The right’s ideological crusade to bring back youth rates

By Gordon Campbell

Roger Douglas is ‘Saturn Devouring His Son’; painting by Francisco Goya; (Remix: Lyndon Hood).

Late last month, Sir Roger Douglas’ bill to scrap the mandatory payment of the minimum wage to young workers was chosen from the private member’s ballot, and thus became part of Parliament’s agenda. The avowed purpose of his Minimum Wage (Mitigation Of Youth Unemployment) Amendment Bill is to end the current legal entitlement of young workers to equal access to the minimum wage. The draft legislation states:

The purpose of this Act is to end minimum wage parity between youth (15–17 years old) and all other workers by enabling the Governor-General by Order in Council to set minimum wage rates defined by reference to the age of workers.

Douglas’s rationale for re-introducing this form of workplace discrimination is that, in his view, the removal of minimum wage youth rates is responsible for the high unemployment rates evident among the young. The facts, as he sees them, are these:

Since the 1st quarter of 2008 until the last quarter of 2009, youth unemployment amongst Maori has increased by 4,000 (over 50 percent). The unemployment rate now sits at 38.7 percent for Maori youth – almost 2 out of 5 are out of a job.

The figures for all youth are also horrific. Almost 20,000 more young people are out of a job compared to the 1st quarter of 2008, and overall the unemployment rate sits at 26.5 percent.

A simple model of the relationship between youth unemployment and overall unemployment created by the economist Eric Crampton shows that there was a sudden increase – far beyond previous differences between the model and actual unemployment – from the 1st quarter of 2008 – the time at which youth rates were abolished.

The existence of minimum wage rates – and the requirement to pay them to young workers – have long been an ideological flashpoint, both here and overseas. Last December for instance, the 2025 Task Force headed by former National party leader Don Brash called for a cut in the minimum wage, which is currently $12.75 an hour, and the re-introduction of a separate youth wage pitched even further below the reduced level. Whether such plans become reality will depend on the stance taken by the National caucus. At time of writing, National’s likely voting position on the Douglas Bill was still unclear. Opposition MP Darien Fenton has claimed to have received a written response from Labour Minister Kate Wilkinson, to the effect that National do not support the re-introduction of a youth rate minimum for young workers. However, much water is still to run under the bridge on this one.

Given that the minimum wage/youth rates issue is such an ideological battleground, the claims made by Douglas bear scrutiny. For convenience, I’ve grouped the issues under a range of headings.

1. The Causal Fallacy aka It’s the Recession, Stupid. Douglas argues that unemployment has risen sharply among young people during the period since minimum wage youth rates were abolished – first quarter 2008 until last quarter 2009. He implies a causal link.

In fact, the period Douglas has chosen perfectly co-incides with the recession that hit the New Zealand economy, and every other economy in the world in 2008-2009. (Presumably, Douglas is not arguing that the removal of youth rates here caused the global recession.) On the principle of ‘last hired, first fired’ one would normally expect young workers – especially unskilled ones – to be disproportionately affected by an economic contraction.

Demographically, they also comprise the bulk of new entrants and thus when job opportunities contract they (again) tend to be affected in large numbers. The findings of the Crampton model referred to in the Douglas quote above – that the recent co-relation between youth unemployment and overall unemployment is stronger than previously recorded – is again exactly what you would expect, given the worst recession since the 1930s.

2. The Local Fallacy. Douglas sees a local problem – high unemployment among the young – identifies a local culprit ( the abolition of youth rates! ) and leaps to legislate. Yet obviously, high youth unemployment is a global problem and not a locally caused one. That doesn’t mean that one should not seek local solutions, but Douglas is implying causal connections, and pinning the essential problem of youth unemployment onto the lack of youth rates, for supposedly pricing young people out of jobs.

Yet to date, Douglas has simply asserted this, without offering any supportive evidence. He (and the National party caucus if it chooses to support him) have an onus of proof – because young workers will be asking for evidence to justify turning back the clock and re-introducing a form of discrimination against them in the workplace. So will their parents. On the evidence, they will achieve little or no measurable gain in employment, for losing their right to equal wage treatment in the workplace.

Since the recession began, the ratio of youth to adults among the ranks of our unemployed has risen substantially – but is this because (as Douglas would argue) the actions of the previous government has priced young people out of jobs ? Or is it because a global recession was always going to hit the young the hardest, and the current government‘s stimulus package comprehensively failed to recognize that fact – as reflected in our stimulus package being smaller than the OECD average, and lacking an adequate range of targeted measures (eg for skills training, enhanced apprenticeships, job creation and employer subsidies) that have been common to the response in so many other developed countries ?

