Right wrong on the youth minimum wage

There is a renewed push from the political right to reintroduce youth rates for the minimum wage.  ACT’s Roger Douglas is trying to blame the Green Party sponsored legislation that removed the ability of Government to set a lower rate of minimum wage for young people for today’s high youth unemployment.  ACT’s new Leader, Don Brash, cites National’s failure to reintroduce age discrimination in setting the minimum wage as the second of the reasons he resigned his National Party membership.

While National hasn’t yet signed up again to the Brash/Douglas prescription for discrimination against young workers, its No. 1 Cheerleader in the blogosphere, David Farrar, is also trying to push the line that that the abolition of youth rates is the cause of today’s high youth unemployment.

But it is all wrong from those on the right.

I looked up the statistics going back to 1993, the year before a youth minimum wage was first introduced.  Before that, employers could pay workers under 20 whatever they chose, even as little as $1 an hour.

Here’s what I found (youth unemployment figures for the March quarter and youth minimum wage for the annual March – April adjustment) – left-click on graph for better resolution:

If the Douglas/Brash/Farrar line on the youth minimum wage had any credibility, I would have expected the transition in 1994 from no minimum wage for people under 20 to a minimum wage of $3.68 an hour to have caused a spike in youth unemployment.   In fact, the opposite happened – the unemployment rate among those aged under 20 plummeted from 24% to 17.6% from March 1994 to March 1995.

Similarly, the substantial increase (69% for those aged 18 or 19) in the minimum wage for those aged under 20 in 2001 should have caused another spike in youth unemployment according to Douglas/Brash/Farrar.  But it didn’t – youth unemployment rates continued to fall and hit a low for the period I researched in March 2004 of 13.5%.

With the same minimum wage applying to all workers over 16, the current unemployment percentage among people under 20 is in the mid 20’s.  That is similar to what it was in 1993, and in several years before that, when no minimum wage at all applied to workers under 20.

Douglas, Brash and Farrar are misleading us. The evidence does not support their assertion that the removal of age discrimination in setting the minimum wage has had any impact on youth unemployment rates.  They are not concerned about the inability of young people to get work at all.

They are just trying to spin it that way to reduce the wage bills of their political supporters and financiers.

The real cause of today’s youth unemployment is a National Government that ignored the Greens’ proposals and did nothing to stimulate the economy and promote employment in the face of the global financial crisis, just as it was in the early 1990s when there was no minimum wage for workers under 20.

30 Comments Posted

  1. Kerry says ” Do you think business people cannot read the signs of a recession coming.
    I could see them as soon as National was elected.

    Many small businesses revised their profit expectations downwards, and cut staff and hours, when National came back”

    So a National govt elected in NZ caused a recesion across the world.

    What an idiot.

  2. john-ston – as to the timing of the retail hours change you noted locally – they would have occured after the minimum wage reached $12 (did the increase in the prior 2 years from 9 to $10 2006 to $11 2007 make no difference?).

    As to the reason why Australia has fewer retail hours despite greater disposable incomes – is this not a function of unions and worker choice/power?

  3. Kerry, there has been some sort of economic problem with every government change in New Zealand since the 1970s and with many government changes in the 20th and 21st Centuries.

  4. JS. Do you think business people cannot read the signs of a recession coming.
    I could see them as soon as National was elected.
    Many small businesses revised their profit expectations downwards, and cut staff and hours, when National came back.

    There has been a recession with every right wing Government starting with the first ACT Government in 1984.
    The weird thing is you still get twits, at Chamber meetings, claiming National is the party for business.

  5. And do you have any evidence that had anything to do with the minimum wage, rather than a decision by management that it was not economic to keep the stores open late, given the drop-off in demand for late night discretionary purchasing (notably booze) due to the economic downturn?

    Toad, the reduction in opening hours opened around the start of the recession, so it wasn’t due to a drop off in demand due to the economic downturn.

  6. It is obvious that capitalists do not really believe in capitalism. One of the maxims is that a business that cannot cover the costs of its inputs is a drain on the economy, and should be left to fail.

    Instead they want wages set below the real cost of labour so that tax payers and employees have to subsidise their inefficient business.

    There are areas where the market cannot deliver, such as sustainable production startups, and subsidies are justified, but why should tax payers and their employees subsidise McDonalds, Foodstuffs or Allied work force.

    A higher minimum wage also means a greater tax contribution from these employers instead of a subsidy.

    The demand for cheap Labour is rather inelastic

  7. @john-ston 4:07 PM

    Two Countdowns went from 24 hour trading down to 6am – 11pm trading (and have since gone down even further to 7am – 10pm trading), and a Foodtown went from 6am to 12am trading to 7am to 10pm trading. A retailer went from 7pm closing on weeknights to 6pm closing on weeknights.

