More jobs better than youth rate

19:38, Oct 10 2012

Give thanks for small mercies all you trainees, teenagers and others, contemplating life on $10.80 an hour.

It could have been much worse.

During consultation over the planned "starting out" youth wage Treasury opened its black heart yet again, pushing for an even lower rate.

It was not alone. Of the 11 agencies consulted over the proposal, only the Education Ministry voiced serious concerns. First, that extending the starting wage beyond its current limits might cut students' income when they are trying to pay their way through study. Second, that the proposal was at odds with the Government's targets of increasing the proportion of people at school with NCEA level 2 and with level 4 in the 25-34 cohort.

As far as Treasury was concerned even 1080 was not the right poison.

The mandarins at No 1 The Terrace noted: "New Zealand's adult minimum wage is the highest in the OECD (relative to the average wage) and – in countries that have some form of youth minimum wage – the wage for 16 and 17 year olds is on average only 71 per cent of the adult minimum wage."


The desk abacus puts that at about $9.60 an hour.

The newly-minted Mobie Ministry stroked its new four-pointed chin and mused how the policy focused "on young people, rather than a wider group of workers who may be facing labour market entry barriers".

"However, if a decision is made at a later date to extend the eligibility for the starting out wage, the Minimum Wage Act 1983 can be amended."

As a statement of the obvious they don't come much more obvious but its implication was the lower wage could be applied more broadly. Perhaps that is unfair. Maybe Mobie was giving technical advice on how to change rather than what to change. And at least it argued the $10.80 rate was "appropriate". But in that word "eligibility" is the politics behind the policy; it is an entitlement – something to be sought after, rather than what it will represent for many; a lower wage than they would otherwise have been paid at a lower cost for businesses.

The Labour Department's own view was generally supportive; that on balance in the current environment it would have a positive impact on the target groups. But its precise nature was uncertain and the department used as its starting point the reaction to minimum wage reforms in 2008 when the youth minimum wage were abolished and a new entrants' minimum wage put in place. That allowed those aged 16-17 to be paid at the equivalent of $10.80 an hour; the same as the training minimum wage; the regime the Government is now expanding. The new entrants' option had a low uptake and evidence suggests the previous regime tipped the balance in favour of more experienced workers – 18-24 year olds – making it harder for the 16-17 age group to get a job.

One study found a loss of 4500-9000 jobs among the 16-17 age group.

The doubt, though, is whether the change will increase overall job numbers or just churn the numbers within different age groups.

In one model, that did not incorporate all the planned changes, the department suggested that if 40 per cent were paid below the adult minimum wage there would be an extra 1000 jobs created among the 16-17 age group, with 800 lost among the 18-19 age group. That's a net gain of 200 jobs, although if the take-up increased to 50 per cent the numbers are more impressive – 3200 new jobs for the 16-17 age group. But pity the older kids; the model estimates 1900 in the 18-19 age group would be displaced.

So while the policy may not do a lot of harm, any good will likely happen only at the margin. In the end, what choice will an employer make faced with a clean-cut kid or the archetypal guy with tatts, no work history and a poor attitude? Does the employer think: "I could pay that college guy $13.50 or take a punt with the tatts at $10.80?"

Possibly in an idealised world but why not just offer the college kid $10.80 and have the best of both worlds.

Net effect, very little. That will not change until the unemployment rate drops to the churn level – maybe 4.5 per cent – or until monetary policy applies a version of the non-accelerating inflation rate of unemployment and starts pushing unemployment back up.

For the individual who gets a job, policies like starting-out can make a difference.

But for the economy it is more jobs we need, not just cheaper labour.