Friday 7 January 2011

Shamubeel, I think you forgot something

New Zealand Institute of Economic Research principal economist Shamubeel Eaqub said the youth jobless rate was expected to decline this year as the economy rallied.

Young people were the first to suffer during tough economic times, and the high figure was "part and parcel" of the recession, Eaqub said.

Young workers had less skill and experience and were often in more vulnerable sectors, such as hospitality and retail.

"Often they're in the kinds of jobs where there is less job security, high turnover, lower wages and more part-time and casual hours," Eaqub said.
Now that's all true. But it was also true in prior recessions. And the youth unemployment rate, relative to the adult rate, is much worse than in prior recessions. Somehow, The Press article nowhere mentions the abolition of the youth minimum wage as potentially having affected folks in the younger cohort.

I'd incorporated the September quarter HLFS data in the simple little regression back when it was released in November, here. I'd then said
The adult unemployment rate this quarter was 5.1%. The youth (15-19 yr old) rate was 23.3%. The residual this quarter was 8.5: if the youth unemployment rate were performing about as it previously did in relation to the adult rate, the youth unemployment rate would be 8.5 percentage points lower. That's about 12,000 kids. If we take the previous highest residual as reflecting the normal effects of recession (2.6 in March of 94), the excess residual currently is 5.9 percentage points, or about 8,500 kids. Note that youth labour force participation has dropped while overall labour force participation is up; the numbers above understate things.
Numbers are in the news again because the OECD says that our youth unemployment rate - for folks 15-24 - is 15th out of 36 countries. That doesn't sound bad, but as a multiple of the adult rate, it's rather bad. And the unemployment rate for the 15-19 year old group is worse than for the group that includes 20-24 year olds.

Abolition of the differential (lower) youth rate hit the younger cohort; the greater bindingness of the adult rate on the younger portions of the adult cohort hit the 20-24 year olds more than the older cohorts.

National's passing Sir Roger's bill wouldn't have prevented this: the bill only allowed that the youth and adult rates be different. It's hard to believe that National would then have made the further step to cut youth rates rather than let them erode over time. But Labour's introducing big nominal rigidities by forcing youths to be subject to the adult minimum wage, heading into a rather large recession, can't be counted as one of their better decisions.


  1. Having read offsetting behaviour over the last year, I wrongly assumed that the negative employment effects of the abolition of the youth minimum wage had passed into the cannon of conventional wisdom. When reading the Press article I was therefore expecting to get to the paragraph where minimum wages were discussed and was somewhat underwhelmed to reach the end of the article without finding it. Come on NZ journalists lift your game!

  2. Its surely true that any increase in any minimum wage will reduce employment. But that doesn't tell us much about the appropriate difference between youth & adult minimum wages.

    Are you suggesting they should be such that unemployment rates are equalised between young & old? If so, is there a rationale for that?

  3. Wasn't saying that at all, John. Rather, that the youth unemployment rate, relative to the adult rate, went crazy high in 2008 after the raising of the youth minimum wage to the adult level, in a way that it hasn't in any of the prior.recessions in HLFS.