What we do know is that an increase in youth unemployment and social marginalization is occurring simultaneously in other countries, which means that the prime driver cannot be a local cause. In the US for instance only 46% of people aged 16-24 had jobs in September last year, the lowest since the government began counting in 1948.

In Sweden – due to an emphatic workplace policy of ‘last hired, first fired’ during recessions and an alleged mismatch between educational skills and labour market needs – youth unemployment has been over four times the adult rate. On the same graphs (pages 8-9, figures 2-3) in this major OECD report. New Zealand’s performance has been interesting. While our actual rates of unemployment and youth unemployment remain below the OECD averages, the rate of deterioration in the youth vs adult ratio within the unemployment stats has been higher than the OECD average –partly because we started from such a low base of unemployment when the previous government left office. Single issue campaigners like Douglas would attribute the subsequent decay to the abolition of youth rates – but others, to repeat, would sheet it home to the significant contraction of our economy thanks to the recession and the inadequacy of the stimulus package.

Some countries have taken up the Douglas Remedy – but it remains a minority practice. Among 21 OECD countries that have a minimum wage, slightly less than half (nine) also have in place a sub-minimum wage for young people.

3. The Plan Nine* Fallacy The connection between scrapping youth rates and rising youth unemployment that Douglas is making will always attract more support in a recession. When bad things happen (especially to our sons and daughters) something tangible has to be held responsible – and for those already ideologically opposed to the minimum wage, the culprit seems obvious.

In reality, minimum wage rises and a lack of youth rates are of limited relevance, come rain or shine. That fact is blindingly obvious when normal economic conditions apply – because if minimum wage/youth rate impacts were as decisive as claimed, you’d think that raising them significantly would serve to stifle economic activity. Yet as Unite union organizer Matt McCarten recently pointed out in the NZ Herald (January 31, 2010):

Under the [previous]government the minimum wage almost doubled from $6.12 to $12 an hour. Yet unemployment dropped from 11 per cent to 4 per cent during the same period. In 2003, 16 -17 year-old kids got a 41 per cent increase in their minimum rate and that age group’s employment actually rose 15 per cent.

When I negotiated union employment agreements some years ago with fast food chains, they insisted that if we abolished youth rates and increased their workers’ hourly rates by $3 we’d put them out of business. In fact, the opposite happened. Every restaurant chain expanded its number of employees and opened more stores. My experience is that if all employers in an industry get paid a higher wage it makes no real difference to any of them.

All well and good, some would grudgingly say, when times are good. Douglas and the hardliners in Treasury would still insist that the negligible employment effects of raising the minimum wage and/or scrapping youth rates during good times, will intensify during a recession. To which the obvious retort is : if the response is relevant only in exceptional times of recession, why should a law be passed to make it a permanent feature of our working landscape?

In essence, how can Douglas be proposing to apply a sub-minimum youth rate for the periods of average to positive economic activity – which is surely the norm – when on the evidence, the only bearing it has on hiring decisions occurs during a recession. The timing of this proposal therefore, is all wrong – given that the economy is now supposedly re-emerging from the recession. By the time the Douglas’ Bill gets passed, its alleged benefits would no longer be necessary – and young workers will have been left permanently worse off in relative terms, for no good cause.

Clearly, the ball is firmly in Douglas’ court. Since the co-relation is negligible to non-existent during normal economic times – obviously, the scrapping of youth rates did not hinder youth employment during the 2000s – he has to prove that it could still play a decisive role when times are bad, even though that is when ( almost by definition) there will be far more powerful forces buffeting the economy. In sum, Douglas’ remedy is mere fiddling during the times when his alleged co-relation is strongest, and is virtually irrelevant during times of normal economic activity.

*The script for the film Plan Nine from Outer Space contains a perfect example of something true by definition : “It was murder – and someone was responsible ! “

4. The Every Expert Thinks Like Me Fallacy. One of Douglas’ undoubted public relations strengths in the 1980s was his ability to portray extremism – in his case, a particularly brutal form of Thatcherism – as if it was ordinary, mainstream economic thinking. In similar vein, Douglas has offered this gem within his “Open Letter” on youth wage rates:

A leading textbook in economics (Greg Mankiw’s Principles of Micro-Economics) presents survey data that shows that 79 percent of all economists agree with the statement: “A minimum wage increases unemployment among young and unskilled workers.”

While there are occasional studies that challenge the mainstream view (such as that undertaken by Card and Krueger), they are typically subject to ongoing criticism for their method. They have also clearly failed to convince a majority of economists – those who are experts at analysing such studies.

