Labour's good intentions led to bad youth unemployment
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%.
Statistics New Zealand tracks unemployment by age going back to 1986. Before June 2009, youth unemployment rates had never exceeded 25%. They came closest in December 1992 when they hit 24.9%; the adult unemployment rate exceeded 9% from June 1991 until March 1993 and briefly topped 10%.
So it’s not surprising that youth unemployment outcomes were then so poor. But from June 2009 until June 2011, the last quarter for which I have the more finely-detailed age breakdowns,* the youth unemployment rate did not fall below 25% in any quarter while the adult unemployment rate did not exceed 5.4%.
Nine consecutive quarters’ youth unemployment outcomes higher than the highest previously recorded, at a time when adult unemployment rates were low relative to other downturns, seems something in need of explanation.
If we run the aggregate unemployment statistics through some fairly simple statistical models, we find that the relationship between adult and youth unemployment outcomes changed substantially in this recent period, although even simpler ocular least squares also tells us a lot. On average since June quarter 2008, youth unemployment rates have been about eight percentage points higher than we might have expected had things ticked along as they had previously.
Click to zoom. Black line March 2008 = Labour's abolition of youth rates.
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.
None of the statistical techniques I’ve used can let me say with certainty that the change in minimum wages caused the change in youth unemployment outcomes.
Something weird happened, with a timing that matches what we’d expect for the minimum wage changes and with an effect patterning across age cohorts that matches what we’d expect if it had been the changes in youth minimum wages. 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.
National has recognised the problem; changes in the regulations around the lower youth “New Entrants” minimum wage are likely to make it a more feasible option for employers. But they also moved to increase the minimum wage by 50 cents effective in April.
Like introducing interest on student loan debt, bolder measures like ACT leader John Banks’ call for a reintroduction of a lower youth minimum wage seem likely to fall into John Key’s “good economics but bad politics” bucket; few of the kids who would get jobs under a lower youth minimum wage would thank National for it, but rather a few would blame him for lower wages. But it is a shame. It would be worthwhile investigating whether the minimum wage, for adults and youths, is the best way of supporting low income workers. Reasonable evidence suggests wage subsidies might do less harm than minimum wages to those they’re intended to help.
Dr Eric Crampton is Senior Lecturer in Economics at the University of Canterbury. He blogs at Offsetting Behaviour.
* Statistics New Zealand very helpfully provided updated figures just as this story went to press. In the most recent quarter, the unemployment rate for 16 and 17 year olds finally dropped to 24%.
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Comments and questions22
The politics of power and the retention of that power are absolutely destroying New Zealand. The bold decisions that have to be made for NZ s benefit are simply not made because of the potential loss of the vote.
Roger Douglas was the only one who made decisions for NZ and not himself whether you agreed with him or not. He had the long term picture in mind.
We must have a return to youth rates or be really bold and have no minimum. We cannot have interest free student loans. We must have an end to the never ending maori grievance payouts. We cannot continue with working for families. We must have at least minor changes to superannuation.We must reduce government to a maximum of 30% of GDP. At long last we are addressing levels of welfare. ON and on we can go. Most of these issues were election bribes.
Every transfer,every sneaky charge made from productive tax producing activity slowly guts our economic engine room. We now only have two people providing taxes for every one receiving assistance. A hopeless ratio.
Cmon JK you know what has to be done for NZ future and not your own. Its not what you are doing, its what you are not doing that is destroying us.
Douglas was nothing but a traitor. How could you be so stipud not to recognise that the sale of core infrastructural assets is not the way to economic prosperity?
We all knew Telecom & Transrail had staff inefficiency, so instead of redundancies; which would have reflected in a higher sale price, he let Fay Ritchwhite do what they liked. Ask yourself how you could advise the government, then end up being the purchaser? Fraud of a grand scale, and so obvious. No royal commission of enquiry here Roger?
Course, those made redundant ended up on the dole que; which turns out to be no different to overstaffed state businesses. Treasury, why wasnt this factored in the analysis? & here we go again!!
