Friday, 2 March 2018

Floors, ceilings, and the youth minimum wage

Treasury warns that young people will miss out during such times if the lower rate is abolished. As jobs become scarcer, they will be squeezed out if employers can hire a more experienced older worker at the same hourly rate.

There is some evidence that this is true. Economist Eric Crampton, in a 2012 article, demonstrated that following the global recession of 2008, youth unemployment rates rose as high as 27 per cent, while the adult unemployment rate never exceeded 5.4 per cent.

The reason for the difference, Crampton wrote, was an earlier Labour government's decision to do away youth wage rates – an example of good intentions having negative unexpected consequences.

However, economic conditions are cyclical. Downturns are generally short-lived. Treasury seems to be asking successive cohorts of young people to carry the burden of significantly lower wages permanently to insure against future temporary downturns.

Economists also tell us that people will act in their best interests if they have incentives to do so. We could start by encouraging young people into the world of work by paying them a proper wage.
National's reinstatement of the lower youth minimum wage was pretty half-hearted. National voted down Sir Roger Douglas's member's bill that would have properly reinstated the lower youth minimum wage. The version National gave us instead is available only for the first hours of work by a younger worker, and it's a hassle to access.

We have to remember that the minimum wage isn't the mandatory wage. If labour market conditions are tighter, employers needing workers would have to pay more than the minimum if they wanted to attract staff: it isn't a permanent bearing of lower wages. And in slacker conditions, perhaps more employers would find it worth the hassle to try the youth minimum wage. At that point, having youths on a higher minimum wage would be binding and hurt employment.

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