This is a Topsy Turvy version of history. The reality is almost exactly the opposite : (a) the historical trend among economists has been away from the belief in the co-relation that Douglas is espousing; (b) a central reason for this change has been the validity now ascribed to David Card (pictured left) and Alan Krueger’s work which rather than being an occasional study, has revolutionized the field; and (c) among labour economists, the recognised experts at analyzing such studies, the support for the social and economic benefits of retaining and raising the minimum wage is stronger, not weaker, than among other economists.

Douglas’ choice of expert support for his views is particularly unfortunate. Greg Mankiw is an increasingly isolated and somewhat crackpot figure, even among right wing economists. During the first term of the George W. Bush presidency, Mankiw was chair of the president’s Council of Economic Advisers and – in a memorable duel last year with US economist Brad DeLong – the latter produced fairly convincing evidence that in 2004 the CEA might have cooked the labour productivity growth/employment figures and thereby given a helping hand to the Bush administration, going into the 2004 election. DeLong’s evidence is here.

Even on right wing blogs, Mankiw has also been decried for his specious attack on the spending/saving habits of Supreme Court nominee Sonia Sontomayor. If Mankiw is the sort of authority that Douglas intends to offer to advance his cause, he will really need to do better.

That aside, it would be folly to pretend to offer here a complete and comprehensive survey of the bloody battles that have raged for the past 16 years in academia over minimum wage research. The fighting has been about whether raising the minimum wage/scrapping youth rates has negative, negligible, or positive effects on youth employment and unemployment rates.

The work of the Princeton University economists Card and Krueger does pose a major stumbling block for Douglas’ argument. Fast food outlets are a good testing ground, since they employ a lot of teenage workers paid at or around the minimum wage. Briefly, Card and Krueger found that raising the minimum wage – in some cases by up to 10 % – in fast food outlets in New Jersey and Pennsylvania had negligible negative effects and even had positive effects upon youth employment – others subsequently have explained this result by pointing to the contribution of minimum wage hikes to job retention and the attraction of more skilled teen workers into the jobs. The criticism of their method that Douglas refers to has been largely a boomerang. Card and Krueger have showed that the methodological flaws were actually rife among their critics – such as Neumark and Wascher – whose work had formerly supported the textbook approach.

The result has been a trend among mainstream US economists on this issue that is almost exactly the opposite of the one claimed by Douglas. Yes, an old 1978 American Economic Review study had revealed that nine out of ten economists accepted a causal link existed between minimum wage hikes and unemployment among low-skilled workers. Yet, by 2000 a sample of 308 American Economic Association economists found that only 45% agreed, 27.9% agreed only with certain added conditions, and 26. 5% disagreed. The authors concluded that the reduction on consensus on this question was “likely” due to the Card and Krueger research and to the debate it had engendered.

By 2006, another survey of the American Economic Association by Robert Whaples found that over half of respondents supported an increase in the minimum wage or wanted it kept at current levels, thereby outnumbering those who wanted to see it eliminated. These figures are much more balanced than Douglas’ claims about current opinion – let alone about the trend of opinion on this issue among economists.

The research battle is still being fought, but Card and Krueger seem to be coming out on the winning side. Late last year, they published their latest salvo – a 432 book called Myth and Measurement : the New Economics of the Minimum Wage. A range of glowing reviews are excerpted here and the gist of them is that minimum wage increases at the levels found in the United States have had little or no effect on employment. True, there may be different effects in countries where minimum wage rates are pitched at a higher level relative to the median wage – which is certainly the case here – but this does not shift the onus of proof now resting on the Douglas camp to make their case. The standard economic textbook view on the negative employment impacts has been upended by Card and Krueger, and their work is not an isolated exception, as Douglas patronisingly implies.

Their findings were confirmed in the UK by the Dickens et al research, by the Machin and Manning study, by Wellington, and by the Turner and Demiralp study – adding up to a body of work far more substantial than the “occasional.” To be fair, this argument is not settled. I think there are also contrary signs in the Pereira 2003 study from Portugal for example, which showed negative effects on the employment of young workers after the scrapping of youth rates.

