Tuesday 9 August 2011

Alternative explanations? [updated]

John Pagani wonders whether there are alternative potential explanations for the hike in youth unemployment rates; he points to a drop in the number of youths in training.
If it wasn't the removal of the youth minimum wage that caused youth unemployment to increase, then it would have to have been caused by something else that happened around the same time One other big change was the a sharp fall in young people getting skills for work. In December 2008 there were 133,300 people in industry training. By the end of last year, there were 108,000. No wonder unemployment has gone up.
I'm not sure of the source on industry training figures so I don't know whether December 2008 was a local maximum or about average. I'd also thought that the bigger part of National's cut to apprenticeship funding was getting rid of an increase that Clark promised shortly before the election that was never enacted.

It's possible that reductions in funding for subsidized apprenticeships could have caused some of the increase in youth unemployment. I'd need to know rather more about the prior structure of apprenticeships to be able to put a figure on it. If there had been apprenticeship schemes providing wage subsidies for youth for the period 1986-2008 and not at all thereafter, a good chunk of the increase could be due to the combination of getting rid of apprenticeships and subjecting those not then eligible for apprenticeships to relatively high minimum wages. I'd be surprised if that were true, but I'll have to rely on someone to give me a good summary link in the comments for the history of youth apprenticeship schemes.

I would note, though, that Key only won election in November of 2008. Youth unemployment in December quarter 2008, which includes the last months of labour and the first months of National, was1.7 percentage points higher relative to the adult unemployment rate than we had ever seen since 1986. Did Key turn off a switch when he took office? Policy rarely moves that quickly, and even when it does, the economy lags it by a bit.

I'd have expected, but don't know for certain, that any cuts to apprenticeships would have cut funding for new apprenticeships rather than throwing out kids currently in apprenticeships. By December 2009, 13,000 more kids were unemployed that we would have expected given the worst prior performance of the youth unemployment rate relative to the adult unemployment rate. Did Key cut 13,000 new apprenticeships in his first year? Or, more realistically, more than 13,000 as at least some of the kids who didn't get apprenticeships would have found other work?

I can believe that the number of apprenticeships dropped. The bust in construction would have killed industry demand for apprentices. But in prior periods, whatever changes there were to apprenticeship demand, youth unemployment outcomes tracked the adult unemployment rate. I'm pretty sceptical that changes in apprenticeship policy regimes could be responsible for any sizeable portion of the increase in youth unemployment relative to adult unemployment. But I'm open to playing with the data if somebody points me to it; I wouldn't have time to get to it 'till semester break, but I'm willing to kick it around.

Pagani continues:
If teenagers were paid less, any improvement in the youth unemployment rate would come at the cost of higher adult unemployment. It doesn't make us better off; it just shuffled the problem around.
Neumark and Wascher suggest there's something to this, but it's sure not the whole story. They find in US data that the employment effects of a youth minimum wage are twice as large as any disemployment effects on the next age cohort up. So some of the benefits of a youth minimum wage are substituting younger cheaper workers for slightly older more expensive ones, but there's a much larger effect through job creation.

 Here, I'll disagree more strongly with Pagani.
Having people in work is better than not in work. But you need to earn a living wage. The current $12.50 minimum wage is not enough to live on so cutting it means the Government ends up paying people accommodation supplement, working for families, and other income support - in other words subsidising wages. Instead of spending the money on benefits, isn't it better to invest it in training, apprenticeships and skills, instead of in welfare supplements?
First, the minimum wage is $13, not $12.50. That's the trivial objection. More substantively:
  • Should we really expect that a minimum wage applying to 16 year olds be sufficient for raising a family? That's what the living wage argument tends to be about; I can't see why we'd push to apply it to 16 year olds.
  • If we have decided that 16 year olds should receive a living wage, here are two potential options. I prefer the second. 
    • a really high minimum wage that forces a bunch of kids out of work and increases the cost of products produced by minimum wage workers, a disproportionate amount of which are bought by lower decile consumers;
    • a wage subsidy packages that place the burden on the taxpayer, who presumably wishes to fund the transfer to 16 year old workers. 
  • I don't get why Pagani seems so averse to subsidising wages directly rather than through mechanisms that come with higher deadweight costs. Maybe in his model all the benefits go to employers who then just cut wages to match. I suppose you could build models in which that happens; they're just not particularly plausible. 
Pagani also calls Offsetting a "right wing economics blog". I sure wouldn't call myself a right winger, but maybe I'm bringing too much baggage from a North American context where right wing means free markets and social conservatism. Either way, I'm not sure that only right wing economists believe that labour demand curves slope downwards.

Update: Do read Luis's comment below. Pagani's numbers seemed crazy high to me - total population aged 15-19 is only around 320K; having that many in training seemed implausible. But I figured I'd just leave it hang there 'till somebody found the actual number. And boy does Luis deliver a knock-out blow. 14k kids aged 15-19 were in training in December quarter 2008; that dropped to 10k in December quarter 2010. And I don't know what portion of that drop is due to changes in the funding environment and what portion is due to a worsening economy in which construction firms are reluctant to take on apprentices; the latter ought to happen in every recession.


  1. Youth unemployment of near 17% prior to the Great Recession indicates we had a systemic problem before we even talk about minimum wages.

    The OECD reckons we are good at educating 80% of our school kids but basically failing the rest, so there's something to look at.. but my guess is that its something as basic as youth can have a quite decent lifestyle living at home being paid something over $100 a week and being supported by over protective parents.

    I well remember a concerned lawyer ringing me and asking if I could employ his amiable but cruising son living at home, and I had to tell him I had the same problem!

    It wasn't till their early 20s that these young men understood that you can't be a serious girl hunter if you haven't got a car that they snapped out of it.

    Back in the 50s and 60s I had coworkers who told me the best thing for them was Compulsory Military Training.. it snapped them out of an extended childhood made possible by prosperous times and parents keen for their kids to avoid what they went through in the Great Depression and WW2.

    In short, I think that a big part of the problem is that parents are wealthy enough through their own jobs or more generous Govt support to be able to hold their children to them rather than booting them out into the real world.


  2. I think Pagani is way off the mark. Industry training stats for Dec 2008-2010 are available from TEC's website. Stats are produced quarterly and by age groups, including 15-19 year olds.

    Considering 15-19 yo, the numbers are 13,859 trainees (Dec 2008), 11,288 (Dec 2009) and 9,657 (Dec 2010), making up less than 10% of the total trainee population for each year. Unfortunately, there are no age specific stats before December 2008, but we can see that the *aggregate* trainee population for Dec 2007 was smaller than the one in Dec 2008.

  3. @Luis: Wow. Will hoist it into an update. Thanks!

    @JC: Few things would make me emigrate faster than mandatory military training for my kids.

  4. @Eric

    Re:Military training. The Swiss do it and if you are determined to be not fit enough (ie city kids) they find somethinfowler in the service for you to do. Incidentally their unemployment stats are pretty also!

  5. Sorry that should read:
    ^Determined as not being fit enough
    ^something else