The most recent raising the minimum wage of Aotearoa New Zealand has once again drawn attention to low-paying jobs and the established belief that low wages are a starting point for employees who can move quickly to a higher paying job. But our research found the situation is not so simple. For older New Zealanders, the opportunities to get out of low-paid work are quite limited.
In our research, we examined whether low-paid workers can easily transition to higher-paying opportunities. We wanted to investigate whether low wages create a lock-in effect, or whether workers in New Zealand have enough room to move up the pay ladder.
Understanding the labor market dynamics faced by low-wage workers is becoming increasingly important for a number of reasons. An employee’s earning level corresponds to the degree of pain caused by the current cost-of-living crisis. They are low paid feel the pinch more than people with higher incomes.
Moreover, being low-paid for a long time can have a negative impact on people’s financial resilience and wealth manage funds for rainy days for unexpected expenses.
New Zealand’s low wage sector
In 2020, the OECD estimated that about one in ten New Zealand workers (8%) could be classified as low paid. This figure is significantly below levels observed in other countries such as the United Kingdom (18%) and the United States (24%).
Previous studies evaluated an average worker’s prospects of transitioning from a low-paid job to a higher-paid job. Some studies found a degree of “permeability” in the labor market – being low paid is more of a temporary phenomenon as workers can move up the pay ranks over time.
However, there are some empirical challenges in testing the earning prospects of low wage workers.
Read more: Raising the minimum wage isn’t reckless – it’s what low incomes need
First, the socioeconomic backgrounds of employees are incredibly varied. Young workers, for example, are much more likely to start with low-paid work, but are better qualified compared to older low-wage workers.
Not surprisingly, our analysis showed that the chances of moving from low wages to higher wages depend on individual characteristics such as age and qualification. And the results aren’t set in stone either, as on-the-job training and changing employers can improve earning prospects.
Administrative data on income
We used Stats NZs Integrated data infrastructure (IDI) to track a group of low-paid workers over time. We then estimated how their chances of leaving low-paying jobs for higher-paying jobs changed over this period. And since a person’s background plays a prominent role in these changes, we conducted our analysis separately for a person’s age and qualification.
Our starting point was the 2013 census. We looked at men between the ages of 20 and 60 in March 2013, their monthly wages and salaries between 2013 and 2016, and their qualifications.
We defined someone as low paid if their monthly income was in the lowest 20% of the salary distribution. To put the threshold in perspective, the minimum wage in March 2013 was NZ$13.50 for an adult, or a monthly wage of $2,268 for a 40-hour week. Our low wage threshold is $2,936.
In terms of qualifications, we used the New Zealand qualifications framework. We focused on three qualification groups: no qualification (level 0), intermediate qualification (levels 1 to 4), and high qualification (levels 5 to 6 and above).
Who leaves low pay – and who doesn’t?
We found that workers aged 20 to 25 with an average or high academic qualification saw the biggest move away from low wages. The probability of maintaining a low wage after one year fell by 9 percentage points for workers aged 20-25 with the highest qualification level.
For workers of the same age group with an average level of education, the decrease was estimated to be 5-6 percentage points. However, the estimated decline hovered around 1-2 percentage points for workers their age without any qualifications.
Read more: Inflation raises prices and lowers real wages – what needs to be done to support NZ’s low income households?
At the other end of the age spectrum (50+), we noticed that low-wage persistence hardly changed over time. There were also almost no differences between the three qualification levels.
The same pattern emerged over a longer period of time. Five years after the 2013 census, we found that only 30% of those workers in their early twenties were still on low wages. For workers in their 50s, the respective share was 60%.
In addition, workers with qualifications were much more likely to move into higher-paying jobs than workers without qualifications. But this positive effect diminished significantly with worker age.
Job hopping to improve wages
Our research illustrated that the earning prospects seemed most promising for young and highly qualified workers. We took the analysis a step further by looking at whether moving to higher-paying firms helped wage growth.
Using tax data from the Tax and Customs Administration to look at average wages at the firm level, we found that the likelihood of joining higher paying firms decreases with age. And while we found that having a higher qualification increases the likelihood of a switch, this positive effect decreases with age.
Clearly, labor welfare policy initiatives to help low-wage workers need to be more nuanced than a simple, one-size-fits-all approach. Young workers with some qualification have, on average, good chances of leaving a low-paid job. However, the outlook is very different for young workers without qualifications or for older workers.
