by Jim Rose in labour economics, minimum wage Tags: difference principle, John Rawls, minimum wage, Pareto improvement, utilitarianism

Auckland University of Technology Associate Professor Gail Pacheco is not quoted as often she should be in the politics of the minimum wage in New Zealand. Her research repeatedly finds that the increases in the minimum wage over the last 10 to 15 years in New Zealand reduced employment, increased unemployment, and reduced skill acquisition among teenagers:

Tim Maloney and Gail Pacheco (2012) found that the real minimum wages increased by nearly 33% for adults and 123% for teenagers in New Zealand between 1999 and 2008. Where fewer than 2% of workers were being paid a minimum wage in 1999, more than 8% of adult workers and 60% of teenage workers are receiving hourly earnings close to the minimum wage. They estimated that a 10% increase in minimum wages, even without any offsetting reduction in earnings due to a loss in employment or hours of work, would lower the relative poverty rate by less than one-tenth of a percentage point! Gail Pacheco (2011) review the impact of rising minimum wages on employment in New Zealand over the time period 1986–2004. She found significant negative employment effects of a higher minimum wage. Pacheco and Cruickshank (2007) found the youth minimum wage increases resulted in some age groups undergoing a 91% rise in their real minimum wage over the last 10 years. They found that for 16–19 year olds, minimum wage rises have a statistically significant negative effect on educational enrollment levels. But the introduction of the minimum wage appears to have had a significantly positive impact on teenagers’ enrollment levels. This is a possible indication of the ineffective level the minimum wage was set at, in terms of reservation wages of youth in New Zealand. Gail Pacheco & Vic Naiker (2006) reviewed the consequences of where in March 2001, the eligibility for adult minimum wage rates was lowered from 20 to 18 years while the youth minimum wage for 16–17 year olds was also increased from 60 to 70% of the adult minimum wage. Most minimum wage workers in New Zealand work in the four sectors: (1) Retail, (2) Textile and apparel, (3) Accommodation, cafes and restaurants, and (4) Agriculture, forestry, and fishing. Using an event study methodology we examine the economic impact of the substantial increase in youth minimum wage rates on employers in industries with high concentrations of minimum wage workers. All conclusions point to there being an insignificant impact on profit expectations for low wage employers by investors.

In summary, increases in the youth minimum wage in New Zealand reduced employment, increased unemployment but did not reduce the profits of employers.

If the minimum wage is operating off the monopsony power of employers, investors should have anticipated that the profits of these employers will fall, but they did not. Investors anticipated that most of the consequences of the minimum wage increases would fall upon low paid workers themselves in terms of loss of employment, greater intensity of work effort and reduce training opportunities.

The minimum wage is an inefficient way of tackling poverty because many minimum-wage earners are actually teenagers or second earners in wealthy households in New Zealand and in all other countries that have a minimum wage. As soon as one person is unemployed as a result of the minimum wage increase or otherwise disadvantaged, applied welfare economics comes into play with concepts like Pareto improvement. How do you trade-off the losses for one with another’s gains.

Most are those who support the minimum wage shift gears their applied welfare economics in all other social context to emphasise how the losers should be given priority and greater weight when adding up the social gains and social losses of economic change.

The social cost of the minimum wage is not discussed in this way: how many jobs are lost and that these job losses are much more important than any gains to society. All that is done is the number of jobs lost is compared with some other social metrics such as how much the wages go up for those that still have a job and that is enough to conclude that there is a socially beneficial change from a minimum wage increase.

Any low paid workers affected by the minimum wage increase are just reduced to numbers and added and subtracted with great ease and few moral compunctions about interpersonal comparisons of utility

A minimum wage increase is not free if one worker loses their job. The Paretian Criterion states that welfare is said to increase or decrease if at least one person is made better off or worse off with no change in the positions of others.

As Rawls pointed out, a general problem that throws utilitarianism into question is some people’s interests, or even lives, can be sacrificed if doing so will maximize total satisfaction. As Rawls says:

[ utilitarianism] adopt[s] for society as a whole the principle of choice for one man… there is a sense in which classical utilitarianism fails to take seriously the distinction between persons.

Minimum wage advocates fail to take seriously that low paid workers who lose their jobs because of minimum wage increases are real living people who suffer when their interests are traded off for the greater good of their fellow low paid workers, some of whom come from much wealthier households.

If the Left want to improve the lot of the poor, they would be doing better by either promoting an institutional framework that promotes general wage growth and by simply increasing the earned income tax credit.