New Zealand's minimum wage

Dr Bryce Wilkinson
Insights Newsletter
1 March, 2013

Governments use the minimum wage to keep workers with the least skills or work experience out of work, albeit as an undesired consequence rather than a direct intent.

School-leavers have the least work experience – in addition, the lack of basic standards of literacy and numeracy is an enormous handicap for 10% to 20% of school-leavers.

Labour progressively lifted the youth minimum wage from 60% of the adult rate to 100% between 2000 and 2008.

Economists might expect an age-invariant minimum wage structure to penalise the youngest would-be workers most heavily, since they have the least work experience.

The latest unemployment statistics for December 2012 bear out this expectation.

The unemployment rate was 30.9% for 15 to 19-year-olds; 12.4% for 20- to 24-year-olds; and 6.6% for 25 to 29-year-olds. The lowest rate was 3.8% for 40 to 44-year-olds.

Those are dramatic differentials.

Economists would also expect that lifting the youth minimum wage relative to the adult wage would increase the youth unemployment rate relative to the adult rate.

In the late 1990s, when the youth minimum wage was 60% of the adult rate, the unemployment rate for 15 to 19-year-olds was about 6% higher than that for 20 to 24-year-olds. This is only a third of the 18.5% difference in December 2012.

It is hard to explain the enormous rise in this differential, other than cite the relative rise in the youth minimum wage. Of course, labour laws that unduly raise non-wage labour costs and employment risks don’t help.

The 30.9% youth unemployment rate in December 2012 is by far the highest recorded statistics since the 1980s. No fewer than 41,500 15 to 19-year-olds wanted work but couldn’t find a job. That is an awful waste of youthful energy and capability.

This outcome can’t be blamed on poor export prices or recession. This will be the third successive year of positive economic growth, according to Treasury forecasts.

Lack of skill can explain low productivity and low wage rates, but it can’t explain a high rate of unemployment.

Higher minimum wages obviously benefit those who receive them. But the gain is at the expense of the more marginal would-be workers, lost national income, and national output. That is why it is better to use the welfare system to redistribute income rather than labour market regulation.

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