Friday, 22 October 2010

Minimum wages and youth unemployment

An interesting post over at Economic Logic blog on the effects of minimum wages on youth unemployment. The Economic Logician writes,
Aspen Gorry uses a suddenly popular labor search model that differentiates between those seeking a first job (the young) and those that have experience (the old). Varying the level of the minimum wages from American to French levels, he finds that about 50% of the gap between youth unemployment rates can be explained. What this is implies is that the minimum wage prevents some of the young workers to find their first job. And this lack of experience implies that they enjoy only later the job stability of an incumbent. Thus the impact of the minimum wage adds up quickly for the aggregate unemployment rate.
The abstract of the Gorry paper reads:
Significant employment differences between the US and Europe are concentrated among young workers. This paper constructs a labor search model that accounts for age patterns of employment. Work experience reduces the probability that workers lose their jobs. By introducing minimum wages, the model explains empirical findings on the effects of minimum wage laws. In addition, the model shows that minimum wages can account for about half of the differences in youth employment between Europe and the United States.
The model suggests that the introduction of minimum wages means that the representative inexperienced workers, the young, have a more difficult time finding their first job and are less likely to become experienced. Such negative effects decline with age as workers become experienced and the minimum wage no longer binds. So the minimum wage effects of job prospects of the young inexperienced worker.

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