Minimum wage in New Zealand : an empirical enquiry

Abstract

This thesis presents a detailed empirical enquiry into the labour market impacts in New Zealand of rises in the youth and adult minimum wage over the time period of March 1986 to June 2004. Such research is important in terms of investigating what types of individuals earn minimum wage and how they are affected by rises in their applicable minimum wage. This information can then be used to inform relevant labour market policy in NZ. Findings by overseas research on this topic have been conflicting. Prior to the early 1990s the standard textbook prediction, using a perfectly competitive model for the labour market, was that a binding wage floor reduces employment of the affected workers. Several studies then emerged in the early 1990s finding no significant negative employment effects and in some cases finding even positive employment effects. This caused research in this area to undergo an upsurge and has led to no clear and consistent empirical evidence of what impact a rise in the minimum wage has on the affected workers, or what type of theoretical model applies to these low-wage workers' labour market. In NZ, research has been lacking on the impacts of the minimum wage and past research has also not produced consistent results. This thesis therefore began as a response to this gap in knowledge. It has made use of a lot more variation in minimum wage levels compared to past minimum wage studies in NZ (15 and 8 nominal increases in the adult and youth minimum respectively over the time period under study) and is also based on two very detailed data sources. Unit record data from the Household Labour Force Survey (HLFS) and Income Survey (IS) allows isolation of workers earning the minimum wage or close to it, and hence a description of characteristics of these workers and then allows investigation into impacts on these workers when the minimum wage is increased. This thesis is therefore able to make several contributions without the main constraints faced by past studies in this country (i.e. limited variations in minimum wage to analyse (especially youth) and data constraints such as reliance on aggregated data). Firstly, this study identifies groups most vulnerable to minimum wage increases, rather than relying on anecdotal evidence or assumptions of findings in overseas evidence. Then, it looks into which groups are becoming more affected over time as the minimum wage has increased. Next, there is an evaluation of the link between earning the minimum wage and poverty, as well as the impact on household inequality, and a brief examination of the role of the minimum wage from an antipoverty perspective. The next contribution of this thesis is aimed at identifying the effects on the wage distribution and wage inequality of different age groups from increases in the minimum wage. This study also extends previous research on the employment effects associated with the adult minimum wage, which was last conducted in 1999. The impact on the employment propensity of affected teens is also delved into, given that only one study has looked at this subgroup and only focussed on the short time period of 1997 to 2003, whereas this study's time period is 1986 to 2004. Besides employment effects, the impact on unemployment, hours worked and inactivity is also presented in this research. Lastly, to examine the economic impact of minimum wage increases from the employers' perspective, an event study is carried out. This particular study focuses on the substantial increase in the youth minimum wage rates in 2001 and 2002 and employers in industries with high concentrations of minimum wage workers.