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.


Friday graph: Sue Bradford’s legacy

Eric Crampton of the economics department of the University of Canterbury is a fine economist. Some months ago he estimated conservatively that the abolition of the youth minimum wage has cost the country over 9000 jobs.

Eric noted that youth unemployment during the current recession, relative to adult unemployment in prior recessions, seemed very high.

More evidence on this point is shown in the graph below (taken from The Economist).

It indicates that New Zealand’s current youth unemployment rates are an outlier relative to other OECD countries.

 Click to enlarge
The further north a country is, measured on the perpendicular from the ‘four times as high’ line, the worse youth unemployment is relative to adult unemployment. Only Sweden and Luxembourg have worse youth unemployment outcomes than New Zealand relative to adult rates. 

That is former Green MP Sue Bradford’s legacy to New Zealand.  We are talking here about the most marginal low-skilled young people.  Firms will pay young workers the minimum wage or higher wages if their productivity warrants it.  Indeed they will be forced to do so because of competition for labour by other firms.  But they won’t if young workers’ productivity doesn’t warrant it – they will make losses if they hire such workers.

Sue Bradford may have been well intentioned but it is outcomes that matter.  This outcome is tragic.  How does she sleep at night?

The government’s Welfare Working Group will have failed if it turns a blind eye to this appalling situation.

From the Bad Economics file

Eric Crampton is a bright and energetic academic at the University of Canterbury.  One of his missions is to expose bad economics.  Last year he and Matt Burgess of Victoria University debunked a shoddy study by BERL on the social costs of alcohol use in New Zealand.  Their critique showed BERL’s cost estimates were grossly inflated (see Eric’s blog Offsetting Behaviour).  This did not stop the Law Commission, in full crusading mode, continuing to cite the discredited BERL numbers in its final report.

Eric was at work again last week, this time on a Ministry of Health study on tobacco.

He notes that:

the vast majority of estimates, both in New Zealand and internationally, conclude that smokers pay far more than their fair share in tobacco taxes.  W. Kip Viscusi’s work in the United States suggests smokers actually save the government a fair bit of money: they pay into the national pension system but die before receiving much in terms of benefits, so non-smokers benefit from their contributions.

Eric then cites a New Zealand study by Des O’Dea, an experienced New Zealand economist:

In New Zealand, Des O’Dea’s estimate, funded by Action on Smoking and Health and the SmokeFree Coalition – hardly members of any big tobacco conspiracy against the public – showed that the health costs of smoking were only a small fraction of collected excise taxes.  O’Dea concluded: “It appears certain that smokers contribute considerably more in taxes than the net ‘economic costs’ to the rest of the community caused by their smoking”.  O’Dea estimated costs to the health system on the order of $350 million per year; annual tobacco excise revenues total about a billion dollars.  His measured “social costs” were much higher, but mostly consisted of costs falling on the smoker himself.

So Eric was understandably taken aback when the Ministry of Health recently came out claiming that smoking costs Vote:Health about $1.9 billion a year.

Just how had MoH managed to provide a figure more than five times greater than the estimate previously provided by an anti-tobacco funded study, and seriously out of line with the body of international literature?  An OIA request and extensive correspondence with the officials behind the figure gave me the answer: they’ve essentially assumed that smokers would never have imposed other costs on the health system if they hadn’t died of smoking.

This is a totally bogus procedure, as Eric goes on to explain:

This isn’t a method commensurate with producing a sound figure that can form the basis for policy.  It’s a method best used for producing a politically convenient figure to rally support for measures to further stigmatize and punish smokers, like a doubling of the excise tax rate.

The full article is available here.

David Farrar commented on the article here.

Taxpayers’ money is being wasted on these worthless reports.  The BERL study on alcohol cost the Ministry of Health and ACC over $130,000.

Academics play a valuable ‘critic and conscience’ role when they expose bad economics.  Another egregious target is the numbers served up by economic consultants to justify government or council support for stadiums and events.  For a critique, see this study for the Business Roundtable by Tyler Cowen, Should Governments Subsidise Stadiums and Events?