    And do you have any evidence that had anything to do with the minimum wage, rather than a decision by management that it was not economic to keep the stores open late, given the drop-off in demand for late night discretionary purchasing (notably booze) due to the economic downturn?

  8. There was no change in retail hours with the increase in minimum wage from $9 to $12 over 2 years.

    SPC, I can think of four places in my local area that reduced hours during that period. Two Countdowns went from 24 hour trading down to 6am – 11pm trading (and have since gone down even further to 7am – 10pm trading), and a Foodtown went from 6am to 12am trading to 7am to 10pm trading. A retailer went from 7pm closing on weeknights to 6pm closing on weeknights.

  9. Lats, the figures Gareth portrays in his graph are the official youth unemployment figures reported by Statistics NZ from the quarterly Household Labour Force Survey. They have nothing to do with a person’s eligibility for benefit.

    They exclude young people who don’t have a job, want one, but are not actively seeking work at the time. They also exclude young people who don’t have a job, want one, but are not immediately available for work. Those categories, plus the official unemployed, make up those who are categorised as “jobless”.

    You are correct that the figure for joblessness, which is arguably a more valid measure of what is happening in the labour market than unemployment, is always significantly higher than for unemployment. But if you were to graph youth joblessness against the youth minimum wage you would find a similar lack of corelation to that in Gareth’s graph.

  10. ACT (by which I guess I mean Brash) have this notion that if they can reduce the cost of labour in NZ then we can “close the gap” with Australia.

    That is, of course, beyond credulity.

  11. I do want to add one more comment here, and then I’ll leave it alone. I don’t have complete faith in the numbers officially reported as unemployed. Successive governments have tried various strategies to modify the reported number of unemployed through diverse means – by excluding those training schemes, on benefits other than unemployment, etc. Many of those on different benefits are not available for work for good reasons, so can quite rightly be excluded from unemployment figures, but some could possibly quite rightly be called unemployed job seekers. And then of course there are the lost ones, those without work but who are ineligible for the dole. I was one of those for a while, when I retrained. After completing my training I was unable to find work for nearly a year, and was also ineligible for the unemployment benefit because my wife earns too much (and the threshold for that isn’t terribly great). So there is potential for this data to contribute to the skewing we see in youth unemployment. I still feel that there is more at play than this alone however.

  12. There was no change in retail hours with the increase in minimum wage from $9 to $12 over 2 years.

  13. A comparison with Australia is most useful due to its close economic connections with New Zealand and the relatively free movement of labour between the two countries.

    SPC, I would point out that in Australia, your typical suburban mall has half their shops closed on a Sunday, and your typical Woolies shuts at 9pm on a Monday through Friday, with 5pm and 6pm closures on Saturday and Sunday. Compare that with your typical Countdown/Foodtown/Woolworths in New Zealand which is open till at least 10pm each night of the week.

    Add all that up, and you will see that there would be significant loss in the number of hours available to employees.

  14. For some relevnce to the figures of a minimum wager at 40% of the average wage (mentioned by Eric Crampton) or 50% (currently) and the 2/3rd rate advocated by many.

    Also from No Right Turn

    “Closing the gap” – but not for the poor

    And to combine today’s OIA with yesterday’s: Wilkinson’s minimum wage review [PDF] includes international comparisons. It notes that
    A comparison with Australia is most useful due to its close economic connections with New Zealand and the relatively free movement of labour between the two countries. The Australian federal minimum wage increased by 4.8% from AU$14.31 to AU$15.00 following their 2010 review. The current Australian minimum wage rate equates to NZ$19.31 on 1 November 2010.

    So, Wilkinson chose an increase less than that in Australia, one which will result in a relative decline in living standards for those on the bottom. And this is deliberate. A later document notes that

    New Zealand’s minimum wage is 49.5% of average weekly wages, higher than Australia’s by 4.3 percentage points.

    Wilkinson has highlighted this in the margin. The obvious conclusion: she sees this as the gap which needs closing. And the way to close it is by eroding the living standards of ordinary New Zealanders.

    http://norightturn.blogspot.com/2011/03/closing-gap-but-not-for-poor.html

    It

  15. The following is from No Right Turn

    Last month, the government announced a miserly increase in the minimum wage, from $12.75 to $13 an hour. The increase was half the rate of inflation, and resulted in low-paid workers going backwards in real terms. I was curious about the process used to decide this increase, and what options the Minister considered, so I filed an OIA seeking the advice she had received on the matter. Today I received the response – and it shows that Kate Wilkinson perversely chose the worst option, as assessed by her own criteria.

