FRIDAY GRAPH: DAVID FARRAR ON MINIMUM WAGE

 

Today’s Friday graph is a guest blog by Kiwiblog‘s David Farrar, live from the Business Roundtable’s Dunes Symposium.

This graph from economist Eric Crampton (http://offsettingbehaviour.blogspot.com/) tells a very sad story. The blue line shows the adult unemployment rate and the red line the youth unemployment rate. As you can see up until 2008, the two rates were significantly linked.

The green line is the best fit line predicting the youth unemployment rate based on the adult unemployment rate. It shows based on the last 20 years of data, that youth unemployment should be around 18% not 28%.

In 2008 Parliament abolished the lower youth rate for the minimum wage. This meant it was illegal to hire a 16 or 17 year old for less than $12 an hour. You do not need to be a rocket scientist or an economist to conclude that the massive increase in youth unemployment is at least partially due to this law change. The best thing the Government could do to lower the youth unemployment rate from 28% is to have the minimum wage only apply to those aged 18 or older.

FRIDAY GRAPH: THE YOUTH UNEMPLOYMENT SCANDAL

This chart from a recent New Zealand Institute publication tells a familiar story.

We think of countries like France and the United States as having shocking rates of youth unemployment (see my Friday Graph of 15 July for the United States).  And indeed they do.  In those countries youth unemployed as a percent of total unemployed is around 25%.  This is a far higher rate than in earlier decades when labour markets were less regulated.

But the chart shows that it is New Zealand that stands out with youth unemployment being 45% of total unemployment, the worst outcome in the OECD.

Why are our political parties not talking about this appalling state of affairs?  One reason is that many of them are complicit in bringing it about.  The abolition of the youth minimum wage, sponsored by the Greens and Labour, is clearly a major contributing factor to the surge in youth unemployment.  National in office has declined to reintroduce youth wages.  The New Zealand Institute in its report also ducked the issue.

This conspiracy of silence on the subject is an indictment of New Zealand’s seeming inability to face up to grim social realities.

90-DAY LAW DOES NOT FAVOUR EMPLOYERS

On 5 April employment lawyer Peter Cullen had an article in the Dominion Post on the employment law changes that came into effect on 1 April.

These included the extension of the 90-day trial period for new employees to all firms.

The article concluded: “The changes generally represent a shift of power to employers.”

In fact they represent no such thing.  The comment reflects the old ‘imbalance in bargaining power’ idea with its Marxist origins.

It’s not hard to see the fallacy.

Start with a world without any statutory provisions about so-called ‘unfair’ dismissals.  Then bring in such a rule.  What will happen?

Clearly something will change, because employers now face the risks and costs of being found to have unjustifiably dismissed an employee.  In the first instance the costs will fall on them.  But clearly they will have to shift them – in competitive markets they have no alternative if they are to maintain normal profits.  The costs will be shifted primarily to employees (or possibly consumers through higher prices).  In other words, employees will largely bear the ultimate costs of the provision through wages (or other benefits) that will be lower than otherwise, or unemployment will rise if the costs are not passed on.

This is just basic economics.  It is explained more fully in this study by US labour academic Charles Baird, ‘The Employment Contracts Act and Unjustifiable Dismissal: The economics of an unjust employment tax’, published by the Business Roundtable.

Baird estimates that, extrapolating from US data, the imposition of unjustifiable dismissal restrictions (which did not apply to around half the workforce prior to the ECA) worsened income inequality, lowered real wages by over 7 percent, and reduced employment by 1.5-3%.

Given these results, it is no surprise that where employees have the option of bargaining voluntarily for unfair dismissal procedures in contracts, few opt to take it up.

As in other markets, bargaining power varies at times in the labour market depending on whether labour is in short or plentiful supply.  That helps labour markets to clear.  But employers have no systematic bargaining power, and recent law changes have done nothing to increase it.

