2015 and to as much as $18 per hour by 1 April 2017 (in the case of the Green Party).

The Green party had claimed that their estimated $1.1 billion of increased Government expenditure from payment of higher wages and increased costs of service contracts over the next 3 years would be more than offset by increases in taxes on the incremental wages (and spending) of those (up to 360,000 wage-earners) whose incomes would be increased. Such a result would be remarkable, and lead to the conclusion that a Government could benefit fiscally from general wage escalation.

Our analysis as originally posted on the Taxpayers' Union website suggests otherwise. We point out that the impact upon employers will be such that some jobs will be lost, and the rate of future increase in employment will be reduced. That will lead to a reduction in income tax and expenditure taxes offsetting much of the claimed gain from higher wages. Further, the profits of many employers will be reduced, leading to lower tax payments on business income, and less money available for reinvestment and distribution to shareholders, many of whom would also pay less tax as a consequence.

We do agree on the $1.1 billion cost to Government, but with a near-zero revenue offset.

Our claims of reductions in actual and future employment were challenged by those who pointed to studies by David Card and others in the US that showed a minimal impact from increasing minimum wage rates in the US. We pointed out that whereas US minimum wages (State by State) are around 38% of the median wage, in New Zealand our minimum wage is already above 60% of the median wage. Therefore, we should look to studies in other countries where the median wage has a similar relativity to the median wage. A recent article by the US Labor Department reported here shows that countries with wage rate relativities comparable to New Zealand include France, Portugal and possibly Israel. Countries with lower relative minimum wage rates (but still above 50% of the median wage) include Hungary, Australia, and Belgium, while Turkey has a higher relativity, around 72%. The latter may be highly relevant, as the Green party policy would lift the minimum wage to 76% of the median.

In an update to our earlier work also published on the Taxpayers' Union website we point to studies which show significant adverse impacts of increasing minimum wages on employment in countries where the minimum wage is above 50% of the median wage. We would refer those who remain sceptical to a more recent paper that reviews a large number of previous studies: David Neumark and William Wascher, "Minimum Wages and Employment: A Review of Evidence from the new Minimum Wage Research", NBER working paper 12663, November 2006. This paper has subsequently been republished by the highly regarded Institute for Study of Labor, as IZA Discussion Paper No 2570, 2007.