Sweeping generalisations about the minimum wage can do more harm than good

Should we keep raising the minimum wage in the coming years? “It depends” may not be the most tweetable answer, but it might be a bit more useful.

When a white man in a suit tells you to be suspicious of “white men in suits”, should you trust what he’s about to say? That’s the rather odd opening to a recent article, “There’s no downside to raising the minimum wage”, by Craig Renney, an economist at the Council of Trade Unions. He makes a series of sweeping generalisations in support of minimum wage increases, via an assertion that we should be “suspicious when people tell the lowest paid in our society that they shouldn’t get any pay rise ‘for their own good’”. But is that really what’s going on in the debate about the minimum wage? Let’s take a look at the sources Renney himself cites.

Minimum wage policy is both important and ideological, two points made by the New Zealand Institute for Economic Research in a paper released earlier this year. They point out that, “more adults earn the minimum wage than are unemployed,” meaning any changes affect a significant number of us. So you’d think careful consideration and some nuance would be appropriate, yet the debate is often over-simplified, even cartoonish, as when Renney tells us that, “For all the warnings about the bogeyman of minimum wage-driven job losses, it turns out he just doesn’t exist.” He argues that the minimum wage can be safely increased in the years to come, implying we should continue the trend of significant rises under the current government. But while Renney relies on the NZIER research and another recent analysis by the think tank Motu, he seems to have missed their detail which, at least to my reading, don’t support the breadth of his conclusions. This isn’t just a pedant’s point—when we flatten out the detail of important policy debates, we risk doing more harm than good and hurting the very people we say we want to help. Renney may be right that future increases are sustainable and wise—or he may not.

Whether the minimum wage ‘works’ depends on what you want it to do, so we need to be clear about who it’s meant to help and whether it’s actually helping them. Renney refers to helping “those on the lowest incomes” and “the poorest households” in the country. But NZIER notes that, “many low-wage earners are secondary earners in higher-income households, while many low-income households have no wage earners at all.” Motu makes a similar point and goes on, rather dryly, to point out that, “policies designed to target low household incomes are more effective at reaching people with low household incomes.” In fact, they say that, “the impacts of minimum wages are very concentrated – on teen employees, and on particular industries” like retail, agriculture, and hospitality, and even that their “main conclusion … is that minimum wages in New Zealand over the past two decades de facto have become a teenage wage setting policy.”

Photo by Ian Harber on Unsplash

Looking at what happened after past increases doesn’t automatically tell us we can sustain future increases. The past is a guide to the future, not a guarantee of it. Both NZIER and Motu find that recent minimum wage rises have been good for workers without being costly for firms, as Renney says. But that may be because policy-makers have actually paid attention to the detail—like the risk that as wages go up employers will ‘buy’ less labour and whether the economy is strong enough to sustain a rise at that point in time—and calibrated their decisions accordingly. A simplistic commitment to raises may yield a different result. NZIER puts it like this: “the fact that, to date, minimum wage settings do not appear to have negatively impacted employment in New Zealand does not mean that large increases in minimum wages can continue indefinitely without negative effects.” NZIER estimates a “Goldilocks rate” for the minimum wage—the ‘just right’ point at which the benefits of wage increases balance out their costs. Renney rightly tells that they estimate this could be as high as $25 an hour—but not that they also say it could be as low as $18 an hour, below the current minimum wage of $20.

Could we see some of those “negative effects” if we raised the minimum wage significantly again? While “it depends” is not the most satisfying or tweetable answer, it’s the right one here. One of the main effects that policy-makers worry about isn’t job losses per se, it’s the “restraint on employment”. That means jobs that are never created because they’ve become too expensive. That’s much harder to see or understand compared to numbers of staff laid off or the headline unemployment rate—and that rate only tells us what’s happening to all workers, not necessarily the ones the minimum wage is supposed to help. The economy may be about to boom when pent-up demand is released from locked-down households, burying any minimum wage risks in an avalanche of spending accelerated by COVID-related stimulus. Or, with some businesses on the brink, interest rates rising, COVID support ending and people adapting cautiously to a ‘new normal’ of restricted living, the economy may be much more muted, making wage increases a more significant cost for employers—one they might choose to avoid. Here’s Motu: “Minimum wage setting needs to take into account the extent of recovery or recession expected in 2021, although this is uncertain.”

What is clear is that we’ll need more than minimum wage policy to help low-income workers and their families. Taxes, benefits and transfers like Working for Families, education and training, migration policy and employment law are among the solutions that both Motu and NZIER say are important rather than a simple focus on what Motu calls the “relatively blunt” instrument of the minimum wage. And with the minimum wage at its “highest since 1946 by a significant margin”, giving it a significant “bite” relative to the median wage, this seems like a bad time to get tunnel vision. In fact, both organisations call for us to expand our vision by commissioning local and “impartial” research to better understand the effects of the minimum wage in New Zealand and save us from reliance on polarised research from other countries.

Let’s end on a note of agreement—like Renney, I think all New Zealanders should be able “to live a decent life from their wages”. The question is how we get there. Policy-makers have to wrestle with the detail of this issue without getting lost in it. Paralysis by analysis doesn’t help anyone. So I’m not arguing that we should bury ourselves in a welter of research and never reach a conclusion. Nor am I arguing against raising the minimum wage now. I’d just like to see a better standard of debate on this issue—on all public issues, actually—one that puts a lower premium on being glib and a higher premium on being useful. I think we might owe that to the people we say we want to help.