    You can read the full documentation here [PDF]. It consists of a number of reports from the Department of Labour laying out the options and assessing the costs and benefits of each. Wilkinson was presented with four options – no change, and increases to $13, $13.50, and $15 per hour. The first and last of these were clearly salmonella – options designed to be discarded, used to frame the issue; in practice the decision was between option 2 ($13 / hour) and option 3 ($13.50 / hour).

    These options were assessed for their impact on employment, wages, and inflation. $13 / hour was assessed as having no impact on economic criteria, as it “does not constitute a real increase” (10/98801, paragraph 20). $13.50 / hour was expected to reduce employment growth by between 480 to 640 people. That’s against an expected increase of 22,000, and the effect is regarded as “negligible in terms of total employment”. Likewise, inflationary effects are expected to be negligible. A higher minimum would result in higher costs to government – an extra $6 million a year for $13 / hour, an extra $30 million a year for $13.50 – but that’s not a significant difference. On the economic analysis, there’s no real difference between the two options.

    The options were also assessed against principles of fairness, protection, income distribution, and work incentives. And here the difference really shows:
    $13.00: This option will maintain existing levels of fairness and income distribution and existing work incentives as it is an increase in line with the change in consumer prices and average wages. It may erode existing levels of protection.
    $13.50: This option will increase existing levels of fairness and income distribution. It may increase or maintain work incentives, as it is likely to have a higher percentage increase than benefits. The size of the increase is greater than movements in average minimum wages in collective agreements so it is likely to improve current level of protection.

    So, no real economic difference, but better rankings on non-economic criteria. The $13.50 option would seem to win hands-down as delivering better outcomes for no real cost. Instead, Wilkinson chose the lower one. After all, she wouldn’t want to increase fairness, would she?

    http://norightturn.blogspot.com/2011/03/choosing-worse-option.html

  16. It was still below the 2003 level in 2007.

    Given the total number on the dole in March 2008 was less than 20,000 – given the unemployed over 18 would have been able to get the dole, one wonders what number of them (the 15% of youth unemployed) would have been those under 18 unable to get the dole (compared to those working and excluding students obviously).

    In reality the endemic problem (10-15%) is those leaving school 16-18 without a job to go to or further education plans or opportunities (which is why the dole has become unavailable for them and more work experience placements coinciding with school continuance is now being developed), otherwise the recent recession causing problem for new work entrants (those over 18).

    I don’t see any evidence of a direct link to minimum wage changes – the low wage markets are very inelastic domestic service ones.

  17. While there is a higher relative rate 2006-2008, this is when total unemployment is falling to its lowest point in over 20 years and youth rate unemployment was also falling (but not as fast).

    SPC, where is this youth unemployment decrease? The graph provided by Mr. Hughes shows that youth unemployment rose from 2004 to 2007, dipped briefly and then skyrocketed in 2009 and 2010.

  18. It’s all too easy to be confused by statistics and jump to false conclusions – especially if you don’t know what is happening in the particular labour market concerned.

    Because of differences between the labour markets there is the likelihood of a little learning resulting in erroneous conclusions totally without relevance to a different labour market (those with free trade and those not for example).

    The lay offs of older factory workers in the mid 80’s to mid 90’s after we ended protection of domestic production jobs (tariffs where phased down and ultimately abandoned over this period) – would lower the number of youth workers to the total unemployment below a norm.

    While there is a higher relative rate 2006-2008, this is when total unemployment is falling to its lowest point in over 20 years and youth rate unemployment was also falling (but not as fast).

    As to hiring new staff, the more relevant wage is not offering youth an ability to undercut other workers and work for less, but a training or apprenticeship wage that new workers acquiring skills or building up competence can be on for a period.

  19. Something interesting to point out is that youth unemployment started climbing in 1996 and again in 2004, several years before recessions started and thus cannot be explained away by a recession. What I would like to see is the workforce participation rate for youth during that period – it is plausible that the decreases might have been caused by other factors, such as young people deciding to further their education and thus ceasing to be deemed unemployed.

  20. And now to present the data in some context… I’ve been to the Ministry of Social Development website and borrowed their data from 1986 to 2009 (this was what was easily obtainable in their table on unemployment data broken down by age ranges, although there are a few gaps in the data they present). I then calculated the youth unemployment rate as a proportion of total unemployment. Figures below:

    Year Youth unemployment rate as a % of Total unemployment rate
    1986 190.5
    1991 182.1
    1992 180.2
    1996 193.7
    2001 224.1
    2006 263.2
    2007 270.3
    2008 271.4
    2009 272.1

    From 1986 to 1996 the rate of youth unemployment (youth defined by MSD as those between 15 and 24) were just under twice the overall unemployment rate (around 180-190%). However, sometime between 1996 and 2001 the numbers started to diverge. By 2001 the ratio had risen to 224%. Since 2007 the ratio seems to have stabilised again at around 270% of the total unemployment rate. This means that young people make up a much greater proportion of the total unemployed than they did 20-25 years ago.

