Opinion: David Chaston shows the unintended consequences of removing the youth minimum wage: 30,000 fewer young people have jobs

By David Chaston

On April 1, 2008, the government abandoned the youth minimum wage, bringing all 15-19 year olds under the general minimum wage.

This raised minimum wage rates for young people by one third over-night, from $9.00 per hour at that time, to $12.00 per hour.

Subsequent increases have raised the minimum wage to $13.00 per hour.

In fact, Phil Goff announced recently that a Labour government would quickly move to raise it to $15.00 per hour if it was elected in November.

But some readers may have noticed recently that youth unemployment has risen markedly. This is at a time overall unemployment has been high.

The question is; has the dropping of the youth minimum wage hurt employment opportunity for people under 20?

This is an issue debated aggressively by economists and labour unions.

But it does seem clear that more than 30,000 jobs for people 15-19 have just disappeared since 2008.

Perhaps they haven’t disappeared overall, but the policy change has meant those jobs no longer go to young people, they have gone to groups that have pushed for the policy change – older workers.

The data at Statistics NZ from the HLFS is the basis of this analysis. That record goes back to 1986, and so covers a number of recession periods where we can inspect the impact of the 2008 policy change compared with prior economic stress periods.

Since the end of the youth minimum wage, participation rates for 15-19 year olds has sunk to their lowest levels on record.

Since the end of the youth minimum wage, the share of the jobs held by 15-19 year olds has sunk to their lowest levels on record.

The share of the employment market that 15-19 year olds had was pretty stable for 15 years or so at about 6.5% - but since the policy change, it has sunk to just under 5%.

Since the end of the youth minimum wage, youth unemployment rates have risen to record levels – mirroring European youth unemployment rates where similar policy changes have been in place for a lot longer.

But overall unemployment rates are a lot lower now than in the previous recession of the early 1990’s. It seems that 15-19 year olds are taking a bigger share of the pain.

Once skilled, workers clearly move into more stable, higher paying jobs. Tracking the age-group employment shifts and median wage (LEEDS) data seems pretty clear. The worry will be that too many of the new 27.5% current youth unemployment levels are not getting the start earlier generations clearly got.

Without that start, we may be setting ourselves up for a deeper structural unemployment issue. Governments have worked hard to address getting the long-term unemployed back into the workforce with some good success.

It is hard to see how the removal of the youth minimum wage has helped the group it was targeted at – although it has surely helped older workers grab the available jobs. The jobs haven’t disappeared, only the opportunity for young people to get started.

If young workers’ share of overall employment had not fallen so sharply after April 2008, and had held at the ~6.5% level consistently evident in the 15+ year period from 1992 to 2008, we can calculate how many youth jobs would not have been lost – and that number now exceeds 30,000.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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35 Comments

I keep mentioning our leadership deficit. This provides another great example of government policies making things worse.

We are led by fools - all current political parties included.

 Correct Colin - not minimum wages is the problem – not enough incentives by the government for decent jobs for the wider NZpopulation is.

 The wider Nzpopulation struggling to afford a decent standard of living, paying for daily necessities is enough prove for that.

 

Thanks Kunst.

I would add that government also provides too many disincentives or perverse incentives against being productive, innovative or taking business risks.

Probably stating the obvious but, if increasing the minimum wage will not cost jobs (as Labour and the Unions claim), why stop at $15 per hour?  Why not $20, or $25 or $30?

A good point....

From my point of view its a choice society makes....$15 an hour isnt excessive......

Alternatively ignoring possible less jobs  is it damaging?  Possibly consider the margins....by this I mean if someone is on a very low wage then I assume the Govn will top their money up via welfare payments to give them a viable amount to live..so others pay via tax to support them...or up the minimum wage and the user who wants the good pays for it....

Example, if a latte coffee is $4.90, would you rather subsidise the coffee drinker as a tax payer or should someone who buys the coffee pay say $5?

As a tax payer  and even a coffee drinker I'd much prefer the latter.

In terms of whether it costs jobs or not, why examine their reasoning and not just complain? their methodology might be sound....or it might suck.

Also there needs to be an incentive to get off welfare and into employment, so the only way I can see that is where a starting wage pays enough more to make that financially viable.

regards

or... is Goofy just trying to bribe his way to an election using other peoples  money?(wont be the first time..)

as for incentives to work..cutting wff and their associated marginal tax rates may be a better option..

