The Coalition Government is slowing minimum wage increases below inflation but research suggests the policy settings don’t matter that much for the wider economy

Last week the Coalition Government opted for the smallest increase in the minimum wage in over a decade, lifting the rate by 2% to $23.15. 

Brooke Van Velden, the Minister for Workplace Relations, asked her Cabinet colleagues to approve an even smaller increase but was ultimately unsuccessful.

The coalition agreement between New Zealand First and the National Party commits the Government to a “moderate increase” in the minimum wage each year. 

However, the Act Party campaigned on freezing the wage for the full parliamentary term. 

The 2% increase in the rate will not cover the roughly 4% annual inflation that will have occurred by April 2024, making the nominal increase a wage cut in inflation-adjusted terms.

Van Velden justified this decision by pointing out the minimum wage had risen faster than both inflation and median wages in recent years.

The past two minimum wage changes were roughly at the rate of inflation, relative to the previous calendar year, but earlier increases were much more generous. 

Between 2016 and 2023, the minimum wage increased at nearly twice the rate of inflation and is now roughly 72% of the median wage, relatively high compared to other OECD countries. 

Lifting the rate slowly could be one way to allow the gap between minimum and median wages to widen gradually over time, without ever actually cutting wages in nominal terms.

Who’s vulnerable?

Camilla Belich, the Labour Party’s workplace relations spokesperson, said the “pathetic increase [was] beyond disappointing”. 

“As the price of goods and services continue to climb, the coalition government has chosen to turn a blind eye to our most vulnerable income-earners by not increasing minimum wage to a level in line with inflation," she said. 

But it is not clear that minimum wage earners are the most vulnerable. Research shows most are young people and part-time employees. 

BusinessNZ, which was consulted on the decision, opposed lifting the minimum wage to the living wage—as suggested by the Council of Trade Unions—for this reason. 

The living wage was predicated on the needs of a family of four but the majority of minimum wage workers were not supporting families, the lobby group said. 

A 2021 paper by Motu Research found the impacts of minimum wage changes were heavily concentrated on teen workers and in particular industries. 

Authors David Maré and Dean Hyslop said over half of all 16-17 year old employees and 43% of 18-19 year olds were paid at or below the minimum wage. 

“Our main conclusion from this review is that minimum wages in New Zealand over the past two decades de facto have become a teenage wage setting policy,” they wrote. 

Maré and Hyslop said wage levels should not be set based on aggregate indicators, such as the overall Kaitz index, and should instead focus on the needs of the key subcategories. 

The report didn’t assess impacts of the minimum wage on productivity—one potential outcome of forcing wages higher—but was critical of using the policy lever as a way to boost low household incomes. 

“Our analysis implies that minimum wages are largely ineffective as a redistribution tool, given the broad incidence of minimum wage workers across the household income distribution — many people on low hourly rates of pay are nevertheless in households where incomes are not particularly low”. 

Macro-economic impact

The Ministry of Business, Innovation, and Employment recommended an increase of 4% based on the official minimum wage objective: “”to keep increasing the minimum wage over time to protect the real income of low-paid workers while minimising job losses”.

It was confident that any increase up to 5% would not result in any losses of jobs or reduction in hours available in 2024. 

However, it encouraged the minister to err on the side of caution, due to difficult economic conditions, and choose a minimum wage increase slightly below the rate of inflation.

“While unemployment is currently low, there are signs of ‘’softening’ in the labour market … this, plus other contextual factors, suggests a need for caution in setting the minimum wage rates for 2024, since any employment restraint from increases in the minimum wage may have more significant effects for employees if general employment growth is lower”. 

Labour market data released on Wednesday showed the unemployment rate and other metrics were weakening, but not as fast as many economists had expected. 

Employment restraint is what MBIE calls job losses, reductions in hours, and other negative effects of a higher minimum wage. 

Maré and Hyslop’s Motu paper found no clear evidence that increases in the minimum wage had led to negative employment losses for affected groups. 

The pair said the research showed the minimum wage policies were neither as effective, nor as damaging, as its supporters and critics would claim.