Well that’s almost certainly been the “cause and affect” of exactly what happens when youth rates or the minimum hourly rates are arbitrarily raised by the stroke of a pen – and not raised on earned value.
This is the exact proof of the validity of what National were saying at the time of the election when Goof / Labour were trying to buy populist votes by claiming they would lift minimum wages to $15 / hr. John Key played them beautifully by calling Labour’s bluff on TV saying something to the effect of “Let’s raise the minimum wages to $20 / hr then – and see what happens” Goof almost swallowed his tongue choking on his insight of his imminent double bluff about to be shot down in flames.
It’s very simple economics… but like anything with a Labour Party politician – you can always tell a Labour Party politician, but ya can’t tell them much.
Would the Governor General please take this proof to the Labour Caucus and hit them around their collective heads with it until they can refute the proof no longer and would the GG also insist that Labour stop trying to deliberately mislead and obfuscate the less fortunate / unemployed / those unable to learn / investigate the truth and reality for themselves – and insist that these unethical, politicians finally start telling the truth – as well as start learning some basic economics 101.
Labour Party politicians should be made to apologise to NZ for their bumbling incompetence surrounding economic knowledge – and they should be beaten around the head with this proof until they acknowledge their propaganda was nothing more than electioneering puffery designed to only win them votes – not provide economic growth for this age group demographic – or for NZ Inc.
…and yet Labour still have no shame whatsoever and still think they have some kind of mandate to even attempt to be in government… talk about a misguided sense of entitlement!
I doubt Dr Eric Crampton could live on a youth wage yet he advocates it. Usual right wing claptrap.
You are not meant to live on it. It is a start, a beginning to working life, a start of working habits and behaviour, hopefully triggering imagination and future direction,having workmates, self esteem and meeting potential future employers who will pay you much more because you now have some skills.
Its not right wing its just right.
Excellent summary.
Anny @ 9.40 only highlights their sense of entitlement that either the dole or minimum wages should be able to pay for a palatial residence, fast cars and faster woman...
Nope- it's enough to aleviate real poverty (like in the slums of India and Bangladesh) whilst the youth gains employment skills and a work ethic that they can then take wiht them to the next employer / promotion / greater role with more responsibility - where the pay equals the deliverables and responsibilitiy.
It's called work. Achievements are not handed out each week with the dole money. Achievements are earnt - not given.
yes you are right as a boy I used to do Milk rounds - hp in the arly hours pushing a card of milk delivering to households - taught me a bunch of good habits and gave me pocket money. At other times I did paper rounds.
As I go older I had part time work at a Woolworths department store on late Friday nights and on 2 week full time stints during the holidays - longer during the Christmas holidays. All this gave me some independence whilst allowing my to continue at school. My kids did the same as checkout operators etc. Youth rates are worthwhile. It is not supposed to be a living wage - rather a learning wage.
No it's just right wing supply side economics. Economics is as much a moral science as a social science. A living wage is important to prevent market failure in terms of the working poor, where they cannot afford the basics. If you look at the profits for companies since the recession they have been increasing at a large rate. Increasing the demand base for consumption is important to provide growth and helping the poor is a extra bonus. Neoclassicals love to spout their darwinian nonsense.
Yeah mate like the "Employment Contracts Act" I wonder how many skilled workers will be heading to Aussie this year. Last years 53,000 was a record. Probably up to 80,000 this year.
Wow. Good article and agree with comments above e.g. from Solidarity. China is a prime example where wages in manufacturing were extremely low for a long time to create low value products such as clothing but have risen in recent years because Chinese have moved up the value and skill chain tremendously e.g. cars, iphones, solar panels etc. Hence a lot of said low wage production has moved to other cheaper SE Asian countries. It is called work and you need to work your way up
Douglas didn't understand the 'big picture;his view was very shortsighted. He didn't
relise that before you destroy employment opportunities, no matter how inefficient they may be, you have to put inplace an economic environment that will create new employment. This does't happen just by magic, or ideological. Drivelling.