Can we catch Australia by 2025? Yes we can, but …

There have been the usual mixed bag of reactions to last week’s 2025 Taskforce report.

Some were facile to the point of being cringe-making, focusing not on the substance but on the presumed political acceptability of the report.

There were exceptions in the regular media, including an article by Rob Hosking in the National Business Review and editorials in the Dominion Post and The Listener.

Taskforce chair Don Brash has also written a good response in Muriel Newman’s electronic newsletter.  I liked the title, ‘Can we catch Australia?  Yes we can, but …’

As I understand it, David Farrar has largely given up on the MSM for serious public policy discussion and thinks the blogosphere is the place to be.

He may be right if this post by Winton Bates is any guide.

Bates is a highly respected Australian economist, formerly a First Assistant Commissioner in the Industries Assistance Commission (now the Productivity Commission), and author of several Business Roundtable research studies and a background paper for the Taskforce.

He begins with a discussion of economic geography explanations of economic under-performance, saying:

Since the Taskforce presented its first report last year, Philip McCann – an economist with expertise in economic geography – has advanced the view that New Zealand’s geographical disadvantages prevent it from becoming a high productivity economy … [T]his is true irrespective of the degree of flexibility in the domestic labour market, the degree of transparency in the local institutional environment, or the levels of cultural aspirations for success.

Bates initially asks, “How does the Taskforce respond?” and observes:

… it judges the evidence in support of the view that New Zealand’s small population limits the potential to obtain agglomeration effects to be weak. In particular, Auckland’s position within the regional hierarchy of Australasian cities is not declining – the population of Auckland has been growing faster than the populations of Sydney and Melbourne. The Taskforce also points out that there is no evidence that New Zealand suffered an adverse shock from globalization during the 1980s; that migration from New Zealand to Australia is disproportionately of highly skilled workers as agglomeration theory implies; or that the relative performance of small countries has declined in the past 20 years.

Then Bates adds his own observations:

Sitting in Australia, current concerns in public policy discussions about the emergence of a two-speed economy in this country make the agglomeration theory of relative decline in New Zealand’s economic performance seem rather odd. Rather than a concern that agglomerations centred on Sydney and Melbourne are leaving the rest of Australia behind, the main concern is that New South Wales and Victoria (along with other states) are being left behind as economic growth steams ahead in Western Australia and Queensland, as a result of rapid expansion of the minerals sector and related industries. There is also reason for concern that, over an extended period, the particularly poor performance of the New South Wales government has detracted from the substantial location advantages that Sydney should enjoy.

The Sydney point – at around 4 million, Sydney’s population is similar to New Zealand’s – is particularly telling.  I find the McCann thesis (also adopted at least in part by the New Zealand Institute) unconvincing.

Bates goes on to discuss the ‘lucky country’ explanations for Australia’s performance:

The Taskforce pours cold water – correctly in my view – on another geographical explanation, namely Australia’s good luck in having plentiful supplies of mineral resources to export to rapidly growing markets in China and India. It is only in the last few years movements in Australia’s terms of trade have been much more favourable than in New Zealand. Moreover, New Zealand also has substantial mineral and hydrocarbon resources.

It could be added that ‘Fortress Australia’ was also an under-performer prior to its mid-1980s economic reforms, despite its mineral endowments.

Finally, Bates gives his own view on why Australia has done better than New Zealand (even though post-reform New Zealand has kept pace with the average growth in per capita incomes in OECD member countries as a whole):

… I think that leaves us with having to explain New Zealand’s relatively poor economic performance in terms of policies that are less favourable to economic growth …  For example, one major problem discussed by the Taskforce is the effect of relatively high levels of government spending in discouraging investment in export industries – via impacts on the real exchange rate as well as tax rates …  It seems to me that those who believe that New Zealand has geographical disadvantages should logically be strong supporters of that view (unless they reject the objective of closing the income gap). The greater the geographical disadvantage, the greater the policy superiority New Zealand will need in order to meet the objective of closing the income gap by 2025.

University of Canterbury economists Paul Walker (Anti-Dismal) and Eric Crampton (Offsetting Behaviour) also blogged on the 2025 Taskforce report

The full report is available here.

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.