Scott Sumner  

The mysterious rise in youth unemployment

PRINT
1.6%, Not 97%, Agree that Huma... What Say You? The Intuitive Ca...

There's a new piece in The Economist discussing the disturbing rise of youth unemployment all over the world. Oddly there is no mention of minimum wage laws. When supply doesn't equal demand, shouldn't artificial price floors be the first place to look? They do discuss other problems, such as lack of training, and then note in contrast that:

Germany, which has a relatively low level of youth unemployment, places a lot of emphasis on high-quality vocational courses, apprenticeships and links with industry. But it is an exception.
Oddly, no mention that Germany is the only large industrial country with no minimum wage.

Of course cross sectional data can reflect many factors, so let's look at time series data. W. Peden directed me to a post by Britmouse, which discusses a major mystery that has puzzled the British government, particularly the commission that is engaged in determining the minimum wage rate. Apparently the rate of unemployment for 16 and 17 year olds has been rising sharply for nearly a decade. The commission noticed that the rise began well before the recent recession, indeed teen unemployment was rising even as the unemployment rate for adults was falling during the pre-recession boom. Britmouse has a graph that nicely illustrates the mystery:

Screen Shot 2014-02-27 at 9.23.32 PM.png
Britmouse is also confused by this mystery, as you can see from this quotation:
It's "difficult to explain"... right. A total mystery. I can't think what might have caused it, so let's blame immigrants and old people, those are surely the most "significant developments" in the British labour market in the years to 2008. If anybody does have any better ideas about what happened, be sure to write to Card, Krueger, Dube, etc.
Just to be clear, I am not at all convinced that minimum wage laws are the only factor involved here. But it's interesting how many people don't seem to be willing to even consider the possibility. Didn't youth unemployment rise more relative to adult unemployment in the US during the recent recession, as compared to 1981-82? And didn't we increase the minimum wage by nearly 40% just as we were sliding into the biggest slump in NGDP since the 1930s? And didn't President Obama just call for another large increase in the minimum wage, on top of that 40% boost? And then didn't President Obama change his mind and decide against the large increase in the minimum wage that he had proposed, suggesting instead that his proposed increase was too small, and that it should be even larger? And didn't that proposal get criticized by conservatives in California, who said no, the increase should be still larger?

After all, if we make it high enough the Mexicans won't be able to find jobs here. And so we come full circle, back the FDR's New Deal, and the very first minimum wage laws of the 1930s. Which groups were those laws supposed to exclude?


Comments and Sharing





COMMENTS (20 to date)
Glen Smith writes:

How do they calculate youth unemployment? Ask? Most young people I know who would say they are unemployed are unemployed because payed work is not the best economic choice as the opportunity cost of work exceeds the wage they can get (but then, most of the young people I know are part of affluent families who can rely on the parents to provide at least their basic needs).

Kevin Dick writes:

I have a half-baked theory.

Suppose that the set of capabilities needed at entry-level positions has been gradually increasing. One needs better people, computer, multi-tasking, etc. skills.

At some point, that set is going to begin getting pretty far to the right of the distribution of skills possessed by teenagers. It's worse if minimum wage prevents an adjustment. So you should expect to see a general decline.

Why the breakpoint in the data? Because there's a chance for some 14 year olds to accumulate enough skills by working to make them productive at 16-17. As higher minimum skills and higher minimum wages price them out of market, this creates a new "bulge" that flows through subsequent years.

If I had some time, I'd construct a simple simulation model and see if it produced that shape. But that's what you guys have graduate students for.

~FR writes:

http://en.wikipedia.org/wiki/National_Minimum_Wage_Act_1998

I'm not British, so I can't comment from experience with this law.

But there is a nice graph showing that minimum wages for 16-17 y/o being set in 2004 and starting to increase in 2006...

Scott Sumner writes:

Glen, They ask people if they've been searching for work.

Kevin, Who has grad students working for them?

FR, Yes, that's probably it.

Mark V Anderson writes:

Kevin, you might well be right that the nature of work is making it harder for the lowest level of workers to find jobs. But I think Scott has it mostly right that minimum wage laws are the main culprit.

The Democrats trumpet those studies that show little change in employment with higher minimum wages, but all those studies are short-term studies I believe. Minimum wages may not cause firms to fire a lot of their current workers, but the next set of teenagers to come of age to work will have a lot harder time getting a job.

Tim writes:
I have a half-baked theory.

Suppose that the set of capabilities needed at entry-level positions has been gradually increasing. One needs better people, computer, multi-tasking, etc. skills.

