Interpreting Changes in Minimum Wage Incidence Rates

Abstract

Statutory minimum wages increased substantially in New Zealand between 2000 and 2008. Where less than three per cent of workers were being paid the minimum wage in the late 1990s, this figure increased to more than ten per cent of workers by 2008. However, it is not obvious how this rise in the minimum wage incidence rate should be interpreted. The problem is that minimum wages can have behavioural effects. A higher wage floor could reduce the proportion of minimum wage workers in an economy by eliminating low-wage jobs. Recent New Zealand experience provides a unique opportunity for estimating this behavioural impact. The substantial gap between adult and teenage minimum wages was eliminated immediately in 2001 for 18 and 19 year-olds and gradually by 2008 for 16 and 17 year-olds. We find little evidence of an overall behavioural effect. Increases in incidence rates were not diminished by losses in low-wage employment. However, we find compelling evidence that minimum wage incidence for an age group is reduced by increases in minimum wages for neighbouring age groups.