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.

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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.

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.