John Key's announcement this morning that National would extend the wage employers could pay 16 and 17 year-olds before they were eligible for the adult minimum wage was short of announcing a full youth minimum wage, but means that age group could be paid 80% of what adults earn for six months instead of three. See Key's announcement here.
Minimum and youth wage rates are now one of the key economic issues in the run up to the November 26 election as parties argue how to fix a youth unemployment rate of about 25%. Alex Tarrant takes a look at the background of minimum and youth wage rates.
1. So what exactly are we talking about?
The current adult minimum wage in New Zealand is NZ$13 an hour. That's NZ$104 a day or NZ$520 over a 40-hour working week before tax.
This applies to all employees aged 16 and over who are not new entrants to the workforce aged 16 and 17, or trainees. Every worker over 18 has to be paid the adult minimum wage, including those workers on piece rates - ie paid per unit of output - for whom the total amount earned cannot be lower than the minimum wage.
The minimum wage is increased each year in line with inflation.
New entrants to the workforce aged 16 or 17, and trainees, may be paid a 'new entrants/trainee' rate which is 80% of the adult minimum wage - currently NZ$10.40 an hour. That's NZ$83.20 for an 8-hour day, or NZ$416 over a 40-hour week.
The new entrants rate can only be paid for the first 200 hours, or three months, of a person's employment - whichever comes first - after which they must be paid the adult minimum wage.
Before a law change in 2008, taken through Parliament by Green MP Sue Bradford, employers could pay 16 and 17-year olds the youth rate of 80% of the adult minimum wage, regardless of how long they had worked.
Before 2001, 18 and 19-year olds were also eligible for the youth rate (introduced in 1994), which back then was only 60% of the adult minimum. Helen Clark's Labour government raised the relativity of the two minimum (youth/adult) rates to 80%, and lowered the age for the adult minimum wage from 20 to 18.
Exemptions are allowed for employers employing workers with disabilities which limit their ability to carry out their work.
Workers under the age of 16 are not subject to minimum or youth wage rate legislation. Sue Bradford said she had come under fire from unions for the fact her 2008 wage rates bill did not address this issue.
2. So there's a different rate for some 16 & 17 year olds. But I thought Sue Bradford's Bill in 2007 was supposed to get rid of youth wages?
Well that's what Bradford wanted, but Labour, New Zealand First and United Future rained on her parade.
What began in Parliament as the Minimum Wage (Abolition of Age Discrimination) Amendment Bill - a bill to remove all wage discrimination between all 16/17 yr olds and 18 and overs - was watered down by Parliament’s Transport and Industrial Relations Select Committee to the Minimum Wage (New Entrants) Amendment Bill.
It was the Select Committee that introduced the new entrants' 200-hour/three month threshold, which meant there would still be some wage discrimination between 16/17 year olds and adults.
“Having considered this bill the majority of us believe the premise upon which it is based is right. The majority of us acknowledge, however, that the main argument in opposition to the bill—that youth workers on entering the workforce for the first time lack basic work skills and experience and therefore initially require more supervision and training than adult workers—has merit,” the Select Committee says in its report on Bradford's Bill.
“The majority of us, therefore, propose amendments to narrow the purpose of the bill by allowing for a ‘‘new entrants’’ minimum rate to be set by minimum wage order for 16–17-year-olds.”
Unsurprisingly, the Green Party did not support this change, while the National Party stated it did not support the Bill.
During the second reading of the Bill, National MP Kate Wilkinson, now the Minister of Labour, said National believed the 200-hour threshold, after which a youth would move up to the adult wage, could still be an incentive for a youth to leave school to undertake work, as they would soon be on the adult minimum, which would be a negative outcome of the law change.
Labour’s Ruth Dyson, then the Minister of Labour, argued the 200-hour threshold would protect against the risk of a youth leaving school early.
In the Committee of the Whole House following the name change, Wilkinson said the Bill was well intentioned in its desire to stop discrimination against younger workers, but said National still thought the changes could price young workers out of the workforce.
Current Youth Affairs and Social Development Minister Paula Bennett also argued against the Bill, saying it would increase compliance costs for employers.
3. So if National opposed Bradford's bill, why didn't it reverse the changes when it got into power?
In 2010, National voted against Roger Douglas' Minimum Wage (Mitigation of Youth Unemployment) Amendment Bill, which sought to reintroduce the youth minimum wage rate for 16 and 17 year olds to replace the new entrants rate.
