Tuesday, 10 May 2011

Goff on youth unemployment

Labour leader Phil Goff talks with Larry Williams about youth unemployment (streaming audio, starts around the 18 minute mark).

He says a few things with which I'd agree. He talks about the importance of skills and training; I'd expect youth unemployment could be lower if some kids shifted earlier into training for trades instead of taking courses for potential university entrance. I disagree with him on using fiscal and monetary policy to goose youth employment figures, but shifting resources towards trade certification and training isn't crazy.

When asked about the effects of youth minimum wages, Goff replies that the youth minimum wage went away ages ago and that when the economy was booming, we didn't have high youth unemployment. There's a bit of a dodge in there. Eighteen and nineteen year olds were brought up to the adult minimum wage in 2001 but the under-18s weren't brought to the adult rate until April 2008. It's true that when the economy was booming, we didn't have high youth unemployment. But we have higher youth unemployment now than we did have in prior recessions when the adult unemployment rate was much worse. He rules out having folks working for less than what it costs to live, but a decent proportion of minimum wage earners are second earners or kids starting out while working at home - which is why the Canadian data shows increased poverty from higher minimum wages.

Williams asks Goff directly about the points I've been making here - that youth unemployment would be lower if we still had the lower youth minimum wage. Williams says seven percentage points; this quarter's data says eight, but other quarters have thrown out results from five to eight points. Goff replies:
  • I don't think that's proven.
    • EC: That's true. It's not proven. Proof's pretty hard to establish in economics. I think the residual plots are a smoking gun, but there could have been something else that happened mid-2008 that threw a big wedge between the adult and youth unemployment rates and that has persisted until now. I cannot imagine what it could be, but it's possible that I just lack for imagination. It's not going to be cuts to funding for training programmes though - the numbers of positions cut don't make a big enough difference and the effect's timing is tough. In December quarter 2008, youth unemployment was already three points higher than its worst ever performance relative to the adult unemployment rate. National was only elected 8 November.
  • Even if he's right, that still leaves you with very very high unemployment
    • EC: Entirely true. But the youth unemployment rate has been above twenty percent since mid 2009; I don't think it would have touched twenty absent having eliminated the youth rate. Some labour market features are really hard to fix. Lowering the youth minimum wage shouldn't be that tough. Another way of looking at it: if you have diabetes and are having to go for dialysis every other day, does that mean you should ignore a totally treatable toothache? Sure, it won't cure your diabetes. But it's still worth doing.
  • It isn't fair that a young person doing the same job as an older person is paid less.
    • EC: I'm no expert on fairness. But I'd find it more unfair that a youth is barred from taking a job at lower pay and proving his worth; the employer will pick the worker with a decent track record if he's forced to pay no less for the worker of as yet unproven quality.
  • When Larry Williams makes the point that lower wages can be a way for the young folks to get their start, Goff replies, "What you may be doing is simply displacing it so making it better for the employer to take on a young person so they don't take on an older person who then becomes unemployed."
    • EC: There may be something to that, but the US evidence suggests these kinds of displacement effects are relatively small. And we really need to remember our history. The point of the minimum wage for the early progressives was that it made the normatively unemployable positively unemployable - the displacement effect caused by forcing folks out of work through the minimum wage was the intention.
Big picture, Goff's right that the youth minimum wage can only account for a minority of current youth unemployment and that getting the economy back on track, though I disagree with his proposals for doing so, is best overall. Reinstating a lower youth minimum wage would likely only improve things slowly over time. But unless we're happier with youth unemployment being on a permanently higher track relative to the adult unemployment rate, we ought to consider reinstating youth rates.


  1. Rather - we must, as soon as possible, eliminate all minimum wages, along with all other disincentives to employers to employ: put simply, it's their money.

    These disincentives include:
    * Employment relations action - go to "fire at will"
    * Trades unions
    * Holidays Act
    * Paid parental leave
    * Corporate tax rate and FBT rate (down to less than Canada's 9%)
    * Employment-related sections of the Crimes Act.
    * Eliminate (or greatly tighten) the dole, DPB etc, to give incentives to work.

    For more details, read the 2025 Taskforce report, - ACT party policy today, enforced in an emergency budget in November.

  2. I can't help but think that if it weren't for youth rates many of todays CEOs may never have gotten that first job that started them on their path to success. How different life may have been for them.

  3. @Anon: The econ case for reducing the minimum wage to 35-40% of the average wage is pretty solid. Going below that I'd support, but with the libertarian hat on rather than the empiricist hat.

    I think you're rather exaggerating the case made by the 2025 Taskforce.

    Do note though that the incidence of the corporate tax rate is not as simple as it might appear.

    @Lats: Most of them probably would have wound up ok. I worry more about the marginal cases where it was always going to be a bit of a toss up whether they'd latch into the labour market.