David, thanks for your contributions.

The argument of Randist loonies is that paying employees a decent wage will make the country go broke.

They support this by claiming that all jobs besides those in the High Finance and agricultural sectors will go offshore, leaving everyone unemployed, other than the High Finance elite and farmers.

This ignores the flood of Kiwis chasing the comparatively high incomes paid in Australia.

It also ignores the undeniable fact that the worst global economic crisis since the Great Depression was caused by the vile Randist loonie elite High Financee f*cktards.

There's an old saying: "Ya gotta spend it to make it."

Kiwis hate the true meaning of that saying, which is why most Kiwis are debt-ridden and broke.

Most Kiwis interpret it to mean that you should borrow as much as you can in order to buy as many shiny things as possible, but never, EVER invest any money into anything which can generate wealth.

Just keep borrowing and spending and paying glowing tribute to the High Finance elite, and shriek at the idea of anyone else being paid a decent living.

YOU OWE YOUR EMPLOYER! GROVEL AT THEIR FEET! YOU ARE OVERPAID!

that's what I like Anon good nurse - sober, trenchant analysis

so, why not $20, or $25, or $30?

hell, why stop at $30? why not $50?

How about you tell us why not $20? or why not $25?

regards

It depends how many people you want to keep out of the workforce.  At present, people are prohibited from working unless they can find an employer who thinks that their labour is worth $13/hour.   That is already proving impossible for many young people with low skills and limited experience.  Raising the barrier won't make it any more impossible for them, but it may turn difficult to impossible for others.   

Anon good nurse : Beautifully argued ! ........Gummy has been thinking , I've had a Bernard Hickey " aha " moment .

........ The new Labour government , after November's election win , need to ramp up the minimum wage well beyond $ 15 per hour . Currently some folks on $ 100 000 p.a. are still struggling , even with WFF assistance .

We need to set $ 2000 / week as the minmum goal for all Kiwis . Yes mandk , $ 50 / hour !

.......And boost WFF , extend it to include those who don't currently have a family . Why are they discriminated against . Everyone ought to be entitled to WFF . It is free government money , after all .

About bloody time that politicians stop cravingly toadying to GS , Australian bankers , and the ratings agencies .....  Force employers to  give more of the profits back to the workers , and to those who choose not to work , too .

.......... EMPLOYERS ARE TOTAL BASTARDS ,  COUGH UP A DECENT WAGE YOU W**NKERS !

Exciting stuff there GBH.....gets the blood a rushin.....I'm gonna make an appointment with myself ..if I can spare the time....and sort out a decent wage to live on... no more of this Beluga.N...Bollinger crap for me ... I mean pate de foie gras..!... how am I meant to survive on that..? ..............................................I'm striking  till I either give me some more money  or get another career whichever comes first.

Go you good thing ....... Hold out against yourself until you get a decent salary . You owe it to you .

....... GBH has thrown off the shackles of Ann Rand , no longer will I toe that line , thanks to the cogent argument set forth by Annie Good Nurse .

We don't have to be Randy , if we choose not to be , ........ thankyou : good nurse .

Well it's been 40 minutes or so now GBH...n I gotta tell you it's tough...really tough..oh!...fragua..fra it's ok....I'm a little strung out right now.

My wife thinks I'm insane because I won't give in to my demands....oh I know she's just worried about how wer'e gonna pay the Au pair..the cook...the maid...the pool guy..the gardener.....well especially the pool guy ,...he comes every day I'm at work..says ya can't have too clean a water 100% pure he tells me...huh go figure..?

But damn it to hell whats this country coming to if I can't stand up to me......thanks for all the support ..I'll hang in there....oh not just for me...but everybody especially the pool guy maybe he could come on Saturday too....maybe that'll cheer her up.....thanks man. 

Strikes Broken GBH.....I held out till there was a deal on the table I could live with......oh I didn't get it all my own way ..but thats the nature of wage bargaining isn't it..?

Anyhoo, I didn't get a lot more money as I told me I was stretched to the point where I might have to let me go as things are tight all round.