In June this year TV3 reported National looked set to reintroduce lower pay rates for younger workers, and Minister of Labour Kate Wilkinson would not rule anything in or out. Prime Minister John Key said in August that there could be work to be done for unskilled 16 and 17 year olds not in school to give them a helping hand to find work.
Now National has proposed to change the law if it wins the November 26 election.
Sixteen and seventeen year-olds in a new job - not just new to the workforce - could be paid 80% of the adult minimum wage for six months instead of three. National changed the name of the 'New entrants wage' to the 'Starting out wage'.
On top of this, National also announced 18 and 19 year-olds who had come directly off a designated benefit (including the independent youth benefit) could also be paid the starting out wage for the first six months of employment, or until they turned 20, given they had been on that benefit continuously for six months before starting work.
And on top of that, the three-six month extension would also apply to 16-19 year-olds in recognised industry training courses involving at least 40 credits a year, down from 60 credits.
4. And what do other parties say?
This is the easy bit. A coalition of the left following the November 26 election would definitely see the minimum wage increased to NZ$15 an hour. That would mean the 'new entrants' age would immediately increase to NZ$12 from NZ$10.40 an hour (it's 80% of the adult minimum wage), if it were to stay.
Labour, the Greens, the Maori Party and Mana all have policies to increase the minimum wage immediately to NZ$15 an hour from NZ$13 currently. See all their policies in our party employment policy section here.
The Green Party opposed the move to introduce the new entrants rate under the last government. They want legislation to ensure the minimum wage does not fall below 66% of the average wage in New Zealand.
On the right, ACT supports the reintroduction of full youth wage rates.
5. So what does the research say?
This is the harder bit as the research on the issue points to differing outcomes.
The latest set of research on the new entrants minimum wage, released a month ago by economists Steve Stillman and Dean Hyslop (who were updating previous research), has been used by both the Left and the Right to back their arguments.
Economist Eric Crampton reviews the Stillman and Hyslop research at Offsetting Behaviour.
Green Party MP Gareth Hughes blogged about the research on Frogblog in September, saying it showed the abolition of youth rates did not contribute to the increase in youth unemployment.
"Despite the scare mongering from right wingers such as Don Brash and David Farrar, the research shows there was no causal relationship between the disturbing increase in youth unemployment and the abolition of youth rates for the minimum wage," Hughes said.
"Even more encouraging is that the report finds the abolition of youth rates for the minimum wage was associated with less inactivity among 16 and 17 year olds. The small decrease in availability of low wage jobs for young people encouraged them to continue their studies instead. Surely, that is the best outcome we could have," he said.
"The massive increase in youth unemployment over the last two years has other causes, most notably the failure of John Key’s government to do anything to stimulate the economy to create jobs."
But today, Key used the Stillman and Hyslop research to support his move to extend the new entrants timeframe:
"In 2008, Labour abolished the youth minimum wage, in a move that research commissioned by the Department of Labour suggests has destroyed up to 9000 jobs for 16- and 17-year-olds," he said.
Make up your own mind
So here is the executive summary from Stillman and Hyslop from their most recent research, which every party says supports their view. What's your view?
Key findings
The study found that the introduction of the New Entrants (NE) minimum wage was largely ignored by businesses and that most 16 and 17 year old workers were moved on to the adult minimum wage. Combined with a 75 cent increase in the adult minimum wage at the same time, this led to a 28.2 percent increase in the effective minimum wage for 16 and 17 year old workers.
This research found that this minimum wage increase accounted for approximately 20–40 percent of the fall in the proportion of 16 and 17 year olds in employment by 2010. Overall, this implies that the introduction of the NE minimum led to a loss of 4,500-9,000 jobs for 16 and 17 year olds (employment of 16 and 17 year olds fell from 61,400 to 39,500 between 2007 and 2010).
The introduction of the NE minimum wage did not have a significant impact on unemployment of 16 and 17 year olds, because employment losses occurred entirely among students who were combining study with part-time employment.
Introduction
The study examined the impact of the 2008 youth minimum wage reform that replaced the youth minimum wage for 16 and 17 year old workers (set at 80 percent of the adult minimum wage) with a New Entrants (NE) minimum wage (also set at 80 percent of the adult minimum) applicable for the first three months or 200 hours of employment, after which the adult minimum applies.
The repealing of the youth minimum wage in 2008 had a significant impact on the wage distribution of 16 and 17 year olds. In 2007, approximately 70 percent of 16 and 17 year olds reported hourly wages below the adult minimum wage. After the introduction of the NE minimum wage, around 20 percent of 16 and 17 year olds reported hourly wages below the adult minimum wage and 40 percent reported receiving the adult minimum wage.