FRIDAY GRAPH: WHAT A FLEXIBLE LABOUR MARKET LOOKS LIKE

Click to enlarge

 

Hong Kong’s unemployment rate fell to 4 percent in December 2010 – its lowest level since November 2008. The rate spiked in 2009 from a low of less than 3 percent in 2008.

Hong Kong has been regarded as a place where everyone who wants a job can get one. It scores highly for labour market freedom, union density is low, and average wages are well above New Zealand levels.

The country has introduced a HK$28 (NZ$4.50) per hour minimum wage set to take effect on May 1 which economists say may restrain hiring.

But compare this rate with the $12.50 per hour minimum wage that even young workers now face in New Zealand: a far greater barrier to employment of low-skilled people and youth.

 

 

 

 

FRIDAY GRAPH: JACINDA ARDERN OUT ON A LIMB ON YOUTH MINIMUM WAGE

Labour MP Jacinda Ardern is arguing that the last Labour government’s abolition of the youth minimum wage (a project of former Green MP Sue Bradford) did not contribute to the current appallingly high rate of youth unemployment.

This is a bold assertion. Elementary economics suggests that, other things being equal, the higher the price for a good or service (such as labour), the less is demanded.

If all wage rates in the economy were doubled by legislative fiat tomorrow, there would be wholesale layoffs and unemployment would skyrocket.

The ceteris paribus condition is important. Legislated minimum wage rates may have little impact if they are below market rates – wage rates that employers would have paid anyway.

Similarly, increases in minimum wage rates may be consistent with increasing numbers employed at those rates if the labour market is buoyant (as it was in the first half of the last decade).

Jacinda Ardern quotes research by Hyslop and Stillman which found no consistent evidence of an adverse impact on teenage employment when youth wage rates were increased in this period.

But this Hyslop and Stillman study was published in 2007. It is not relevant to the effects of the Bradford legislation.

One way to get a feel for those effects is to compare the unemployment rates of 15-19 year olds and 20-24 year olds today with the comparable rates in the early 1990s when unemployment was also high.

The following graph presents these unemployment rates for males.

Click to enlarge

The rate of 15-19 year old male unemployment in 2009 was comparable to the peak rate in 1991, which is not the case for the 20-24 rate.

The following chart plots the difference between these two series – and puts a 5-quarter moving average through the difference for greater clarity.

This chart clearly demonstrates that the 2009 recession has hit 15-19 year-olds harder relative to 20-24 year-olds than was the case in the 1988-91 recession.

If Jacinda Ardern thinks that the abolition of youth minimum wage is not responsible for this sharply different outcome, she needs to give another plausible explanation for it.

Eric Crampton of the University of Canterbury has estimated conservatively that the Bradford legislation has cost young people around 9000 jobs. He has also responded to Jacinda Ardern’s statement here.

Ms Ardern also needs to engage with the analysis of the 2025 Taskforce, which said in its last report:

 New Zealand has a relatively flexible labour market by the standards of some OECD countries, but this flexibility was reduced substantially over the period 2000 – 2009. International indicators of labour market rigidity in New Zealand tend to highlight our minimum wage,….

…..In the last decade, New Zealand has introduced substantial real increases in the minimum wage. The minimum wage was increased sharply during the boom years of labour shortages, and in 2008 the separate lower youth minimum wage was abolished (putting all young employees on the same minimum wage as adults). In 2008, New Zealand had the second highest minimum wage in the OECD relative to the median wage at 59 percent of the median wage, up from 51 percent of the median wage, in 2002. Only France, whose minimum wage at 64 percent, was more generous, and the OECD average is for the minimum wage to be at 46 percent of the median wage (OECD 2010a).

These changes have had a particularly serious impact on youth unemployment (Figure 12.2). Making sure that young people are easily able to get into the workforce is important for them and for the wider economy.

