Friday, October 28, 2011

Policy change? Youth minimum wage edition

National has, much to my surprise, promised some policy changes around the youth minimum wage. I'm not optimistic that the changes will have substantial employment effects, but they could lead to changes that would. Let's parse things quickly as I have grading to finish.

First, let's recall my prior work, consisting of simple difference-in-difference forecasting models, showing that youth unemployment rates were about eight percentage points higher than expected subsequent to Labour's abolition of the differential lower youth minimum wage.

The Department of Labour commissioned Hyslop and Stillman to look at the changes in the youth minimum wage. They found big decreases in the number of youths in employment, but this was largely offset by increases in the number of youths in education, at least some of whom, by reports from school principals on Radio New Zealand, would really have been better off had they been able to leave school and enter employment.

Hyslop and Stillman also found that very few employers took up the New Entrants' Wage policy that would allow them to hire youths on a lower wage for the first few months of their employment; employers viewed it as not being worth the hassle.

Under Labour's policy, 16 and 17 year olds could be paid 80% of the adult minimum wage for their first three months or first 200 hours of employment (as well as workers aged 16 and up engaged in 60 credits per year of industry training). And few employers bothered with the paperwork hassles. Here's Hyslop and Stillman:
Although not definitive, we believe these patterns suggest the new entrants wage was largely non-binding after 2008. In addition, we suspect that, in practice, there may be significant issues associated with the information employers require on young workers employment experience and wage equity across their workers that inhibit employers using the new entrants rate. Below, we also show that, after 2008, the adult minimum wage appears to have a substantial binding effect on the wage distribution of 16-17 year-old workers. For these reasons, in our subsequent analysis we will assume that the adult minimum wage is the relevant minimum wage for all 16-17 year-olds after 2008. 
Ok. So the prior New Entrant wage was effectively useless in getting kids started in employment.

So what has National promised to do? Expand eligibility for the New Entrant's wage (now called the "Starting-Out Wage").

The starting-out wage will be set at 80 per cent of the adult minimum wage and three groups of people will be eligible:
  • 16- and 17-year-olds in their first six months of work with a new employer.
  • 18- and 19-year-olds entering the workforce after more than six months on a designated benefit.
  • 16- to 19-year-old workers training in a recognised industry course involving at least 40 credits a year.
What's the sum total of the changes then?
  • 16 and 17 year olds get an additional three months' eligibility for the training wage. Maybe this is enough to make employers deem the transactions costs worthwhile, maybe not;
  • 18 & 19 year olds have access to the starting out wage - this is new;
  • Youths in training only have to be doing 40 instead of 60 credits per year.
In short, there's not much there there. Or at least not much that could be expected to yield any substantial employment effects. [Update: it looks like the paperwork for employers wishing to use the new entrants' wage is simpler, which could start yielding some results.]

Even a complete reinstatement of the former youth minimum wage would only have had slow effects on youth unemployment rates. The best we can hope for on this one is that it opens the door to more substantial changes later on.

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