Here's the problem I have with that: being a busboy, sandwich artist, McDonald's worker (i.e. true entry level jobs) have not become any more rigorous. What instead would likely occur is that as the price floor on this type of labor rose employers would respond by hiring more experienced workers with higher productivity.

Andrew_FL writes:
After all, if we make it high enough the Mexicans won't be able to find jobs here.

You are describing here some pretty bad reasoning.

If anything, a higher minimum wage should increase illegal employment.

Where possible, employers will substitute the now more expensive legal labor, for the illegal labor.

Andrew_FL writes:

@Andrew_FL-Er, I mean to say "with the illegal labor" not for. For would be the opposite of what I meant.

Scott Freelander writes:

Scott,

Of course minimum wages cost some jobs, but the question many liberals ask is whether the rather slight drop in employment that might occur is worth the benefit to the millions who actually benefit.

I realize that minimum wages are not the way to go. I also realize that there was recently a liberal backlash against the prediction by the CBO that some proposed minimum wage increases would increase unemployment, even slightly. But, to take the CBO prediction that a $10.10 minimum wage would only cost 500,000 jobs, but benefit over 16.5 million workers, it's worth weighing the costs and benefits, in absence of any hope of getting a wage subsidy.

For me, the real answer is to start pushing a wage subsidy.

Scott Sumner writes:

Andrew, I was actually being sarcastic, describing the views of others.

Scott, Good post, although I believe the job loss would be even greater than 500,000. Of course Obama also favors lots of other policies that cost jobs.

andy writes:

To be fair, Germany does not have a minimum wage but there is some system of sectoral minimum wages set by labour unions (not sure how that works though).

But, to take the CBO prediction that a $10.10 minimum wage would only cost 500,000 jobs, but benefit over 16.5 million workers, it's worth weighing the costs and benefits, in absence of any hope of getting a wage subsidy.

Even if we could see all the costs, I am quite unsure how would one weigh the costs and benefits. If there are 10 people, under which conditions it would be proper if 9 people forbid the 10th to work in order to restrict supply?

Mico writes:

"To be fair, Germany does not have a minimum wage but there is some system of sectoral minimum wages set by labour unions (not sure how that works though)."

This is true, but only applies if you are working in such a sector. I know students in Germany who have worked retail jobs for less than 2 Euros/hour, which is less than a third of the US minimum wage and about half 1/2 the UK minimum wage.

Scott Sumner writes:

Andy, The German system works well because they allow people to work who have very low productivity. Germany has lots of jobs with low wages. The other advantage of their system is wage subsidies. So not only are low productivity people allowed to work, they are encouraged to work.

Jeff writes:

Germany doesn't have minimum wage laws? I was not aware of that. If that's true, I think it's a point that we minimum wage skeptics ought to harp on. I suspect a lot of people don't actually grok the economic arguments for and against it, they just reflexively support minimum wage laws due to habituation and status quo bias. Being able to point to another WEIRD (Western, Educated, Industrialized, Rich, Democratic) country that does not have these laws and yet everyone still seems to get along fine or even better than fine would be a powerful rhetorical point.

Joe writes:

Never reason from a price change?

Max writes:

Germany didn't have a general minimum wage but a sectoral one: Tarifvertrag.
This mostly applies to big companies in the production and engineering sectors.

However as of this year Germany will introduce a minimum wage law that forces employers to pay 8.50 euros per hour. I think this will be an interesting case. How will a country cope that will have rising Labour costs and rising energy prices for all sectors?

Garrett writes:
Joe writes: Never reason from a price change?

Reasoning from a price change is using the following logic form: "Price X changed, therefore effect Y will occur." The classic example is when reporters claim that a drop in gas prices will lead to people driving more.

The problem with reasoning from a price change is that prices can change due to both supply and demand factors. Good analysis requires determining why the price changed, and then projecting the future effects of the changes in the factors.

Scott clearly didn't reason from a price change in this post.

Helmut Schmidt writes:

[Comment removed pending confirmation of email address and for policy violations. Email the webmaster@econlib.org to request restoring your comment privileges. A valid email address is required to post comments on EconLog and EconTalk.--Econlib Ed.]

A.B Prosper writes:

[Comment removed for supplying false email address. Email the webmaster@econlib.org to request restoring your comment privileges. A valid email address is required to post comments on EconLog and EconTalk.--Econlib Ed.]

Floccina writes:

Raise the minimum wage and some shy people who deserve a wage increase will get one BUT I think some of the worst workers (ex-cons, people who drop out of school at 16 or who never really go to school much after the 4th or 5th grade) will not get hired and I think that there are large non monetary benefits to a job.

Comments for this entry have been closed
Return to top