Minimum Youth Wages. Huhhh. What are they good for?

There has been some discussion lately about the possible reintroduction of a minimum youth wage at a lower rate than the adult minimum wage. This has predictably upset a lot of well meaning socialists who think that it is morally wrong to pay young people less than adults for the same work.

I certainly understand their argument. Why should a 16 year old be paid less than a 20 year old for the same work? The 16 year old might be a better worker. It’s discriminatory. And so on.

There are two distinct but related arguments that I would make on the subject.

The first argument is purely pragmatic. I (along with the vast majority of economists) predicted confidently to anyone who would listen that Labour’s abolition of the youth rate would increase youth unemployment. Since then, sure enough, youth unemployment has skyrocketed. Sure, you could say that this is a post hoc ergo propter hoc fallacy, ie that chronology doesn’t imply causation. But the mechanism by which the abolition of the youth rate would lead to higher youth unemployment is so well understood that I don’t think that this stacks up.

Employment is a risk management exercise. You meet someone, you look at their cv and ask them some questions, and then you take a bet on whether their future performance will be worth the money you’re paying for the role. It is inherently risky because a bad employee can do a lot of damage, especially to a small business. In the minds of employers, if not in the minds of high school students, maturity and reliability are positively correlated. Therefore, all other things being equal, an employer is much more likely to plump for an older candidate. Note, however, that all other things are unlikely to be equal, seeing as the older candidate is much more likely to have work experience and, therefore, referees. This means that, if they have the choice, the employer will usually choose to purchase the services of the non-youth candidate, unless the higher risk of the younger worker is compensated for in the form of lower wages.

There’s a good analysis of the effect of youth rates on youth unemployment here

It has an excellent graph that I can’t seem to post, so I’ll describe it. There’s a squigly line at the bottom, which is the adult unemployment rate since 1985. Then there are two squigly lines above that, which are the predicted youth unemployment rate (based on the adult unemployment rate) and the actual youth unemployment rate. As you’ll see if you follow the link rather on relying on my powers of description, all three track very nicely for a quarter of a century. Through booms and busts, huge economic reforms, myriad educational experiments, youth unemployment rates track a predictable, albeit slightly erratic path, higher than the adult rate but clearly in tune. Then, in 2008, the horizontal lines traverse a big vertical line, at which point the predicted and actual rates of youth unemployment decouple and head off to do their own thing. The big vertical line, you will at this point be unsurprised to learn, is the point at which the youth minimum wage was abolished.

So, what we have now, in New Zealand, is a situation in which many young people would like to work but can’t find a job, and in which many employers who would like to hire more labour, but cannot do so profitably at $13 per hour. If a youth rate were re-introduced, many small businesses could operate more productively and profitably and many more young people would be getting a wage and work experience. This is a win-win situation. Sure, the young people would like to be being paid more. But that doesn’t mean that being paid less than what you’d like is not a ‘win’ if the alternative is being paid zilch.

Which brings me to my second objection. I believe that it is morally wrong for the state to use the compulsive force of law to prevent, through threat of significant sanction, the aforementioned young people and the aforementioned business owners getting together to come to a mutually beneficial arrangement. I don’t just think it’s bad economics. I think that it is morally wrong to legislate for the use of legal force to punish people for behaviour that does no harm.

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6 comments on “Minimum Youth Wages. Huhhh. What are they good for?

  1. Sinner says:

    I think that it is morally wrong to legislate for the use of legal force to punish people for behaviour that does no harm.

    Right – so the problem is not the youth minimum wage: rather it is
    * the adult minimum wage
    * the employment “relationships” act (AKA Union empowerment act)
    * the Unions (especially in the public service)
    * the sections of the crimes act related to employment
    * welfare – especially the Dole, DPB & Super

    Reintroducing the Youth Minimum Wage is clearly discriminatory: no ‘classical liberal’ could support such a move. The solution is of course obvious: repeal the adult minimum wage, ERA, and related crimes act sections, and especially refuse any negotiations with Unions in the public sector – simply terminate the employment of all unionists. Finally of course the largest distortion of all are the benefits payed to those who choose not to work.

    These simple, straigtfoward, classical solutions would permanently resolve NZ’s employment and unemployment problems.

  2. Hiya – thanks for commenting.

    If a policy such as Friedman’s negative income tax with flat tax was up for debate in NZ, I’d be keen to debate the utility of an adult minimum wage. The only minimum wage policy up for debate, however, is around the youth minimum wage.

    I think that reintroducing a youth minimum wage at a lower level than the adult minimum wage is better policy than not doing so. I acknowledge that it’s discriminatory, but I don’t agree that such discrimination is unsupportable from a classically liberal standpoint. I have no philosophical objection whatsoever to discriminating between those above and below the legal age of majority.

  3. maungakiekie says:

    Some good stuff, nzcl.

    Only a child between 11 and (I think) 18 years old is allowed to deliver local newspapers in Auckland; ie, an adult is not ALLOWED to do that job because someone somewhere decided it would be demeaning for them to receive such a low wage. They’d prefer that that adult was unemployed! Sick.

    Maungakiekie.

  4. Hey there, Maungakiekie. Thanks for commenting.

    I guess that must, therefore, create the rather perverse situation of forcing people to retire at the age of 18! How odd.

  5. James says:

    I did a paper run in the early 80’s by bike…now that’s a thing of the past as its deemed too unsafe and the parents drive the kids around. I wonder what the pay is now…

    • Well, I guess it’s illegal to pay less than $13, unless they pay them based on how many papers they deliver. I can’t imagine the rate’s very good once you’ve accounted for the parent’s time and the fuel.

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