Yet precisely because it looks like there is a hung jury on the international evidence – as to whether minimum wage rates serve to price kids out of jobs – what does the New Zealand research say ? Well, there is local research evidence that also tends to refute the dire consequences on youth unemployment of minimum wage hikes that Douglas is claiming. In a 2007 paper published in the prestigious Labour Economics journal entitled “Youth Minimum Wage Reform and the Labour Market“, authors Dean Hyslop and Stephen Stillman studied the impact of a 2001 reform by the Clark government that is still clearly relevant to the current debate. In effect, the reforms of 2001-2002 lowered the eligible age for the adult minimum wage from 20 to 18 years, thus creating a 69 percent increase in the minimum wage for 18 and 19 year- olds. Secondly, the reform raised the youth minimum wage in two annual steps from 60% to 80% of the adult minimum, thus creating a 41 percent increase in the minimum wage for 16 and 17 year-olds over a two-year period.

Now, if Douglas is right, all hell should have resulted for young job seekers. What Hyslop and Stillman found instead was :

We find no robust evidence of adverse effects on youth employment or hours worked. In fact, we find stronger evidence of positive employment responses to the changes for both groups of teenagers, and that 16-17 year-olds increased their hours worked by 10-15 percent following the minimum wage changes. Given the absence of any adverse employment effects, we find significant increases in labour earnings and total income of teenagers relative to young adults. However, we do find some evidence of a decline in educational enrolment, and an increase in unemployment and inactivity, although these results depend on the specification adopted.

Similar conclusions were reached from a comprehensive review of the international literature (on the employment impact of minimum wage increases and the scrapping of youth rates) carried out in 2006 by John Stevenson of Otago University, and published in the Otago Management Graduate Review, Vol 4, 2006. “It was decided that upon analysis of the literature that evidence points towards there being either a small positive or negative effect on youth employment from minimum wage changes, and that this could be expected to be the case in New Zealand.” In sum, this is hardly a ringing mandate for Douglas to try and re-introduce wage discrimination against the young into the New Zealand workplace.

5. The Surrogate Dad Fallacy. On a planet in a galaxy far far away a race of benign employers would dearly love to hire 15-17 year olds and instill in them a vigorous work ethic – were it not for the fact that they must needs endure the tyranny of having to pay them the full adult minimum wage. Many an employer has tearfully turned away an earnest young job seeker – ‘just give me a chance guv. for the love of Gawd that’s all I ask’ – for this very reason.

Back on Planet Earth however, people behave somewhat differently. Real young people tend to find it extremely difficult to negotiate a wage that is commensurate with the worth of their labour and with what they produce. That’s partly because most employers do not behave like surrogate fathers – and they do not tend to pay the highest possible wage that the firm can afford, but the lowest possible wage that the worker can be induced to accept. Without a decent, legislated level of wages – and in some industries and workplaces the minimum wage functions as a ceiling, not a floor – young workers forced to work at a sub-minimum rate would be left entirely at the mercy of their employer. Is that what most parents would want ?

6. The It Ain’t Broke, But Lets Fix It Anyway Fallacy. Supposedly, paying 15-17 year olds the minimum wage is pricing them out of the job market – and stopping employers from taking on young people at an affordable cost, trying them out and training them up. Well, newsflash – all that is entirely possible under the existing law. When Parliament scrapped youth rates, they actually retained them for the first 200 hours on the job – so effectively, employers can pay young workers a sub-minimum for the first three months on the job. On April 1st this year, that ‘new entrant’s minimum wage’ is increasing from $10.00 per hour to $10.20 an hour.

A reasonable balance, many would say. Let the kid show what they’re made of at a lower rate of pay. Yet then, if they’re worth keeping, recognise that fact and pay him or her accordingly– thus giving the kid some reason to believe that effort will be rewarded. Instead, what the Douglas Bill promises is a free ride for employers to pay young workers sub-minimum rates in perpetuity. It claims to instill a work ethic – but the ‘ethic’ being promoted allows for no motivation-enhancing reward in wages for hard work and productivity increases shown on the job. Instead, it would create a charter for exploitation. Again, the National Party caucus should be thinking through the political impact of being held co-responsible for what is so clearly an exploitative piece of workplace engineering.

7. The It Would Only Affect 15-17 Year olds And They Don’t Vote Fallacy. In fact, the re-creation of a sub-minimum wage for 15-17 year olds opens the door to a possible displacement effect for those aged 18-24. Cheaper young people are likely to replace slightly older and more expensive workers, especially in relatively unskilled workplaces. Already, the minimum wage provides a low level of remuneration.. This year, even the Ministry of Labour recommended raising the minimum wage to $13,10, and not the $12.75 chosen by the government.

Logically, opening up a layer of sub-minimum wage workers below that again, can only help to displace voters slightly further up the earnings ladder – that is if, for arguments’ sake, we accept for a moment Douglas’ premise that labour pricing in the minimum wage zone does have a measurable negative impact on the job market. Meaning : if the Douglas Bill became law any social gains could well be cancelled out by the negative ripple effect it is likely to create slightly further up the age and income chain, with further inevitable costs in unemployment benefits. True, many 18-24 years olds don’t vote either- but the passage of this Bill would create an incentive for them to vote in future against its perpetrators.

