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Minimum wage extends minimal help

With four in ten poor children living in families where mum or dad is in work, raising the minimum wage is an intuitive response to help them.

Work is often trumpeted as a key response to solving child poverty, and for good reason, children in workless families are seven times more likely to be poor.

But when hard-working families remain trapped in poverty, it really rubs us the wrong way. Labour and the Greens rightly think something should be done about this, both unveiling policies that would seek to increase the minimum wage to around two-thirds of the average wage (currently sitting at around half, one of the highest in the OECD).

Open debate

But while the intention to help working families in poverty is good, debate remains well and truly open over the effectiveness of raising the minimum wage.

The classic economic argument against these increases is that rises in the minimum wage go hand in hand with rises in unemployment: higher wages sure, but at the cost of fewer jobs, with diminished hours.

National Party agrees, saying that Labour’s policy to increase the minimum wage by $2 would not only cost 6000 people their jobs, but would also increase taxes and inflation and reduce competitiveness.

However, other research suggests that in practice this kind of impact on employment is limited.

Some rationale

Economics aside, if raising the minimum wage is actually going to help children in poverty-stricken working families, those on a minimum wage actually need to be in poor families. In reality, minimum wage workers are perched on all rungs of the household income ladder.

An analysis by two academics in 2008 suggested that only 40% of minimum-wage workers live with households in the bottom three income brackets, with more than 16% living in homes that sit on the top three rungs of the ladder.

Because many minimum wage earners do not actually live in poor families, an overwhelming majority under 30 without children, a raise would be a poorly-targeted intervention.

Higher wages hurt

Adding to this, higher wages do not necessarily translate to more money for these families to spend on getting by.

This is because means-tested benefits like the Family Tax Credit and Accommodation Supplement are reduced as incomes rise.

Some families may even be worse off if government assistance reduces more than wages increase, a particularly likely outcome for single parents.

As Jonathan Boston and Simon Chapple conclude in their book, ‘Child Poverty in New Zealand,’ raising the minimum wage would “do little to solve child poverty in New Zealand” and that “directly addressing tax and benefit rates for families with children is a far better solution to child poverty than raising the minimum wage.”

Besides, the fact that it would do nothing at all for a majority of children in poor families who rely on benefits, increasing the minimum wage as a response to child poverty is well-intentioned but fundamentally flawed.

We need to do something, but this is not the solution.

Kieran Madden is a Researcher at Maxim Institute based in Auckland.

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