Friday 5 February 2010

Youth rates [updated]

Update: Please do read the follow-up post here which presents rather stronger evidence than is here presented. Original post follows below.

Sir Roger Douglas links rising youth unemployment to the abolition of the youth minimum wage in early 2008. Of course, the overall unemployment rate also has risen considerably over the last couple of years - recessions do that. But it does look like youth unemployment rates have risen disproportionately this time around.

The blue line traces the youth unemployment rate according to the Household Labour Force Survey (easiest one for me to find that splits out youth and overall rates). The red line traces the overall unemployment rate, which includes the youth rate, mostly because I can't be bothered to figure out how to get the Stats website to spit out a rate for {all but 15-19 year olds}. The green line just takes the difference between the two. Note that the higher the youth unemployment rate rises relative to other groups, the greater will be the attenuation bias in this line since the youth rate then is doing more to pull up the overall rate.

The Minimum Wage (New Entrants) Amendment Bill came into force 1 April 2008. At that point, kids and adults became subject to the same minimum wage. I've drawn a vertical line in the graph above at the Second Quarter, 2008.

Prior to Q2.2008, the youth rate bounced around a lot but stayed about ten points higher than the overall rate. During the early 90s, it got almost up to 15 points higher - the last big recession. It's now almost 20 points higher.

The folks over at the "elasticity of labour demand denialist" parts of the blogosphere might say this is all because we elected a National government in 2008. But National was in office for most of the period in the 90s when the youth rate was stably sitting about 10 points higher than the overall rate. Would that group say that Shipley was that much better than Key? Note also that we then operated under the Employment Contracts Act.

It could of course be that this recession is just different from the recession in the early 90s in some way that disproportionately affects youths. It's possible. But I can't think of any reason why it should be the case. But I can look at that bright red line.

Is there any better plausible explanation of why the youth rate would be jumping so much relative to the increase in overall unemployment? If youths were a much larger fraction of the labour force in 1991 as compared to now, that would be an explanation. But if I plot youths versus another age group - 25-29 year olds (below) - I get the same pattern.

The difference between the youth and older groups' rates reached a maximum of 13 points in the early 90s. It's now at 19 points.

Of course, youth unemployment rates would have gone up absent the change in the minimum wage legislation. But it would pretty plausibly now be sitting about 6 points lower absent that change.

Again: can anybody come up with a better explanation than the abolition of youth minimum wages?

Update: Kiwiblog tread similar ground (apparantly before I did too).


  1. Hi Eric,

    I can't seem to find the figures to break down youth unemployment by ethnicity, but I think you will find a much larger increase in Maori youth unemployment than would be expected given the recession as well. I may get the Parliamentary library onto it.


  2. I could get UE by sex and age, by sex and ethnicity, but not by ethnicity and age. I would be very surprised to find you're wrong. Had always figured biggest effect would be on most marginalized sectors: that's where the minimum wage is most binding.

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  4. Perhaps young people are just marginal workers? Can you go back any further in the data and see if they tend to be laid off disproportionately in past recessions?

  5. There was a recession in 1991 and 1999 from memory, so the data covers this period.

  6. Here you go Eric,

    Still waiting on better figures.


  7. Robert: entirely plausible, and that's what would have been going on at 1991. The gap this time around relative to the adult unemployment rate is much larger.

    Sejanus: Thanks! Something odd with that series...why the spike in 2005?

  8. Firms have stated that they are "labour hording" pretty substantially during this recession - hence why productivity growth has been negative compared to the strong productivity growth we normally get in the later parts of a recession.

    If the justification for labour hording was the fact that hiring employees is like an investment, then it is likely that older and more experienced employees would be kept on while younger people are let go.

    Another possibility is that, we know working age net migration has increased even more than net migration generally. If this is primarily younger New Zealanders returning this would have some impact on the UR (as least for the old "young categories").

    Personally I mainly blame the minimum wage anyway ...

  9. Yeah, I was wondering that myself.

    I wonder when interest free student loans came into effect - or was announced. Then again, if that was the reason it would be expected to cause the reduction, but not the spike.

  10. @Matt: it would have to be a heck of a lot of hoarding as compared to the prior recession to drive the difference. On the second one, we'd then expect to be seeing a much bigger jump in the 25-29 rate as compared to the overall rate, but it looks pretty similar. I'm with you - minimum wage change most plausible explanation for the bulk of it.

    @Sam: It was the 2005 election bribe, so it started coming in for 2006. Interest free loans, if anything, ought be dropping the youth unemployment rate - you're right.

  11. would a higher university drop out rate and turfing out of underperforming students add significant numbers to the young jobless ?

  12. I'd be surprised if it amounted to much. Turfing the underperforming is only just starting. I think Canterbury is moving this year to have about a hundred underperformers leave. That doesn't amount to anything in the aggregate unemployment stats.