Saturday, 31 March 2012

Labour's good intentions led to bad youth unemployment

Or so Eric Crampton tells us in the NBR. Interestingly the picture the NBR use of Eric looks like it was taken in the Staff Club. What does this tell you aboot Eric!!!

More seriously, Eric writes,
Something strange started happening to youth unemployment rates starting around December of 2008.

The global recession had started in earnest, but seemed to be nowhere in New Zealand’s unemployment statistics – at least among adults.

The adult unemployment rate hit 3.3% in 2008’s December quarter; not alarmingly higher than it had been in the prior few years.

But the unemployment rate for 16 and 17 year olds, which had always tracked a fairly predictable but noisy path above the adult unemployment rate, instead took a jump.

Where we might have expected a youth unemployment rate around 14%, it instead touched 20%.

Two quarters later, when adult unemployment rates hit 4.5%, and we would have expected youth unemployment rates around 16%, the youth unemployment rate instead hit 27%.
What might have caused youth and adult unemployment outcomes to take such divergent paths? One explanation, and I think the correct one, is the Labour government’s abolition of the differential lower youth minimum wage effective April 2008.

Youth unemployment rates did not spike immediately afterwards, but neither would we have expected them to; employers are not likely to fire youths en masse with a change in the minimum wage, but they are likely to avoid hiring younger and riskier workers when more experienced and similarly-priced alternatives are available. And they’re also likely to stop creating the kinds of jobs that can usefully be done by lower-paid youths.
Demand curves do slope downwards. Eric continues,
It’s always possible that something else caused the change, but it’s not easy to come up with a “something else” that either has the right timing, the right age targeting, or is big enough to plausibly have done the job.
Those who wish to claim that the abolition of the youth minimum wage didn't cause the divergence in unemployment rates have the challenge of coming up with the "something else". There must be some labour economists out there who can raise to the occasion.

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