2  Background

2.1  New Zealand’s Minimum Wage Legislation

A statutory minimum wage was codified into law in New Zealand in 1983 by the passage of the Minimum Wage Act 1983. This act set a binding wage floor for all workers 20 years or older with the only exemptions being for workers who undertake a set level of training and for disabled workers who are employed in approved sheltered workshops.[3] This legislation decreed that the minimum wage rate must be reviewed each year by December 31st. Any changes in the minimum are then typically implemented in the following March. In the 1980s, legal floors were also set on market wages in all industries covered by union collective bargaining awards and these were typically set higher than the minimum wage. This system was abolished in 1991 under the Employment Contracts Act, and the national minimum wage became the only legal wage floor. In March 1994, a youth minimum wage, set at 60% of the adult minimum, was introduced for 16-19 year-olds.

A general election was held in November 1999, following which a coalition government was formed between the Labour Party and the Alliance. The Alliance had campaigned to improve the labour market outcomes of youth workers, and viewed an increase in the youth minimum wage as critical for such an improvement. An intention to review the youth minimum wage was announced after the 1999 annual review of the minimum wage. In March 2000, a preliminary decision was made to lower the eligibility age for the adult minimum wage from 20 to 18, and to increase the youth minimum wage from 60% to 80% of the adult minimum, with both changes to take effect in July 2000. The intent and details of these proposed changes were announced in a speech by government ministers on 4 April, and concerned individuals were given 10 days to comment on the proposal. These changes were subsequently postponed until the next minimum wage review was implemented in March 2001, and the increase in the youth minimum was introduced in two annual steps from 60% to 70% of the adult minimum in the first, and 70% to 80% in the second. This decision was formally announced on 14 December 2000.

Table 1 summarises the changes to the statutory minimum wages that have occurred since 1990. The adult rate was held constant from 1990 through to 1995, increased 2 percent in 1995 and 1996, followed by a large (10 percent) increase in 1997, was then held constant for 3 years, and has been increased each year since 2000 (by 8, 2, 4 and 6 percent, respectively). The youth minimum rate tracked the adult minimum from its introduction in 1994 until 2001. Lowering the age eligibility for the adult minimum from 20 to 18 in March 2001 had the effect of increasing the minimum wage for 18 and 19 year-olds by 69 percent. Coupled with the 4 and 6 percent increases in the adult minimum wage in March 2002 and 2003, the minimum wage for this group rose by 87 percent between 2000 and 2003, compared to the 13 percent increase in the adult minimum wage. Together with the adult minimum wage changes, the increases in the youth minimum wage from 60% to 70% of the adult minimum in March 2001, and further to 80% in March 2002, each had the effect of increasing the minimum wage for 16 and 17 year-olds by 19 percent and, together with the 6 percent increase in 2003, by 49 percent between 2000 and 2003.

Figure 1 describes the trends in the real minimum wages (in June 1999 dollar values) that applied to 16-17 and 18-19 year-olds, and to adult (20 years and over) workers over the period of our analysis, 1997—2003. Although the statutory minimum wage remained constant at $7 from March 1997 until March 2000, relatively low or negative inflation caused little erosion in the real value of the minimum wages. The 8 percent increase in 2000 provided a combined catch-up and real increase in the minimum wages over those prevailing in the late 1990s. The large changes observed in figure 1 correspond to the shift of 18-19 year-olds from the youth to adult minimum wages in March 2001, and the two-step increase in the youth minimum for 16-17 year-olds from 60% to 70% of the adult minimum in March 2001, and to 80% in March 2002.

2.2  Related Minimum Wage Research

Limited prior research has examined the relationship between minimum wages and labour market outcomes in New Zealand. Maloney (1995), Chapple (1997), and Pacheco and Maloney (1999) each examine the time-series evidence on the relationship between minimum wage changes during the 1980s and early 1990s and employment outcomes for youth and low-skilled workers. Although there is some evidence that these prior minimum wage increases had negative employment effects, the findings, in general, are not robust to different model specifications. Summing up this research, Chapple (1997, p. 47) concludes that “overall consideration of the employment impact of minimum wage rates suggests that conclusions regarding significant negative employment effects from real minimum wage increases are strikingly non-robust.”

Interestingly, Portugal undertook a similar reform of the youth minimum wage in 1987.[4] Pereira (2002) and Portugal and Cardoso (2002) examine the impact of these reforms on youth labour market outcomes using firm level data. Pereira (2002) estimates negative and statistically significant effects of the increase in minimum wages on the employment of 18-19 year-olds, with an implied elasticity in the range –0.2 to –0.4. She also found evidence of a positive spillover effect on the employment of 20-25 year-olds from this reform. In contrast, Portugal and Cardoso (2002) estimate a significant positive impact of the minimum wage change on the employment of the affected teenage groups.[5] Portugal and Cardoso decompose the effect of these changes into “separation” and “accession” effects, and conclude that although there is a reduction in accessions to firms, this impact is outweighed by a reduction in worker separations from firms.

Elsewhere, Abowd, Kramarz, Lemieux and Margolis (2000) examine the impact of minimum wages on youth employment in both France and the US using household survey data. By comparing youth workers whose wages lie between the current and next year’s minimum wage, with those workers whose wages are marginally above this level, they find that subsequent employment probabilities of the former group are lower and conclude, for both countries, that real minimum wage changes are typically associated with significant employment effects in line with competitive labour market theory. Currie and Fallick (1996) use data from the US National Longitudinal Survey of Youth to examine the relationship between changes in the minimum wage and youth employment, and find that youth workers who are affected by a minimum wage increase are about 3% less likely to be employed in the following year. Neumark and Wascher (1995) examine spillover effects of minimum wages on teenage school enrolments using state level data, and find negative effects on enrolments and positive (i.e. increasing) effects on inactivity rates.