Dialogue: Critics of raising minimum wage should look at history

By PAUL GOULTER*

Critics of the minimum wage ignore the evidence.

Whenever those on the lowest wages in New Zealand have an increase, critics raise the cry that the increase comes at the cost of jobs.

To argue convincingly that raising the minimum wage means job losses, a link needs to be made between an increased minimum wage and increased unemployment.

History does not demonstrate that link.

At various times when the New Zealand minimum wage has been high compared to the average wage, unemployment has been comparatively low.

A year ago, the youth minimum wage was abolished for 18- and 19-year-olds and rates for 16- and 17-year olds were increased.

Over this period, employment increased nearly 13 per cent and unemployment was reduced by more than 4.5 per cent.

The latest increases in minimum wages, bringing the adult minimum wage to $8 an hour, have also coincided with a fall in unemployment.

The adult minimum wage was recently set at about 44 per cent of the average wage.

So, at present there appears to be no connection between higher minimums and job losses.

In the past, the rate of the minimum wage has fluctuated wildly, but there is no evidence that the times of high minimums have had a negative impact on employment.

Unemployment in 1947 was nearly zero when the minimum wage was set at 83 per cent of the average wage.

That 83 per cent figure would translate to more than $15 an hour today, almost double the minimum adult wage.

In 1973, another year of almost zero unemployment, the minimum wage was two-thirds of the average wage.

By 1984, the adult minimum wage had declined to a third of the average wage, but the strong national award system provided minimum wages and conditions for about 880,000 workers depending on their occupation or industry.

The safety net of that award system for the lowest paid was wiped out by the Employment Contracts Act and has not been re-established with the Employment Relations Act.

What does research show?

Some individuals and organisations do not support any minimum wage at all.

To support that ideological position, commentators selectively quote studies of the employment effects of raising the minimum wage.

But a range of studies establish no connection between high minimums and increased job losses.

A few examples since the mid-1990s have been done by Card and Krueger, Chapple, Panecho and Panchero and Maloney.

All found that increases in the minimum wage have either an insignificant effect on employment or even a positive employment effect because higher wages increased participation.

Frequently quoted by critics of the minimum wage is an earlier, controversial study by Tim Maloney who argued that the minimum wage has had a negative effect on employment, particularly for teenagers.

The Department of Labour considered there was no evidence for Maloney's view that a lower minimum wage gives young workers with employability problems access to jobs.

Setting a minimum wage addresses a question of social justice: What is the minimum people should work for, and below which employers should not be allowed to pay?

While it makes sense that there should be consideration of the employment effects of any increase in the minimum wage, the evidence shows there is an insignificant effect, if any.

Recent changes to our minimum wage take the youth minimum (for 16- and 17-year-old workers) to 80 per cent of the adult minimum wage.

Young workers on the minimum wage will now receive $6.40 per hour, compared to $5.40 an hour.

The adult minimum wage has increased from $7.70 to $8 per hour, an increase of 3.9 per cent. There is provision for genuine trainees to be paid less than the adult minimum wage.

The Council of Trade Unions views the Government's moves to improve the minimum wages as a necessary part of policies which will build a high-wage, high-skill, and high-trust quality economy.

A sensible minimum wage is only one part of the policy mix.



If we are to build a modern economy we have to ensure there is investment in education and skills.

The level of wages and the degree of employability and job security will increasingly depend upon the level and relevance of skill acquisition.

In the 1990s we went down a path of wage dispersion, flexibility and attacks on minimum pay and conditions.

Our productivity suffered, income differences widened, our economy did not perform well and many social problems emerged.

The CTU supports a balanced and integrated set of policies which combines a more reasonable set of minimum standards in the labour market, holidays, minimum wages, paid parental leave, health and safety with investment in skills and modern infrastructure to underpin long-term sustainable economic development.

* Paul Goulter is secretary of the Council of Trade Unions