High minimum wages are also likely to seriously impede any determined efforts to reduce long-term welfare dependency. The case for any minimum wage at all is questionable, and we believe it should be reduced in value, but as a minimum we believe the Government should move to lower the real value of the minimum wage by holding it constant in nominal terms. Further, and as a matter of urgency, the youth minimum wage should be reinstated to assist in addressing the chronic youth unemployment problem currently facing New Zealand.

 

Sue Bradford: Job Destroyer

University of Canterbury economist Eric Crampton has posted this interesting analysis on his blogsite.

It investigated the impact on youth employment of former Green MP Sue Bradford’s successful push to eliminate the previous youth minimum wage. This was set at a lower rate than the adult minimum wage because in general young workers are less skilled, experienced and productive.

Dr Crampton calculates that Sue Bradford’s initiative has cost young people somewhere between 8,500 and 12,000 jobs.

What a great legacy for a self-proclaimed – but economically illiterate – crusader for social justice.

Ask Joe

An article by Kevin A Hassett Bury Keynesian Voodoo before It Can Bury Us on aei.org draws some similar conclusions to this one I wrote for the ODT a couple of weeks ago.

 I’ll paste in a few sections from Hassett’s article:

Initial claims for unemployment benefits surged to 500,000 in mid-August, a level more typical of a recession than a recovery. The bad news confirmed what conservative economists have been saying for some time: The biggest Keynesian stimulus in U.S. history was a bust.

But the Keynesians still weren’t fazed:

Incredibly, some Keynesians who supported Barack Obama’s $862 billion stimulus now claim it fell short of their goals not because the idea was flawed, but because the spending package was too small.

So where to turn for evidence for that claim?   The US stimulus package was in fact the largest ever tried in that country and bigger than that tried by any other OECD country. Hassett asks Joe the plumber:

Why is the left so profoundly committed to stimulus-by-spending, even though there is scant evidence that it succeeds?

Joe the Plumber knows the answer: The left has become religiously Keynesian because that is the only corner of economics consistent with its redistributive ideology.

You remember Joe. During a campaign stop in the 2008 presidential election, Samuel Joseph Wurzelbacher asked Obama whether higher taxes would punish his business. Obama answered in part, “I think when you spread the wealth around, it’s good for everybody.”

Obama’s words captured Democrats’ ideology: outside of fairy tales, only government can play Robin Hood, taking money from the rich and giving it to the poor.

Joe the plumber won instant fame in the US after this exchange. The truth is Joe was right – higher taxes would punish his business. Tax cuts rather than tax increases are far more effective in a recession. Obama’s outgoing chief economic adviser recently said herself “tax increases are highly contractionary … tax cuts have very large and persistent positive output effects.”  As Hassett notes, that fact is bad news for the Robin Hooders:

If you cut tax rates in a recession in order to stimulate the economy, then you are conceding that lower tax rates can be a good thing. And if that’s true, then higher tax rates will be harmful–something the left has always denied.

So the Obama economic team was left to rely totally on spending in its response to the recession.

 Which turns out to be bad medicine:

Supporters of this type of stimulus are either unfamiliar with the literature or willing to ignore it. The result is policy that is harmful to our country and inconsistent with modern economic science. If the Obama economic team were medical doctors, they would be pushing the use of medicine not approved by the Food and Drug Administration.

Indeed, as I wrote in my article, naïve Keynesian ideas have not survived the GFC well, and should never have been contemplated.  Keynes once wrote:

 “If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coal mines which are then filled up to the surface with town rubbish, and leave it to private enterprise [to dig them up again] … there need be no more unemployment and … the real income of the community, and its capital wealth also, would probably become a great deal greater than it actually is.”

Few economists would take that proposition seriously today.

In all likelihood, the data will soon be so convincingly bad that we’ll again debate the need for an economic stimulus. Let’s hope that when that begins, all will finally concede that the ideas of John Maynard Keynes are as dead as the man himself, and that Keynesianism is the real voodoo economics.

Let’s hope. 

Read Kevin A. Hassett’s full article here and my article The Dubious Benefits of Fiscal Stimulus here.