8. The ‘This Won’t Hurt A Bit’ Fallacy . The guiding rationale for the Douglas Bill is that if you cut the wages of young people, the price of labor falls so employers will hire more workers. Unfortunately, the reality is that firms only hire the workers they need – largely irrespective of small changes in wage costs, and especially so among the workforce employed at or near the minimum wage.

Even so, as their wages were forced down to sub-minimum rates, the young workers involved would have less to spend (since these days, loss of wages tends to have a greater and faster impact than any subsequent decline in prices) thus driving down demand, and – potentially – helping to create a climate in which more layoffs will occur, thus creating more demand for welfare benefits. And this would be good for the economy – how ? The last thing this economy needs right now is an impetus to contraction.

Since Douglas seems willing to invoke Economics 101 to support his Bill, his critics can certainly do the same, and point to the contractionary impact of cutting youth wages in the manner intended, an especially stupid trend to foster during recessionary times. The more churlish of his critics could also point out that, given his track record, Douglas is the last person to whom the nation should be turning for a remedy for youth unemployment. Because the last time youth unemployment was at its current levels was back in 1993, when the economic policies of Douglas and his acolyte Ruth Richardson were at their zenith. Unemployment among 15-19 year olds peaked at 24.5 per cent in 1993, and stayed resolutely high for the following five years. Historically, Douglas has been more part of the problem of high youth unemployment, and not part of the solution.

9. The Race Card Fallacy. In his press release Douglas cited high youth unemployment rates among Maori as a rationale for passing his Bill. It will be interesting to see Hone Harawira’s response to the suggestion that cutting the wages for young Maori and Pacific Islanders should be treated as a pressing priority as we start coming out of this recession. Harawira would seem more likely to believe that other economic factors – and social and racial attitudes – were to blame for those high rates, and that Douglas should not be putting the onus on Maori youth to accept less for the work they do, in order to earn a seat at the table.

What this exercise usefully does do though, is identify whose kids we are talking about. Keep in mind that not every industry that could pay the minimum wage resorts to it – some fast food outlets for instance, now pay even their youth workers above it, presumably in order to attract and retain good workers. Last year in the House, Labour Minister Kate Wilkinson indicated that between 94,000 and 123,000 New Zealand workers would be affected by the changes to the minimum wage.

Who are these people ? In 2006, the Cabinet papers for the Minimum Wage Review usefully noted that the benefits of minimum wage increases are most likely to be felt among women, younger workers, Maori, Pacific peoples, other non-European/Pakeha groups without post-school qualifications, part-time workers, people with disabilities, recent migrants, the low skilled and people with non–English speaking backgrounds.

And the places where such people work ? The Cabinet paper had that sorted out as well – “Employees in the retail, hospitality, health community, agriculture/forestry/fishing/mining, manufacturing and property sectors, and in small and medium enterprises which have a higher proportion of low wage employment.” Plainly, there is a balance to be struck between the affordable value of employees in those sectors, and a fair wage – especially since after three months on the new entrant wage, many of these jobs are unskilled enough that a young worker would be just as productive as an older one, in very short time. The Key government talks up the need for balance when it comes to tax cuts and GST rises. It can hardly expect the Maori Party to support a measure that would deliver a wage cut for young Maori workers, in return for the kind of nebulous benefits that Douglas is peddling.

For that reason, the government would need to raise the adult minimum wage substantially if it decided to support the Douglas Bill – because that would be the only way it could re-introduce youth rates at a percentage rate below the adult minimum wage without delivering in real terms, a substantial wage cut to young workers. There would also need to be explicit grandfathering provisions to ensure that no young people currently employed had their wages slashed. To achieve this, the government might well need to be offering the Maori Party a $15 an hour minimum wage as an incentive, so that Mrs Turia and Dr Sharples could be re-assured that Maori youth, women and other vulnerable work groups – such as young people with disabilities – would not be left to bear the cost of the Douglas Remedy, for little or no employment gain.

At the end of the day, the Key government may simply decide that the Douglas Bill is just an empty gust of ideological rhetoric, and more political trouble than it is worth. Out in the real world, there are far more useful things to be done within the school to work transition than this.

ENDS

Tags: ACT, David Card, Employment, Krueger, Minimum Wage, Roger Douglas, Skills, Taskforce 2025, Wages, Workers, Workforce, Youth Wage

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