The package ......I managed to get enough for crackers with my fragua...increase the Beluga to a 200ml....and the pool guy for saturdays

The trade off.......I've got to come in on Saturdays.

Thanks again for the support.....just goes to show...nothing ventured ,nothing gained..eh..? 

 Why not  leave it $ 12.50, but for 50 minutes – so youths work a little bit faster ?

speaking of sayings....

what about"you have to earn it before you spend it"

or "if you never earn more than you are paid then it is likely you will never be paid more than you earn..."

also..."one of the few jobs where you start at the top is ...gravedigging.."

@Don m. Like you, I used to believe in your second saying. In fact I went as far as... " Pay a man more than he thinks he's worth, and he'll perform up to that pay". Guess what really happens... !

Here's another for you then St.Nick.....Free advice is worth every penny you paid for it.

If I didn't know you better, I'd say you were having a go at my posts :) But, hey, it's Friday....and we all know what that means.... ( my wife still reminds me of 'the toast'...)

No I wasn't Nick...I like the quote...............a lot.

too funny

Sorry about the wall of text that follows, but this discussion deserves some sustained analysis.

This post is poor economics. It takes one data point--2008--and extrapolates a theory. This data point nearly coincides with the start of GFC, and certainly coicides with pre-cursor events. Some points to consider:

* Irrespective of changes in minimum wages, recessions cause spikes in unemployment, and youth unemployment in particular. This is the worst recession--particularly for unemployment, in a good long while, so we could easily have predicted a surge in youth unemployment. A reasonable theory would have to draw the conclusion that youth uneployment surged higher than it would have gone, given that it was going to surge anyway.

* The potential reasons that youth unemployment spikes during recessions are various. New workers are usually the first laid off when times are tough, and youth tend to be new workers. Youth are more likely to enter the employment market, while older workers are more likely to be employed or to exit the employment market. Employers tend to retain experienced, trained and specialised workers who are hard to replace.

* Gobal comparisons would be useful. From what I have noticed, the GFC has caused youth unemployment to spike across the OECD. NZ is the only country I know of that increased minimum wages specifically for youth more or less at the outset of the GFC, and yet (IIRC) its increase in youth unemployment is not unusual. This needs to be accounted for.

* Longitudinal comparisons would also be helpful. The last Labour government consistently increased the minimum wage generally, and youth rates in particular, and yet the only significant increases in unemployment and youth unemployment coincided with the 2001 recession. In fact, while the minimum wage and youth minimum wage increased considerably during this period, unemployment and youth unemployment plummeted. This needs to be accounted for.

* The optimum rate for the minimum wage is up for debate, but our nearest neighbour has significantly higher minimum wages, both in absolute and relative terms. This probably partially contributes to their higher median wages.

* Youth unemployment is bad, but so is locking youth (or other workers) into low-paid work with marginal employers and no training. Youth benefit from good jobs, not crappy underpaid jobs provided by employers so unstable they can't pay the minimum wage. IMHO, youth should only be low-paid if they are in training (which, after all, often impairs their productivity relative to other workers in the short term).

Economics is known as the dismal science for a reason; it relies on statistics (cf. damn lies), and is lodged in the practice of spotting and predicting correlations (which do not necessarily imply causation). Nonetheless, with robust analysis and several data points, meaningful analysis is possible.

In contrast, the single-point correlation identified here is quite meaningless.

So if there is a questionable link between the mimimum wage and youth unemployment, regardless of the number of datum points selected, then why not scrap the minimum wage all together? Let the market and employers determine the rate at which they can attract employees. It's a stabiliser in times of worker excess/shortage. Any wage is better than no wage at times, surely, and the welfare system provides a de facto mimimum wage anyhow? Labour does not work for a loss, ad infinitum, and at that stage it sods off, leaving the employer with no alternative than to 'pay up' to attract staff. And those who wish to earn more than that offered to them by an one particular employer can either relocate or become more productive.

My reply to this is society can choose to have a minimum wage or not...there is no right or worong just choice.

Apart from that a bad or unscruplious employer can pay less to the desperate and even fiddle wages so "deductions" take place and as a reult undercut a good employer sending the good employer out of business first......

Also in effect the tax payer is subsidising the bad employer with welfare payments.

