The Coalition Government has agreed to increase the minimum wage to $23.15 in April, a 2% boost that's less than half the forecast rate of inflation for the year ending March.
National’s coalition agreement with New Zealand First committed to “moderate increases to the minimum wage every year” while the Act Party campaigned on freezing the minimum wage.
Cabinet's decision to increase the minimum wage less than inflation effectively lowers the base rate in inflation adjusted terms.
Minister for Workplace Relations, Brooke Van Velden said this was justified as the minimum wage has been increased much faster than average wages or inflation over the past 20 years.
She initially recommended a 1.3% increase to Cabinet, alongside a 2% and 2.7% option.
“I believe such a rate is appropriate given the current economic conditions and the historically large increases to the minimum wage (relative to inflation) that have distorted relativities”.
Van Velden’s Cabinet paper said the increase to the minimum wage should be compared to official inflation forecasts for the year ending December 2024 — of between 2.5% and 2.9%.
“Any increase to the minimum wage that is substantially higher than inflation risks increasing pressure on businesses that are already struggling in a cost of living crisis, and reducing employment opportunities in a softening labour market,” she said.
The Ministry of Business, Innovation and Employment recommended a 4% increase to $23.60, based on an assessment of inflation over the previous year and the relative gap between median wages.
In a 2023 review of the minimum wage, which informed the Cabinet decision, MBIE said the wage “would likely” need to be at $23.60 or higher to “approximately maintain the current real-value of the minimum wage”.
However, the gap between the minimum wage and the median wage has been getting smaller over the past two decades and particularly during the two terms of Labour-led governments.
“In the past two years, the minimum wage has increased by about the rate of inflation. Prior to that, there was a period of significant increases in the real value of the minimum wage,” MBIE said.
Austerity measure?
BusinessNZ, which was consulted on the decision, said no increase in the minimum wage would “effectively represent an austerity measure” for workers.
The advocacy group said it could support an increase that reflected the recent movements in the Consumer Price Index and Labour Cost Index.
Van Velden said a new minimum wage would be set every year but “not necessarily at the rate of inflation”.
“This is a cautious increase, noting that inflation is decreasing,” she told reporters.
MBIE also consulted the Council of Trade Unions which recommended an increase to the living wage, which would be $26 an hour.
Craig Renney, an economist at the union group, said the 2% increase was a cut in real terms.
“Taking money away from hundreds of thousands of workers during a cost of living crisis defies understanding, and is poor economics,” he said in a statement.
There was a $944 difference between what MBIE recommended and what the Government ultimately decided to do.
“These losses dwarf the tax changes that the government is proposing – meaning that workers will be worse off in real terms even after any tax package changes,” Renney said.
Fallen through the cracks
Brad Olsen, the principal economist at Infometrics, said minimum wage settings have generally not been set based on inflation over the past few years.
The Labour government had a policy of increasing the base rate in real terms to bring it closer to the living wage.
Olsen said if wages were being adjusted for inflation, that could be done relative to inflation that has already occurred or in anticipation of future inflation.
Either approach could be appropriate, but switching from the former to the latter would result in one year’s worth of inflation falling between the cracks.
Olsen said there wasn’t a settled principle for how minimum wages should be set and governments were just deciding based on the political and economic context.
“It would be good if there was a principle, but for now politicians are just choosing based on what suits them best,” he said.
It was reasonable for the Government to opt for a smaller increase this year, given there had been larger increases in previous years.
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