The purpose of this paper is to assess the potential distributional effects of an increase in the statutory minimum wage in New Zealand. In a recent comprehensive review of the empirical literature, Authoret al. 2016, p. 61) note that "the impact of the minimum wage on employment remains a controversial issue. Brewer and De Agostini (2015) also used a non-behavioral model (UK EUROMOD module) to examine the interaction of the minimum wage with the tax benefit system.
Budget Constraints
Examples for single parents are presented in subsection 6.1, given the results discussed in the following sections.
Revenue and Labour Supply E¤ects
The main feature of these matrices is that the distribution of hours worked after the change in the minimum wage, conditional on working at a certain level of hours before the change, is multimodal and reflects the "jumps" in hours worked that arise from the non-convexity of the budget sets discussed above . From the first line of Table 4, it can be seen that almost six percent of single women who did not work before the minimum wage change want to ensure positive working hours after the reform. The probability of an increase in hours worked for single women is higher for those working 20 hours before the reform due to the minimum wage change: in addition, there is a very small probability of an increase in hours worked (the diagonal of the matrix is almost 100 percent).
However, for those who already work 5 to 10 hours a week, the labor supply rises to 35 hours and more; This again reflects the non-convexity of budget sets. The small magnitude of the reduction in labor supply (represented by the data below the main diagonal) occurs in those who may experience an increase in net income along with a reduction in hours worked: this possibility is clearly indicated by the type of budget line shown above. Given that the only people whose labor supply could potentially change are those working at or just above the initial minimum wage, the only case unaffected is that of single women who initially work 50 hours.
A smaller share of married women worked zero hours before the minimum wage increase (45.8 percent compared to 53.4 percent). Before the minimum wage change, 16.2 percent of single women worked 5 to 30 hours, but the corresponding figure for married women is 21.9 percent.
Inequality E¤ects
The left-hand box of the table shows that the redistributive effect of the minimum wage increase is small, measured by the change in the Atkinson measure of net income per adult equivalent person. The increase in inequality due to the minimum wage increase, for the higher values, is the highest for single parents. This reflects the fact that the minimum wage increase causes more inequality in the very lowest ranges of the distribution of net income, but less inequality in the somewhat higher ranges.
This is important for lone parents, where the level of involvement is the lowest (proportion providing zero hours is the highest, see Table 5). Nevertheless, for demographic groups consisting only of couples (with and without children), an increase in the minimum wage reduces inequality even at a high inequality parameter. In the appendix, the above inequality results are compared with equivalent measures, but based on a ... fixed labor supply assumption.
However, allowing for the potential labor supply effects of a minimum wage increase is crucial in accounting for changes in inequality. Not surprisingly, the differences between the supply of …xed and variable labor cases for the inequality of the metric utility of money are much smaller, because this includes changes in the value of leisure.
Social Welfare Function Evaluation
At all levels of inequality aversion and across all demographic groups, the reduction in inequality is much lower than for net income. Furthermore, at higher values and 2.0, all demographic groups experience a small increase in inequality with the sole exception of couples with dependent family members. This is an important result because it suggests that reductions in inequality, as commonly used to measure household income (in this case income after direct taxes and benefits), are largely associated with reduced leisure time for households that increase their labor supply. .
When properly valued, this reduced leisure time minimum wage policy generally has a negligible impact on inequality, and in some cases may increase inequality for some inequality aversion parameters and household types. These relatively small effects on net income or utility inequality are obtained with endogenous responses to labor supply. There it is shown that the inequality reductions associated with the increase in the minimum wage are even smaller in this case.
This shows a clear trade-off between 'justice and efficiency', i.e. the extent to which an increase in inequality (a decrease in equality) can be offset by an increase in the arithmetic mean (an increase in equality). ciency). In cases where inequality increases, the higher minimum wage does not benefit the unemployed, while it does help those who work to obtain higher net incomes and higher utility (in most cases, even if some free time is available). is sacrificed).
