Minimum Wages

By Eric Crampton 10/02/2014 2


The NBR asked me about John Key’s proposed hike to the Minimum Wage. So I told them:

New Zealand’s minimum wage is among the world’s highest, when we consider it in relation to the median wage. American minimum wages vary state-to-state, but the federal minimum wage of $7.25 is about 40% of median hourly wages in the US; ratios in individual states vary with state-by-state wages and minimum wages. The latest New Zealand Income Survey has median hourlyearnings at $21.58, so a $13.75 minimum wage is about 64% of the median wage. I get nervous about disemployment effects of the minimum wage when the minimum wage is more than half the median. If we want to support the working poor, targeting assistance through wage subsidies like Working For Families can do the job without forcing low-skilled workers out of the workforce.

The PM cited numbers that were close to the true ones and that got the important bit right: there is a very large gap between American and Kiwi minimum wages when we consider them in terms of the median hourly wage. A $15/hour or $18+/hour minimum wage would be a pretty bad idea.

I wasn’t saying we should make WFF more generous. But if you want to do more for the working poor, wage subsidies still beat minimum wages. I’ve seen some complicated arguments around complementarity between minimum wages and wage subsidies, but it’s hard to avoid that very high minimum wages do damage to the employment prospects of our least skilled, that the poor are more likely to be the customers of the products and services provided by minimum wage workers and consequently bear more of that burden, and that the tax system is a more equitable way of distributing the burden of helping the working poor if we think it is a good thing that the working poor be paid more.

I suppose it’s also relevant that Obama wants a substantial hike to the US minimum wage. A dark side of me wants him to do it, just so we can get some clean estimates of just how bad the disemployment effects would be. Some states would have to hike a lot to hit a much higher US minimum; others, not at all. But the social costs of such experiments can be large. If you want to make sure that poor workers have more money, run it through EITC instead of minimum wages. I know there’ve been a few recent surveys getting reasonable support among economists for a hike to the US minimum wage, but that, I think, is largely because they’ve written off the prospects of doing it through EITC or other wage subsidy schemes. Why not try for the first best, if those are your values?


2 Responses to “Minimum Wages”

  • So, what John Key is saying is if you are a low income, low skill worker, its best to have kids so you can be provided additional income by the state?

  • another socialised cost of business.

    I agree with the idea of using the tax system to increase minimum incomes (if that is deemed necessary). However, since the labour being subsidised is earning income for a business entity, and that entity could not otherwise afford the labour, any social transfer is in effect reducing the costs to that business, so it stands to reason (to me anyway) that businesses should clearly bear a proportion of the cost.

    In effect then, the skew of taxation would need to be addressed as a part of any such a move.