Tuesday, 11 January 2011


Labour's criticizing National for New Zealand's relatively high youth unemployment rates.

Jacinda Ardern, Labour's Youth Affairs spokesperson, gives a few reasons not to blame the prior Labour government's big increases in the youth minimum wage.

Her first reason: youth unemployment was also really high in the early 1990s when young folks didn't face the adult minimum wage. But the adult unemployment rate was also much much higher then. September quarter HLFS figures had unemployment among 15-19 year olds at 23.3%. The unemployment rate for folks twenty and up was 5.1%. Prior to 2008, the last time the youth unemployment rate was at or above 23.3% was March 1994 when it hit 24%. The adult unemployment rate at the time was 8.4%: more than one and a half times higher than the current adult unemployment rate. The youth unemployment rate is very high relative to the current adult unemployment rate.

Second, she notes the big increases in the youth minimum wage under Labour in the 2000s weren't associated with increases in youth unemployment. This is true. It's also true that anybody who could fog a mirror could get a job in the mid 2000s in New Zealand. She cites a youth unemployment rate of 11.8% in December 2005 (matches my figure); she doesn't note that the adult unemployment rate at the time was 2.9%. The youth minimum wage simply wasn't terribly binding in the mid 2000s. That's one reason that Hyslop and Stillman's very nice piece didn't find any employment effects of increases in the youth minimum wage at the time. Note further that Hyslop and Stillman found evidence of employment decreases for youths until 2003; unemployment rates for folks aged 20 and up dipped as low as 2.9% in 2004. Once the adult labour market completely overheated, there was no effect of changes in the youth minimum wage on youth unemployment.

Here's an analogy. State Highway 73 runs from Christchurch over to the West Coast. The first part of it is flat and straight. We're all driving along to the West Coast. But we're a bit annoyed at a few slow drivers. So we put up a minimum speed limit - say at Kirwee where the road is still nice and flat. 50 kph minimum speed for cars with 2 litre engines, no minimum speed for cars with smaller engines. No problem. Any cars that were driving slow just speed up a bit. Then we increase the minimum limit, say around Darfield: 70 kph for the powerful cars, 50 kph for the ones with smaller engines. Still nobody notices. So we up the minimum speed to 75 kph for all cars regardless of engine size at Springfield. Things are fine for a bit - a couple of scooters had to pull over and the small cars have turned off their air conditioners. Then we hit the Southern Alps and even reasonable cars have to work hard to get up the hills. The smaller cars can't keep up with that minimum speed limit and have to pull over. Hyslop and Stillman found that small cars weren't affected by increases in the minimum speed limit from Christchurch to Darfield. But their data didn't include the Southern Alps, never mind Springfield. The mountains still loomed.

It could be the case that something other than the abolition of the differential youth minimum wage explains the rather large increase in the youth unemployment rate relative to the adult unemployment rate. But Ardern's blaming National's failure to invest in youth training courses doesn't seem the simplest or most plausible explanation.


  1. As an economic layman, I have a question regarding youth rates. Suppose youth rates are reintroduced, and naturally youth unemployment falls. Is there any data on what kind of affect this has on the adult unemployment rate? I.e. does the increase in firms hiring younger workers correspond with less employment of adult workers? Does the adult unemployment rate increase at all, significantly? Or perhaps firms simply hire more people, since they can employ more young workers than previously with the same costs, and it's not really as zero-sum as it might intuitively seem.

    Thanks for any thoughts.

  2. A very good question to which I haven't the answer. What we'd need is the cross price elasticity of demand for adult workers with changes in young workers' wages around the minimum. It would be tough to estimate because where there are differential youth minimum wages, they usually move in parallel with changes in the adult minimum wage. Most of what we know about the effects of minimum wages on youths is from studies of changes in an overall minimum wage that affects both youths and adults.

    It's likely that there would be some substitution of youth for low-skilled adult workers with the reintroduction of a lower youth minimum wage. Overall employment would increase - some jobs that weren't worth doing at $12.75 an hour would be worth doing at $10.

    I'd love to see a study that quantified the substitution effects. I'd be surprised if there were much in the way of firing low skilled adults and hiring youths, but I'd not be surprised to see more newly created jobs going to youths rather than low-skilled adults (with more total jobs being created).

  3. Neumark and Washer, 1992, "Employment Effects of Minimum and Subminimum Wages: Panel Data on State Minimum Wage Laws."

    The employment effects on youths of a youth subminimum wage is twice as large and in the opposite direction as the effects on employment of 20-24 year olds. So in that study, roughly half of the benefits to young workers are substitution away from older workers; the other half will be increased job creation. Compare results from tables 7 and 8.

    But statistical significance is a big problem. Joint significance is rejected in all cases for effects on older workers: in other words, we can't reject that there's no effect at all. For younger workers, the effects approach conventional significance in most cases (and are significant in others).

  4. And note that the "roughly half" was picking the set of comparable coefficients that seemed to yield the biggest substitution effect.

  5. Great, thanks for the information, very fascinating.

    Hopefully I'll see you in your economics and policy course.