The NE minimum wage was largely ignored by businesses and most 16 and 17 year old workers were moved on to the adult minimum wage, which resulted in an increase in the effective minimum wage of 28.2 percent (adjusting for inflation) for this group. This led to a rise in average hourly earnings of 8.5 percent for this group. The adult minimum wage, in comparison, only increased by 2.5 percent in 2008.
Research methodology
The study used survey data from the quarterly Household Labour Force Survey (HLFS), and the annual June-quarter Income Supplement to the HLFS, also known as the NZ Income Survey (NZIS).
The focus of the analysis is on the impact of the 2008 youth minimum wage policy change on the employment and other labour market outcomes of 16 and 17 year olds. The HLFS is used to measure wage and salary employment, weekly hours worked, self-employment, studying, unemployment, and inactivity and the NZIS provides measures of hourly wages, receipt of non-student benefits, weekly earnings, and weekly total income.
The analysis estimates the impact of the 2008 minimum wage reform on the labour market outcomes of 16 and 17 year olds by comparing their outcomes, before and after 2008, to a comparison group of 20 and 21 year olds. The comparison group was selected because they were not directly affected by the 2008 reform and are considered to have been less-affected by the policy change than 18 and 19 year olds.
While 18 and 19 year olds were not directly affected by the 2008 reform, it is possible they were indirectly affected by the adult minimum wage constraining their wages or by employers hiring them instead of 16 and 17 year olds.
A regression model is used to control for other factors that may be related to changes in labour market outcomes, such as differences in outcomes that exist between different age groups and because of differences in the demographic and socio-economic characteristics of individuals. The model also controls of changes in outcomes caused by seasonal changes in the labour market and the impact of a growing or declining economy, and allows these effects to differ by age.
Labour market impacts of the 2008 youth minimum wage reform
The research found that the minimum wage increase lowered the proportion of 16 and 17 year olds in employment by between 3 and 6 percentage points in the subsequent two years (there was no impact on employment immediately following the policy change), which accounted for between 20 and 40 percent of the fall in the proportion of 16 and 17 year olds in work over this period (a loss of 4,500–9,000 jobs). The remaining 60 to 80 percent of the fall in employment can be attributed to the deteriorating economic conditions.
The introduction of the NE minimum wage appears to have impacted primarily on the employment prospects of 16 and 17 year olds who were combining study with part-time employment (80 percent of 16 and 17 year olds are in part-time jobs).
The finding that the minimum wage increase adversely affected the employment of students is likely to explain why the study did not find a strong negative impact on unemployment. The study finds some evidence that the proportion of 16 and 17 year olds unemployed increased in 2009 by 1.4–2.6 percentage points because of the minimum wage increase, but the negative impact on unemployment was not evident a year later in 2010.
The NE minimum wage appears to have encouraged more 16 and 17 year olds to stay at school or continue their education (this effect is in addition to an increase in studying due to the economic downturn). This may explain why the impact on unemployment had disappeared by 2010 and why the minimum wage increase was associated with lowering inactivity among 16 and 17 year olds. The research also found that, relative to 20 and 21 year-olds, average hours worked by 16 and 17, and 18 and 19 year olds fell after 2008, as did their earnings and total incomes.
Comparison with the 2001 youth minimum wage reform
Compared with the 2001 youth minimum wage reform, repealing the youth minimum wage in 2008 resulted in a smaller increase in the effective minimum wage for 16 and 17 year olds (28.2 percent, compared with 41 percent in 2001/02), but had a larger negative impact on their employment prospects.
The study of the 2001 reform found no evidence of an adverse effect on youth employment immediately following the reform, but some weak evidence of employment loss two years later in 2003. Changes in hourly wages, hours, and employment led to significant increases in earnings from work and total income for teenagers relative to young adults.
The stronger fall in employment in 2008 can be attributed to a larger proportion of 16 and 17 year olds being impacted by the minimum wage increase (60–70 percent, compared with 10–20 percent in 2001) and that the 2008 reform occurred immediately prior to a downturn in the economy. The current analysis cannot judge the relative importance of these two effects. In addition, the 2008 reform moved 16 and 17 year olds onto the same minimum wage as adults, which could have encouraged employers to replace them with older more mature workers.
The 2001 reform study did find evidence of a decline in educational enrolment and an increase in unemployment, inactivity, and benefit receipt, which suggests that while the 2001 reform increased the labour supply of teenagers, this was not matched by as large an increase in the supply of jobs from employers.
The chart below shows unadjusted unemployment rates, including for the 15 to 19 year old group:
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