Tuesday, March 08, 2011

Choosing the worse option

Last month, the government announced a miserly increase in the minimum wage, from $12.75 to $13 an hour. The increase was half the rate of inflation, and resulted in low-paid workers going backwards in real terms. I was curious about the process used to decide this increase, and what options the Minister considered, so I filed an OIA seeking the advice she had received on the matter. Today I received the response - and it shows that Kate Wilkinson perversely chose the worst option, as assessed by her own criteria.

You can read the full documentation here [PDF]. It consists of a number of reports from the Department of Labour laying out the options and assessing the costs and benefits of each. Wilkinson was presented with four options - no change, and increases to $13, $13.50, and $15 per hour. The first and last of these were clearly salmonella - options designed to be discarded, used to frame the issue; in practice the decision was between option 2 ($13 / hour) and option 3 ($13.50 / hour).

These options were assessed for their impact on employment, wages, and inflation. $13 / hour was assessed as having no impact on economic criteria, as it "does not constitute a real increase" (10/98801, paragraph 20). $13.50 / hour was expected to reduce employment growth by between 480 to 640 people. That's against an expected increase of 22,000, and the effect is regarded as "negligible in terms of total employment". Likewise, inflationary effects are expected to be negligible. A higher minimum would result in higher costs to government - an extra $6 million a year for $13 / hour, an extra $30 million a year for $13.50 - but that's not a significant difference. On the economic analysis, there's no real difference between the two options.

The options were also assessed against principles of fairness, protection, income distribution, and work incentives. And here the difference really shows:

$13.00: This option will maintain existing levels of fairness and income distribution and existing work incentives as it is an increase in line with the change in consumer prices and average wages. It may erode existing levels of protection.

$13.50: This option will increase existing levels of fairness and income distribution. It may increase or maintain work incentives, as it is likely to have a higher percentage increase than benefits. The size of the increase is greater than movements in average minimum wages in collective agreements so it is likely to improve current level of protection.

So, no real economic difference, but better rankings on non-economic criteria. The $13.50 option would seem to win hands-down as delivering better outcomes for no real cost. Instead, Wilkinson chose the lower one. After all, she wouldn't want to increase fairness, would she?