Poverty E¤ects
If a relative poverty line is chosen (set as a … fixed percentage of, say, the median income), then an increase in the minimum wage has the effect of raising the poverty line. Two ratios, 50 percent and 40 percent of the median income per adult equivalent person, was used for the relative poverty lines. The results suggest, first, that for all households combined, the increase in the minimum wage reduces poverty using P0 or P1 measures: reductions range from -0.18 percent to -7.09 percent.
These reductions are less pronounced and even negligible once the distribution-sensitive measure P2 is used: there is a zero poverty change for P2 when using 40 percent of the median income and -0.03 percent when using 50 percent of the median income. The results in the previous sections suggested that, given the composition of household incomes, a policy of raising the minimum wage has a relatively small effect on income inequality per adult equivalent person. It has even been shown that with high inequality aversion (given more weight to low incomes in the social evaluation function), an increase in the minimum wage may actually increase overall inequality.
Thus, it turned out that the minimum wage policy is not particularly well oriented towards this goal. When comparing the increase of the minimum wage with the alternative, which includes a change in the system of tax transfers, it is known that there are also "target inefficiencies" in the structure of benefits.
De…ning Policy Equivalence
Measuring the Minimum Wage Subsidy
In this case, the full value of the new minimum wage, wmin, instead of wmin; would be paid by the government and the implicit subsidy for this group is thus given by SN W = NN WhN Wwmin, where wmin is the new (higher) minimum wage and where hN W is the arithmetic mean number of hours worked of the new NN W wage earners. An alternative decomposition of the implicit subsidy to that given in (6) could be the implicit subsidy for fixed labor supply and the additional subsidy associated with policy-induced changes in the labor supply that entail the payment of the minimum wage. 17For current purposes, hours worked after the policy change can be calculated as, for each person, the expected value of the conditional time distribution (that is, subject to an optimal number of hours existing before the reform equal to the observed discretized hours).
However, additional tax revenue (plus lower benefit payments) of the policy is estimated at $1,170 million.18 The net cost to the government of the simulated increase in the minimum wage would therefore be $523 million. Therefore, to identify an equivalent benefit reform, simulations consider uniform increases in all basic levels of welfare benefits (such as Domestic Purposes Bene...t, Unemployment Benefit and Sickness Benefit) with a net cost of $523 million. Simulating a range of benefit level increases (in $0.50 increments) identifies that increasing all benefit levels by $12.50 has a net shell cost of $525 million (after accounting for labor supply responses).
The following therefore examines the impact of this policy change on inequality and poverty. 18 This net income to the state budget due to the increase in the minimum wage is largely the result of labor supply effects captured in the model.
Inequality and Poverty Impacts
Therefore, the results in this section suggest that, even when allowing for wage spreads a long way up the wage distribution, the effects of a significant increase in the minimum wage on inequality and social welfare are generally quite small. Indeed, it was shown that for high inequality aversion, an increase in the minimum wage can actually increase overall inequality. Despite the small estimated reductions in inequality, the results in the Appendix suggest that ignoring endogenous labor supply changes may lead to substantial underestimations of changes in inequality associated with minimum wage reform.
The evidence shows that the inequality reductions associated with the increase in benefit levels are much smaller than the increase in the minimum wage, even though the latter also turned out to be small. These results highlight the limited redistributive gains achievable, at least in New Zealand, from a minimum wage or an increase in social benefits. This appendix examines the impact of the simulated minimum wage increase on inequality, prior to any labor supply adjustments.
The already small redistributive effects of an increase in the minimum wage are further reduced when the labor supply is considered to be … xed. The comparisons show that it is essential to take into account potential labor supply effects of an increase in the minimum wage in the calculation of inequality measures. 2017) Reducing poverty and inequality through tax credit reform and the minimum wage: the UK as a case study.
The measurement of low pay in the UK labor force survey. 2012) Wage Inequality, Minimum Wage Effects and Flooding.
