Join Us
Joining the Taxpayers' Union costs only $25 and entitles you to attend our annual conference, AGM and other events.
Dr Michael Dunn on relationship between unemployment and minimum wage
Minimum wage policy was quite a feature on last night's TV3 leaders' debate between John Key and David Cunliffe. Stuff reports:
The first half of the televised TV3 debate was dominated by the economy, with Key on the attack over Labour’s plan to raise the minimum wage by $2.
Key argued that small business can’t afford the hike and it will cost jobs.
Cunliffe cited US research that shows there is no relationship between a minimum wage rise and unemployment, saying this was backed by Treasury. ‘‘You can have cheap government or you can have good government,’’ he said.
Earlier in the week, we released an independent report by Dr Michael Dunn (who ran the team at IRD costing social policy for various ministers of revenue) which critiques the numbers in the Green Party's wage policy. The report is relevant to the debate:
Context
There is now a lot of debate about the minimum wage and the expected impact of an escalation of the minimum wage on employment as well as on net Government revenues (the fiscal impact).
Our previous analysis focussed on the fiscal impact, and showed that even without limiting employment growth, the extra revenue from income tax (and for that matter, on GST on the additional wages) would be insufficient to offset the additional cost to the Crown to fund its payroll and primary service contractors.
Impact of increasing minimum wage on employment
We are now hearing claims that “numerous studies have shown that increasing minimum wages has no adverse impact on employment levels, and may in fact lead to increased employment”.
We agree that there are numerous studies from well-respected researchers that demonstrate this to be the case, particularly in the US. However, the US is a poor choice for estimating the likely impact of increasing the minimum wage in New Zealand. The minimum wage in the US is less than 40% of the median wage, whereas in New Zealand the minimum wage is above 60% of the median wage. This means that further increases here are much more likely to affect wage relativities and the employment market in general.
There are studies that demonstrate an impact of increasing minimum wages on employment in countries where the minimum wage is above 50% of the median wage. We referred to some of these in our previous paper. We repeat that section of our paper below.
Source: US Department of Labour, September 2014
Studies that compare the employment effects of minimum wage changes in different countries
Research into the impact of increasing minimum wages on employment has identified that the effects are negligible when the minimum wage is below 35% of the average wage (as in the US), but are more significant and negative (i.e. raising the relative minimum wage reduces future employment) when the minimum wage is above 45% of the average wage (as in France and several other European countries).
So in short, Mr Cunliffe is right to say that in countries such as the United States, Japan and Korea, where the minimum wage is a small fraction of the median lifting the wage has little impact. The key question though is whether that holds true in New Zealand, France and Turkey - where minimum wages are already a much higher percentage of the median.
Dr Dunn's full paper can be downloaded here. His abridged version (just covering above) is available here.
Expert costing of Green Party wage policy
The Taxpayers’ Union is today releasing independent research from former NZIER Principal Economist, Dr Michael Dunn, which raises significant questions about the Green Party’s election costings.
Dr Dunn’s analysis of the Green Party’s “Fairer Reward for Fair Effort” policy document shows that the Party’s taxation forecasts are incorrect and instead of generating tax revenue, will actually result in a net loss in revenue.
The Greens say that their policy will mean increased revenue to the Government of $800 million per year, our independent expert says the actual cost to the Government is at least $110 million. That is a massive difference of more than $900 million in the one policy and suggests the Greens' costings are fundamentally flawed.
On top of the drop in tax revenue, Dr Dunn estimates that the policy would increase government expenditure on employee wages and contracts for services by around $1.1 billion over 3 years.
The Taxpayers’ Union repeats our offer to allow our independent expert to confidentially cost any political parties' policy before they are released so that the public can have confidence in how much a policy will cost or benefit taxpayers.
The report's author, Dr Michael Dunn, has told media:
The Greens' costing completely ignores the reduced taxes from companies due to the higher wages. They appear to assume that businesses can magically generate more money to fund higher wage bills. It doesn’t happen like this in the real world.
Expected slower employment growth will also adversely affect tax revenue.
Under this policy the Governments' primary fiscal balance would be reduced, by at least the direct costs already acknowledged by the Green Party, as the incremental tax revenue yield would be minimal, if any. In addition social transfer payments linked to wage rates would be increased.
This isn’t some Taxpayers’ Union hack calling into question the Greens' costings. Dr Dunn led the team at IRD that costed revenue policy and produced budget revenue forecasts for 12 years. He has advised both National and Labour led administrations. We've engaged him to review numerous party costings and provide the information for our Bribe-O-Meter.
UPDATE: Our expert, Dr.Dunn, wishes to thank a reader who pointed out that the proposed October 2014 increase in the minimum wage would be only 75 cents per hour, and that would have a reduced cost and impact. He has recalculated his figures accordingly, but the conclusions are unchanged. The updated report is available for download here.
Minor parties added to Bribe-O-Meter
We've added the Green, ACT, United Future and Conservative Parties to the ‘Bribe-O-Meter’ election costing page launched last month. Excluding ACT and New Zealand First, the total election ‘bribes’ - that is new spending not already in the budget covering the next parliamentary term, equals $12.7 billion, or $7,486 per household.
We're delighted that the Bribe-O-Meter is enabling Kiwis to judge for themselves the various bribes this election. With the addition of the minor parties voters can assess which political parties are offering taxpayers value for money.
Currently National's election promises add up to $329 per household. The equivalent figure for Labour is $2,776, the Greens $2,893, United Future $1,253, and the Conservatives $236. ACT is in the negative, committing to cut spending by $6,876 per household.
A lack of detail in New Zealand First’s policy documents has made it impossible for the Union's independent expert, Dr Michael Dunn, to calculate credible figures for the Party’s inclusion in the Bribe-O-Meter. Public and private requests to New Zealand First have, to date, not resulted in amelioration. New Zealand First apparently just doesn’t have the information. It appears that Mr Peters makes promises to all and sundry, but no one at his office is adding up the cost.
Click here to view the Bribe-O-Meter.
