Minimum Wages Effect Youth Unemployment

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Youth Minimum Wage Reform and the Labour Market *

Dean Hyslop Social Policy Branch New Zealand Treasury dean.hyslop@treasury.govt.nz and Steven Stillman Labour Market Policy Group New Zealand Department of Labour steven.stillman@lmpg.dol.govt.nz

February 2004

*

We thank William Dillingham, Sid Durbin, Michael Hampl, Brian Johnson, Tracy Mears and Julian Wood for discussions surrounding the background to minimum wage legislation in New Zealand, and comments on the paper, and also seminar audiences at Auckland University, the Australasian Labour Econometrics Workshop, IZA/SOLE Transatlantic Meeting of Labor Economists, Canterbury University, La Trobe University, the New Zealand Econometric Study Group, and Victoria University of Wellington for comments. Access to the data used in this study was provided by Statistics New Zealand under conditions designed to give effect to the security and confidentiality provisions of the Statistics Act 1975. Any views expressed are the sole responsibility of the authors and do not purport to represent those of the New Zealand Department of Labour, the New Zealand Treasury, or Statistics New Zealand.

Youth Minimum Wage Reform and the Labour Market

Abstract This paper analyses the effects of a large reform in the minimum wages affecting youth workers in New Zealand since 2001. Prior to this reform, a youth minimum wage, applying to 16-19 year-olds, was set at 60% of the adult minimum. The reform had two components. First, it lowered the eligible age for the adult minimum wage from 20 to 18 years, and resulted in a 69 percent increase in the minimum wage for 18 and 19 year-olds. Second, the reform raised the youth minimum wage in two annual steps from 60% to 80% of the adult minimum, and resulted in a 41 percent increase in the minimum wage for 16 and 17 year-olds over a two-year period. We use data from the New Zealand Household Labour Force Survey (HLFS) to estimate the impact of these changes on a variety of labour market and related outcomes. We compare the average outcomes of these two groups of teenagers, before and after the policy reform, to those of 20-25 year-olds, who were unaffected by the reform. 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. Keywords: minimum wage, New Zealand, natural experiment, difference-in-differences JEL CODE: J38, J22, J23, J24

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Introduction

Until recently, it had been widely believed by economists that the imposition of a binding wage floor, e.g. minimum wage, would reduce the employment of younger and less-skilled workers. Both simple theoretical models of competitive labour markets and time-series evidence on the relationship between minimum wages and youth employment supported this consensus (Brown, Gilroy and Kohen 1982). However, recent empirical research relying on quasi-experimental evaluations of cross-

sectional and longitudinal data, in particular Card (1992) and Card and Krueger (1994), has failed to find negative employment effects for young or low-wage workers in the United States. The inherent complications with quasi-experimental evaluations have led some researchers to question the results in these papers (Burkhauser, Couch and Wittenburg 2000; Neumark and Wascher 2000).1 Still, it seems safe to say that the consensus has been broken and that the empirical evidence indicates, in certain situations, an increase in the minimum...
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