Debate continues over minimum wage

00:10, Jun 14 2011

The minimum wage for young people appears to be back on the political agenda. It shouldn't be. Those wanting to bring back youth rates say they will slash youth unemployment. The evidence simply does not bear this out. There are much more important issues at stake including skills, education, productivity and living standards.

First, let's look at the international research evidence. There have been numerous studies but attempts to link the level of the minimum wage to employment have been inconclusive.

The findings of a 1998 International Labour Organisation survey are still true: "All in all, it seems fair to conclude that the existing evidence supports both positions in the debate. Whether a minimum wage has a negative or a positive effect depends on many factors such as its relative level, the structure of the labour market and the country concerned."

A major study by Dean Hyslop and Steven Stillman in 2004 looked at the effect of increases in the youth minimum wage in New Zealand the early 2000s. It found "no robust evidence of adverse effects on youth employment or hours worked". "In fact, we find stronger evidence of positive employment responses to the changes," the authors wrote.

One of the most recent large-scale studies was published in 2009 by Hristos Doucouliagos and T D Stanley. It re- analysed 64 United States minimum- wage studies - including 39 relating to teenagers - and found not only bias in selection of published studies toward ones showing an adverse effect for employment but, once such effects were corrected for, positive effects between a rise in the minimum wage and employment. At worst, they found "no practically significant adverse employment effect".

Research published in November 2010 by Arindrajit Dube, William Lester, and Michael Reich looked at low-wage workers over a 16-year period in all US counties bordering a county in another state with different minimum wages. They found that increases in minimum wages had no negative effects on low- wage employment.

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Canterbury University economics lecturer Eric Crampton argued recently (Stop pricing young workers out of the labour force, June 10) that this last study did not apply to New Zealand because it studied restaurant workers who can't be "outsourced" compared to call-centre operators or machinists. But more than a third of 15-to-24-year-old employees in New Zealand are in retail, accommodation and food services - the biggest users of minimum wages - and about three-quarters are in industries that similarly can't be easily outsourced.

Mr Crampton asserts that the abolition of the youth minimum wage in 2008 resulted in the unemployment rate for 15-to-19-year-olds rising more steeply than that of other age groups. However, minimum rates for 18-to-19-year-olds had been raised to the adult minimum much earlier and Hyslop and Stillman found no employment problem.

Only 16-and-17-year-olds were affected in 2008 - well under half of the 15-to-19- year-old workforce. In addition, other events since 2008 may have affected youth employment. Some clues emerge by looking beyond unemployment rates to actual employment numbers.

THE number of unemployed 15-to-19- year-olds has risen slower between March 2008 and March 2011 than other age groups: by 56 per cent, rather then 80 per cent. The unemployment rate has risen more quickly because it equals the number of unemployed as a proportion of a shrinking 15-to-19-year-old labour force. Over this period, employee numbers in this age bracket fell by 19,800. Many of these young people have gone back to school or tertiary education. Secondary school rolls rose (contrary to Education Ministry forecasts), as did 18-to-19-year-old participation rates in tertiary education.

This highlights that the serious problem of youth unemployment is much more complicated than a simplistic wage theory. Many 15-to-19-year-olds are in secondary school, tertiary education or industry training - and more should be. Some may be unemployed while studying. Many are already raising families.

However, there is a core that is doing none of these. Rather than cutting wage rates, for which there is scant evidence of employment benefits, we should be improving education, training and employment pathways. Are caps on tertiary enrolments and policies discouraging tertiary institutions from increasing their level 1-to-3 certificate enrolments - both also introduced in 2008 - disadvantaging these young people? Are unclear school pathways to suitable vocational education and work-based training letting them down? Are youth employment programmes effective, and are there enough of them?

Finally, the minimum wage is part of a wider picture. Orthodox economics has a poor understanding of work and wages. That car you like in the sales yard will not perform better if you pay more for it - but people do. The above studies complement evidence that productivity increases and turnover reduces if firms pay their employees well and help them increase their skills.

One reason the minimum wage has assumed such significance in New Zealand is that - unlike Australia and many European countries - governments have jettisoned any other involvement in wage setting. During the 1990s, wage increases fell well behind increases in labour productivity.

Until we have a wage system that produces more sensible outcomes, we will need a minimum wage that ensures that those at the bottom of the heap are treated with a modicum of decency.

Dr Bill Rosenberg is an economist at the Council of Trade Unions - Te Kauae Kaimahi. Further details of the research quoted above, and other relevant studies, can be found at here.

The Dominion Post