Youth minimum wage and youth outcomes

One question I’ve been receiving a lot during presentations is “what is the cause of the really high youth unemployment rate”.  I have been answering with two things:

  1. The youth minimum wage was significantly increased, making young people more expensive (but also making more young people want to participate in the labour market)
  2. A recession disproportionately hits the young, as they have less human capital and can be seen as a more “risky investment” then other labour types.

I usually go on to say that I can’t say which factor is bigger – I would need someone to do empirical work.

Luckily for me, the work has now been done.  The Department of Labour commissioned a report by Dean Hyslop and Steven Stillman which went through these issues.  Now these guys are top draw, so I’m pretty comfortable just stealing their results 😉

Interestingly, they found that the change in the minimum wage did have a binding impact – it lead to a reduction in employment, hours worked, and earnings for the relevant group.  However, instead of completely dropping out of any work relevant discipline people in this cohort tended to move into education – which is a nice result.  Furthermore, the unemployment rate is said to have increased.  [All these points are just from their conclusion]

Other feedback

I have seen Frog Blog and Eric Crampton both write posts on the issue.  (Update:  More good points from Eric Crampton.  This is a very interesting useful issue to think through – in terms of thinking about the linkage between training, work, and income policies.)

Frog Blog’s post is a bit weird – as they claim that the study invalidates what the “right” has been saying.  But the “right” has been saying that higher youth unemployment rates were partially due to the minimum wage change … which the study also suggested.

The study appears to indicate that the decision is between education and getting into work for the 16-17 year old age group.  The increase in the minimum wage does lead to LESS people working than want to when they are 16-17 – so it is binding.  We have to ask “do we think 16-17 year olds make good enough decisions, or do we have to make them for them” in order to decide whether the changes are good and bad.  [Note, a 16-17 year old may get more lifetime income/human capital from starting work early than from education – so this is not a one-way argument].

I would prefer it if both sides were just transparent about this …

Eric Crampton discusses how this work compares to his prior work (with the proviso that the DOL study had more data).  It is a good piece to read alongside the other piece, just to help clarify what is going on 😉

And now I expect political debate about the youth minimum wage to turn into quibbles about which definition of unemployment matters most: the one that StatsNZ regularly reports, or the one Hyslop and Stillman were commissioned to use.

In terms of thinking about matters I will defer to what I said with regards to the Frog Blog post:

The study appears to indicate that the decision is between education and getting into work for the 16-17 year old age group.  The increase in the minimum wage does lead to LESS people working than want to when they are 16-17 – so it is binding.  We have to ask “do we think 16-17 year olds make good enough decisions, or do we have to make them for them” in order to decide whether the changes are good and bad.

If we think 16-17 year olds make alright decisions with regard to their future, then the UNEMPLOYMENT RATE is what matters.  If we think they discount education too heavily then looking at the substitution in terms of education (like the study appears to have focused on) makes sense.

Although I can imagine a lot of people saying “of course they discount education too much”, it is nowhere near a clear case – this is the sort of policy issue that needs to be transparent and fair.  IMO, there are a lot of people that would get more value from work when they are 16-17 – although my view is biased by the fact I grew up in Otorohanaga, where this sort of skill development is highly promoted in the community.

  • Kimble

    Its a shame people debate the marginal benefit of additional years of education, but not the marginal benefit of additional years of experience. At least, not to the same extent.

    The people most hurt by removing the youth minimum wage would be those that do not get as much benefit from additional years of schooling. They are forced to forego two years experience in favour of two years of low value education.