The Redistributive Effects of a Minimum Wage Increase in New Zealand. A Microsimulation Analysis

Abstract

This paper examines the potential effects on inequality and poverty of a minimum wage increase, based on a microsimulation model which allows for labour supply responses. It then compares these outcomes with an alternative, commonly used policy of raising government welfare benefits, similarly aimed at poverty or inequality reduction. Results suggested that, due to the composition of household incomes, a policy of increasing the minimum wage appears to have a relatively small effect on the inequality of income per adult equivalent person, using several inequality indices. The minimum wage policy is not particularly well targeted at its objective, largely due to many low-wage earners being secondary earners in higher-income households, while many low-income households have no wage earners at all. However, an ‘equivalent’ policy of raising welfare benefits does not clearly demonstrate ‘target superiority’. Results suggest that while raising benefits has a greater ability to reduce most poverty measures examined, substantially smaller inequality reductions are found to be associated with benefit increases compared to a minimum wage increase. Thus benefit increases represent a relatively effective strategy for poverty reduction, mainly by targeting sole parents, but (like minimum wages) are also relatively ineffective if inequality reduction is the objective.