FRIDAY GRAPH: THE IMPACT OF MINIMUM WAGES ON YOUTH

This graph from a 1 July 2011 Wall Street Journal article tells a familiar story.

The article explains that:

This is a rotten summer for young Americans to find a job. The Department of Labor reported last week that a smaller share of 16-19 year-olds are working than at anytime since records began to be kept in 1948.

Only 24% of teens, one in four, have jobs, compared to 42% as recently as the summer of 2001. The nearby chart chronicles the teen employment percentage over time, including the notable plunge in the last decade. So instead of learning valuable job skills – getting out of bed before noon, showing up on time, being courteous to customers, operating a cash register or fork lift – millions of kids will spend the summer playing computer games or hanging out.

The lousy economic recovery explains much of this decline in teens working, and some is due to increases in teen summer school enrollment. Some is also cultural: Many parents don’t put the same demands on teens as they once did to get out and work.

However, there is more to the story:

But Congress has also contributed by passing one of the most ill-timed minimum wage increases in history. One of the first acts of the gone-but-not-forgotten Nancy Pelosi ascendancy was to raise the minimum wage in stages to $7.25 an hour in 2009 from $5.15 in 2007. Even liberals ought to understand that raising the cost of hiring the young and unskilled while employers are slashing payrolls is loopy economics.

As always, such minimum wage increases hit disadvantaged groups hardest:

Black teens have had the worst of it, with their unemployment rate rising to 41.6% in April from 29% in 2007, faster than almost any other group. A 2010 study by economists William Even of Miami University of Ohio and David Macpherson of Trinity University found that as a result of the $2.10 increase in minimum wage, “teen employment dropped by 6.9 percent… For the teen population with less than 12 years of education completed, teen employment dropped by 12.4 percent.” For teens priced out of the labor market, their wage fell to zero.

All this mirrors New Zealand’s experience in first increasing youth minimum wages and then abolishing them altogether.  It has been estimated that these moves have cost around 10,000 jobs for young people.

Note too that the current US minimum wage is US$7.25 an hour or under NZ$9.00.  Our current minimum wage is $13.00 an hour, a ludicrous level for a country that is far less wealthy than the United States.

Why former Green MP Sue Bradford has not been pilloried for her ignorance or wilful blindness about the impact of abolishing youth rates, and why the government has not moved to reinstate them, is impossible to fathom.

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.

 

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.

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.