The above article is very true, and reflects the 'Real World's no matter how unpaletable it may be to the ideologically deluded Socialist adherents.
Im sure he understood all right but he wasnt allowed to get on with it. Remember the famous cup of tea. David Lange panicked. It was him who was shortsighted not Douglas in my view.
What is urgently needed is positive action to address NZ's problems.
Key et al have been at the helm for four years and the corrective action taken has been sparse- too much emphasis on the next election at the expense of the longer term.
WG
And how many years has National been in power.
Not very long this recent time - certainly not long enough to undo the damage done by 9 years of labour.
That's just b*llsh*t.
Even benefit from the Dole to DPB to super can be stopped in about 24 hours with an order in council. Ending state funding for school, hospitals, & GPs, might need a week. Stopping all ACC payments - again, the same week (once the legislation is drafted, and that can be done in advance).
If you're got the discipline and the guts, it's not hard!
The fact of the matter is the NZ govt is borrowing around a billion dollars every week - with private borrowing probably at least as much again.
Was NZ in the EU it is irrefutable that NZ would be undergoing "forced austerity" on the scale of Spain: cutting govt spending by 30%; halving all state sector wages with no prospect of increases in the foreseeable future; eliminating the minimum wage, WFF, ACC, not to mention unions like MUNZ, privatizing health insurance and state education, and getting rid of "state assets" as soon as possible.
These are the policies NZ needs - not Key's "communism by stealth" or Labour/Greens/Mana/MUNZ "blatantly open communism".
Key needs to man up and do what is right - or NZ's creditors, mostly China will insist. And once China calls in the debts, what Labour or Mana want to do with the dams, farms, roads etc will mean absolutely nothing.
This is drivel - Where do you get your figure of $1b per week government borrowing?
In the private sector approximatley 50% of lending capital is sourced via local bank deposits while a significant remainder is through debt issuance, which is a mix of insitutions such as insurance/re-insurance/pension funds etc...
How is it 'irrefutable' NZ would be going through austerity measures??!! Our debt position does not compare to the European countries you have mentioned nor does out state services expenditure or tax revenues.
Please make sensible comments if you are going to post them on a forum
What a load of bollocks. And how many years has National been in power. How pathetic trying to blame the last Labour govt.
Right or left neither of the major parties are doing a decent job. Labour went over board with social engineering. They did some good things and some dreadful things. National has done some good thing and some dreadful things as well.
What is clearly evident is that both are failing to address structural changes need to correct the damages that has been done but also to bring competitiveness to the NZ economy. Each party try hard to preserve the control over governing NZ. None are prepared to stick their neck on the line for change. We can have the left right argument till the end of time but all that is is playing at the edges. What do we want to be, stop looking overseas and trying to be like AUstralia/ Europe? USA/ Asia. We are not these nations we are NZ we have our own values and beliefs. Our foundation should be for hard work first, smart pratical thought to businessand a belief to provide opportunity to all through strong values on education, work and health.
Before we jump in screaming about this statistic I would like to see other evidence on why a youth rate is good or bad. The variables and impacts of these changes can not be assessed by just one graph. If it was the case how easy would management decisions be.
But the graph has highlight an issue that deserves further attention and scrutiny.
The commentariat focus on child poverty for two reasons. Firstly, it sidesteps the more complex question of why their parents are poor. Whatever the explanation for their parents' poverty, it muddies the emotional waters. It provides less justification for emoting, for expressing outrage and for demanding that Something Must Be Done.
Secondly, in bypassing parents, professional meddlers cut out a potential obstacle to them exercising influence over the lives of others. The caring classes want the recipients of their largesse to be voiceless and impotent - all the better to project their sanctimonious, self-justifying guff onto.
Focussing on child poverty means pretending their parents don't exist - or at the very least presuming they are incapable of helping their children. This legitimises the intervention of the state, under the guidance and approval of the chattering classes, filling them with the sense of morality and importance they crave in their meaningless Sate-Serf lives.