So a minimum wage levels the playing field somewhat.

regards

Are you a 'bad or unscrupulous employer '?  Where are all these bad employers, that pay wages week in  and week out, to extend a livelyhood to people? That take the risk necessary to create a productive country. I haven't met one! I am not one.  Yes, there will be some, just as in any large sample of whatever it is you choose to look at. But the vast  majority of employers, employ people to make their company or business a financial, or otherwise, sucess. It is not in their interest either to misuse their workforce. And , yes, a minimum wage levels the playingfield. Have a look about you at our level playing fields...Do you like what you see?

You've misread my comment. Correlations can be drawn between minimum wage and unemployment. A correlation does not imply causation, but if we have enough data points we can start to elaborate theories. Doing so off a single point is dismal economics.

Whatever your theories about the effects of minimum wages, the research generally supports the idea that increasing minimum wages results in increased median wages, and lower rates of poverty. Moreover, the NZ research has not indicated any great correlation with increased unemployment.

Your notion of a free labour market leading to better outcomes is not well supported. It's lovely in theory, but the evidence suggests that it leads to lower wages and (in NZ) has not led to lower unemployment. This suggests there are other factors at play.

Poverty is alleviated by productivity, not nominal wage rises per se. Without jobs, poverty in the community widens. An increase in the minimum wage, or even having a minimum wage, produces wages creep, as those earning what was the miminum, expect more. It is self defeating and inflationary at the national level. And I'm not sure we have truely tested the 'lower wages does not lead to lower unemployment' theory...yet. But we are about to .

Poverty is alleviated either by increasing general prosperity, or by re-distributing wealth towards those who would otherwise be poor. Increasing he minimum wage has been shown to achieve the latter.

It is also correlated with increased labour productivity. Workers who are paid more warrant greater capital investment, and are more likely to remain in positions and therefore increase their skill set, acquire experience, and prevent the need to re-recruit and re-train.

Moreover, increased minimum wages reduce other costs (health, benefits, WFF, etc.), increase tax takes (both income and GST), and the increased amount of money that workers earn leads to greater savings and consumption, both of which are highly likely to be within NZ rather than overseas.

Wages creep, at the bottom end, is a desirable outcome. As the minimum wage approaches the median wage, median wages are generally forced higher. This is the best way to encourage people to work, and work more, and develop a strong local economy. As a general rule, we want higher wages.

There is a limit to this, of course, but NZ doesn't appear to be near that. Australia doesn't appear to have crossed that line: it's much higher minimum wages (in both relative and absolute terms) appear to have contributed, thus far, to its high wage/high productivity labour market.

How big was the wages cheque that you wrote out yesterday ? That may explain some , sorry all, of your theoretical points. It will come as no suprise that I disagree with all of your writing, and have much more empathy with the Canadian Study, as noted by Eric Crampton below.

Further,  a poster above puts it a far better way than I did:

"by Ms de Meanour | 27 May 11, 3:58pm

It depends how many people you want to keep out of the workforce. At present, people are prohibited from working unless they can find an employer who thinks that their labour is worth $13/hour. That is already proving impossible for many young people with low skills and limited experience. Raising the barrier won't make it any more impossible for them, but it may turn difficult to impossible for others."

 Have a good weekend.

Ooh. How big's yours? I bet mine's bigger, and I bet I can piss further, too.

Take your ad hominem arguments and keep reading the people you agree with; right or wrong, they'll confirm what you believe, and make you feel good all weekend.

Oh you people are funny... Friday or not... go and read Eric Crampton...  seriously...  READ what Eric Crampton at Offsetting Behaviour has to say about this topic....

I've blogged some preliminary work on the effects of the youth minimum wage. Starting late 2008, the youth unemployment rate goes really nuts relative to its prior path relative to the adult rate. Yeah yeah yeah recession, but we've had far worse once since 1986 as far as adult unemployment goes and youth unemployment never hit current levels.

A nice recent Canadian study also showed increased poverty with Canadian minimum wage increases as lots of second earners were pushed out of work. 

Hit the "Minimum wage" tab over at Offsetting Behaviour....

 

I haven't read you blog Eric, but if I understand your second paragraph correctly, you note that the Canadian study appears to show what I maintain wil happen, here. That raising the minimum wage, leads to further poverty. Or to put it another way, less jobs.