23 February 2010
Open Letter To Union Representatives And All Those Opposed To The Reintroduction Of Youth Wage Rates

Re: Youth Unemployment
The Facts
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 Theory
The idea that unemployment amongst those groups which have the fewest skills and the least experience may be caused by high minimum wages is not new.  Standard economic theory suggests that, by mandating a minimum wage above the equilibrium price for wages, some people will lose their jobs.  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. 

The Implications
What this means is that excessive minimum wages for youth workers is unnecessarily locking them out of the labour market, and leading to de facto discrimination against them by employers who are choosing to go with skilled and experienced employees.  This will have ongoing effects, because those 16 and 17 year olds then become the 19 and 20 year olds who have never worked, and they will struggle to find jobs at that point as well.

Moreover, many of those who are seeking employment may have left school.  Failure to get a job denies them the opportunity to get on-the-job training, to get experience, and to develop a work ethic.  Given the higher level of unemployment amongst Maori, this will disproportionately affect Maori job prospects in the future.

This is why I have introduced my Minimum Wage (Mitigation Of Youth Unemployment) Amendment Bill – so that employers have an incentive to hire young people over their older and more experienced counterparts and invest the time and money needed to train them.  It will bring our abnormally high rate of youth unemployment back to normal levels.  Young people will be given a greater chance of gaining employment, benefitting from the work experience gained and helping them build a strong work ethic for the future.

Regards,

Hon Sir Roger Douglas