Minimum wages and wage inequality in New Zealand

This paper addresses the effects of dramatic increases in minimum wages on wage inequality in New Zealand since 2000. Over this period the adult minimum wage increased more than 75% in CPI-adjusted real terms, and applicable minimum wages for teenagers increased by more than 200%. There has been broad-based wage growth across the distribution, with remarkably stable growth of about 30% (1.2% per annum) across the top-half of the wage distribution, and substantially stronger at lower quantiles (up to 66% at the 5th percentile). This has compressed the lower tail, and reduced wage inequality: between 1997-2000 and 2020-2023, the standard deviation of log(wages) fell by 16%, while the log-difference between the 50th and 10th percentiles of wages (50-10 gap) fell by 28% compared to a small (4%) increase in the 90-50 gap. Adapting the DiNardo, Fortin and Lemieux (1996) methodology to assess the contributions of changes in worker characteristics, economic (wage) returns to characteristics and the minimum wage to changes in wage inequality over this period, we conclude that minimum wage increases explain most of the reduction in wage inequality (about 90% of the 50-10 change, and 70% of the change in the standard deviation of log(wages)), while changes in worker characteristics modestly increased wages and inequality, and changes in returns reduced inequality slightly. However, there has been an unexplained increase in the density between the recent minimum and median wages: differences between male and female wage changes are consistent with recent pay equity settlements being a contributing factor, together with minimum wage spillover effects.