    To claim this is due solely to the recent recession is fallacious. There was a recession from about 1988 to 1992 and during this time the ratio of youth unemployed didn’t change significantly.

    So something changed sometime around the late 90’s / early 00’s to prevent more young people from entering the workforce. What was it?

  21. @Michael 5:50 PM

    No, you are either lying or mistaken. Before 1994 there was no minimum wage for employees under 20 at all.

  22. Before 1993, the minimum wage for under 20s was the adult minimum wage. So at introduction we see a huge fall in Youth unemployment. Then when we see it’s abolition we see the youth unemployment spike up again.

    Your graph proves we should have a youth minimum wage again to reduce unemployment.

  23. @SPC There will no doubt be a number of factors contributing to youth unemployment. But Gareth is concluding from his graph that removing youth rates has had no effect on youth unemployment. Unless we know what proportion of total unemployed youth make up over time there is no way to determine this one way or the other. He is making a totally unsupportable conclusion from the data he is presenting.

    Don’t get me wrong here, I’ve been a labour and/or Green voter my entire life, but I’m also no fan of poor science. If one is going to use data to establish a point of view it really needs to actually prove what one is concluding. And Gareth’s data simply fails to meet that test in my opinion.

  24. Yep, as the first commenter said, come back when you’ve put it in the context of overall unemployment. Otherwise this is just amateur hour dressed up somewhat pretentiously.

  25. Lats, I disagree, with any recession the number of youth who are unemployed will increase relative to the rest, new workers coming onto the market when there are no jobs will become unemployed.

    Eric Crampton, I guess you realise our minimum wages are 50% of the average wage and above the 40% figure you said was problematic – when this ration also applied in early 2008 we had less than 20,000 on the dole.

    The impact on labour market depends whether there is any employer dependent on low minimum wage costs to compete with an external competitor – I know of no local employer that competes with foreign supply via minimum wage labour – do you?

    Canada has a higher minimum wage than USA and Mexico and operates within NAFTA. Australia has higher wages than us and as we have free trade with the wider world we have already ceded low wgae production jobs offshore already. The remaining low wage jobs are in the domestic service sector not vulnerable to price elasticity.

  26. I think your grasp of causality and the relevance of your argument and graph is appalling.
    However your title for the post is marvelous. It’s the cleverest I’ve seen for ages.

  27. I’m sure that N-Act really want to do away with the minimum wage across the board. If they were really serious about closing the gap with Australia, they would follow similar strategies.. i.e. mimimum wage $15, tax-free thresh-hold $5,000, remove GST off basic foods & introduce a CGT. But it seems obvious that their main strategy is about shifting the tax burden south (to all the lowest paid workers). Giving biggest tax breaks to the ‘top end of town’.
    “Three more years.. HELL NO !!” Kia-ora

  28. Seriously, if you care about low income wages, the way to fix things is through something like a negative income tax, or a fix to WFF to scale back the high EMTR. Minimum wages probably don’t do much harm on average if they’re around 40% or less of the average wage; above that, they’re harmful. And youth minimum wages can do damage below the rate at which they affect adult outcomes. A well done Canadian study showed that increases in the minimum wage increased adult poverty rates: the small gains to the winners were more than offset by the number of families pushed below the poverty line by having a second earner lose a job.

    Go read Chris Dillow on minimum wages in the UK. He’s reasonably hard left, but he’s a realist on minimum wages. Try here, for example. http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2006/01/against_the_min.html

    Or, think about it this way. If you want to raise wages of the working poor, because it’s something all of society should care about, should the burden of that fall on the folks who buy things made by low income workers (and the low income workers who lose their jobs), or on everyone through general taxation used to fund income support through something like a negative income tax?

    I don’t necessarily endorse a minimum income tax, and if I did, we’d probably disagree about how much support was appropriate. But at least then we’d be talking about appropriate points on an equity-efficiency tradeoff curve. High minimum wages push us inside the equity-efficiency production frontier. There simply are better ways of achieving what I presume to be your desired ends.

  29. The graph above would be more meaningful and useful if it also include a plot of general overall unemployment rate. If youth unemplyment stays proportional to the general rate then your argument holds water. If the proportion of youth unemployed changes, then some factor has influenced this, be this abolition of youth rates or something else.

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