Real minimum wages

By Eric Crampton 27/02/2013 2

Despite inflation outcomes slightly below the lower-bound of RBNZ’s inflation target, and despite high unemployment rates, New Zealand’s increased the minimum wage by $0.25 to $13.75.

It’s mildly interesting to check the CPI-deflated series and one indexed to average wages.

The blue and red lines track the nominal and CPI-adjusted minimum wages on the left hand axis; the yellow line traces the adult minimum wage as a percentage of the average wage on the right hand axis. In 1996, the minimum wage was 40.6% of the average wage. That increased to 50.4% of the average by 2008 and has held steady there since then.

NZ youths in their first 200-hours of work are now eligible for a new-entrant’s wage that’s 80% of the adult minimum wage: $11. That’s 40.3% of the average wage (not the median, the average) for a new 16 year old worker with no experience.

Australia allows a youth minimum wage of $7.55 for 16 year olds.

Maybe there are reasons in the behavioural economics literature for nominal wage rigidity. But government does seem to like to turn that into real wage rigidity for the bottom of the wage distribution.

If National can’t countenance holding the minimum wage steady when inflation is below 1%…

2 Responses to “Real minimum wages”

  • Eric, I wonder if referencing against the average is fair. Between 96 and now how has the distribution of wages changed? I thought it was a skewed distribution – is it more skewed? What would a comparison to the median wage look like?

  • The median wage is lower than the average. We tend to worry about disemployment effects when minimum wages are 45% or more of median wages rather than average wages – the minimum wage simply doesn’t bind for the folks who pull the average above the median. So the median wage being lower than the average makes the disemployment effects rather worse.

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