Thursday, February 17, 2011

On Youth Unemployment and the Minimum Wage

Today's youth unemployment statistics are worrying, no doubt about that. Tim Worstall is pointing the finger of blame for squarely at the door of the minimum wage, I thought I'd take a look at the historic data and see what it shows.

The data in question can be found here (Specifically, Table 9, Datasets: YBVQ,YBVR,YBVS)

It's a bit of a short cut because the data is only for 18-24 year olds, so doesn't include 16 and 17 year olds, but I think it's close enough. In addition to the data for youth unemployment I've also included the data for the minimum wage and adjusted for average earnings. We can only go back as far as 1993, but this is a reasonably good time period since A) We were recovering from a recession and B) We didn't have a minimum wage.

So, here's a graph of the results:

So what conclusions can we reach from the dat, well since we can't see the 80's we unfortunately can't really prove anything on my preferred "it was Thatcher, Neoliberalism and Globalisation" line of reasoning. We can however see that there's not a huge amount of difference between the non minimum wage nineties and the minimum waged noughties, the latest figure is a little higher than the 90's figure but this could be put down to the greater severity of the recession and the current set of cuts.

There is one potential bit of support for the anti minimum wage argument in all this data, that is the rise in youth unemployment after 2004, this rise occured against a background of above average increases in the minimum wage despite the otherwise benign economic conditions. Unfortunately there's anther huge variable that throws a gigantic spanner in the works and that's that 2004 was the year that ten new eastern european nations joined the EU. While it's an acceptable argument that the minimum wage might have put employers of hiring, it's also quite reasonable to argue that employers hired foreign workers in preference to unskilled domestic workers.

All we can really say from the data is that if the minimum wgae had an affect on youth unemployment, the effect was not particularly signifigant. While the data may in parts indicate a relationship, it could easily be explained by other factors. All in all, I personally don't think the minimal benefits we'd see are worth the massive social costs.


. said...

There was some right-wing knobhead on today this morning trying to argue for a reduction in min wage for youngsters. The trade union dude also on pit up a very eloquent rebuff. One point he made that says it all was that if you need to recruit 10 people you don't suddenly recruit 12 because they are cheaper. Of course the reverse argument could be raised about only 10 being employed when 12 are needed but in my experience this would rarely happen.
Paul Garrard - of-course-blog

Timdog said...

"All in all, I personally don't think the minimal benefits we'd see are worth the massive social costs."

Surely the "minimal benefits" would be in the form of more employment, so what social costs are we talking about here? Also, one very key point you did not address is the logic in having one minimum wage across the UK. There are massive variations in average wages, housing costs and the cost of living, and having a floor on wages is distorting.

Furthermore, it once again shafts the poorer areas where unemployment is a bigger issue to begin with. A MW in London is a much smaller deterrent for employers than it is in say Liverpool.

The comment saying "the reverse argument could be raised about only 10 being employed when 12 are needed but in my experience this would rarely happen." What is your experience? I would think actually this is a much more likely scenario, and this is why.

If you "need" 10 people, but you can hire 11 or 12 because that's the cash for wages and other costs that you have at your disposal, you might consider that, if you think the return on your investment is high enough to justify it. You expand your production accordingly if you think there is room to do so (this isn't just manufacturing btw, I use production to describe whatever your output is, be it services, goods or whatever).

However, if you "need" 12 people to meet your production, but you only have enough money to hire 10, how can you hire 12? In this case, you know the production 12 people will give you, so if the costs are too high then you may have to scale back. Economically (I did an A-level 13 years ago so not an expert) scenario 1 is possible while scenario 2 is very likely indeed.

Just my opinion, interested to hear your thoughts.

Andreas Paterson said...

Hi TimDog,

Apologies for the delay in my reply, in regards to the "social cost" what I mean is the exploitation of unskilled and low skilled labour. People who don't have the same bargaining power as skilled or unionised workers. I say minimal benefits because as far as we can see from the data, the effect of the minimum wage on youth unemployment would seem to be minimal (indeed, same appears to be true of unemployment more generally), I don't think the minimal employment gains to be had from scrapping the minimum wage are worth a return to the days where these workers were exploited.

On regional variations, it's a bit beyond the data I've looked at so I couldn't really say if there is any regional effect. My gut opinion is that there's no real problem with the minimum wage being nationwide, but if Labour were to go further and implment some kind of living wage policy it would have to take into account regional variations.

Chris said...

If minimum wage is £5 and I can't produce £5 worth of value I can't work.

However if I get £5 and immediately give my employer back £2.50 for training I'll soon be generating £10 worth of value (go I can ask for £9 an hour). I'm effectively earning £2.50 while I train. The same is true if I'm an intern. But I earn nothing.

This is how training on the job works, you take the hit of a lower wage and that pays for your training.