...they pull me back in

I've been off the youth unemployment file for a few quarters. National's looking like it's done all it's going to do, so it's been on the backburner as other projects demand more attention. ACT's pulling me back in though; their latest press release calling for the reintroduction of a lower youth minimum wage cites one of the numbers from the last post I'd written with those numbers. The NBR picked up the story and asked me for comment; I'll be writing up something a bit more thorough for their weekend edition.

The NBR casts it as ACT having "appropriated" my research; really, I'm exceedingly happy when anybody appropriates anything in my posts so long as there's attribution. It's usually a good idea to drop me a note first to make sure that nothing's been updated or superseded, but I do always hope posts will be "appropriated" somehow or other.*

I'm happy for now to stand by that, subsequent to the changes in youth minimum wages, unemployment outcomes among 16-17 year olds were about 7-8 percentage points higher than we would have expected given prior trends in the youth unemployment rate relative to the adult unemployment rate. In the post from which ACT would have sourced the number, I'd said the table provided:

the expected rate if youth unemployment performance were no worse than in the worst prior quarter relative to the adult unemployment rate.

The 13,100 figure cited is excess youth (15-19 year old) unemployment relative to the trend that prevailed prior to the changes in the youth unemployment rate. I subsequently received more finely grained data from StatsNZ on the age-by-age breakdown; that gave me the 7-8 percentage point figure that's more strictly applicable to the 16-17 year old cohort affected by the most recent legislative change. But we also have the complication that the prior changes affecting 18-19 year olds look to have become binding during the more recent recession.

I'm always reluctant to say "causal". Or at least I try to be. My method is difference-in-difference, so it leers suggestively at causality, but I can't rule out that something else might have happened with the exact same timing that really hit youth unemployment rates relative to adult unemployment rates. I cannot fathom what that "something else" might be, and I think I've ruled out a couple of the potential ones (changes in apprenticeship budgets seem insufficient to explain things), and I'd put money on its being the changes in youth minimum wages. But I can't rule out that it's just my lack of imagination. I do my best to avoid saying "causal" because I can't prove causal.

I'd also caution about getting our hopes up about the speed of any effects coming from a restoration of a lower youth minimum wage. I fully support having a lower minimum wage for youths. But it'll take a while for it to start having real effects. It's faster to kill jobs by hiking the minimum wage than it is to reverse things by lowering it: wages are downwards sticky; employers might be reluctant to hire new kids earning less than very similar kids who'd be sitting next to them the day after a law change. But they might do it a year later.

Anyway, I've asked StatsNZ for the age-by-age breakdowns they'd previously given me, but for the more recent quarters. I'll aim for an updated reckoning for this weekend's NBR.

Had ACT asked me for a usable quote, I'd have said something a bit more nuanced and I'd have cited the 7-8 percentage point figure as likely being due to the prior legislative change.

But ACT is right that letting the youth minimum wage be well below the adult minimum wage is pretty sound policy. The UK gets it: they just last week froze youth minimum wages while mildly increasing adult rates. The adult minimum wage there is £6.19; £4.98 for 18 to 20-year-olds and £3.68 for 16 to 17-year-olds. Double all those numbers to roughly get the New Zealand equivalents: about $12 for adults, $9.67 for 18-20 year olds, and $7.14 for youths. And wonder just a little bit why New Zealand's National Party generally reckons it a good idea to force employers to pay $13 per hour - more than the UK adult minimum wage - for a 16 year old except under exceptional circumstances. And that's going up to $13.50 as of 1 April: £6.96 at current exchange rates. And the NZ New Entrant's rate will be $10.80: £5.56. Less than the UK adult minimum wage rate, but more than their minimum wage for 20 year olds.

* Occasionally I only find out about such appropriations when the University's media monitoring service highlights them. Apparently my suggestion that international students in New Zealand be given permanent residence in New Zealand on graduation made Mike Williams' show on Newstalk ZB earlier this month. Alas, it hasn't seemed to have gotten much traction otherwise.

Benchmarking the minimum wage increase

New Zealand's $13 minimum wage is now scheduled to go up by $0.50. The government says that's as much as they can increase it without bad employment effects, though I can't yet find any RIS or Treasury statement in Cabinet Papers assuring us of the safety of a 3.8% increase.

The Greens are mad because the CPI was up 4.6% in the year to September:

The nominal increase is 3.8% – but at the same time the Consumer Price Index increased 4.6% in the year to September 2011 and 1.8% in the year to December 2011.  So it is not “boosting incomes” at all, as Minister of Labour Kate Wilkinson claims, it is just keeping pace with inflation.

50c an hour is not going to help the people that need it most – people like the Bradley family who were profiled in the Herald this week, where dad is having to work three jobs just to feed the family. And even so, the parents are having to go without food some days just to feed the kids.

But let's not forget that the September quarter annual results include the one-off effect of the GST increase: a tax shift that was fully compensated for lower income earners through income tax cuts. So it's the December quarter annual results that form the relevant comparison. And the minimum wage increase is more than double that; there's no indication of any looming inflation on the horizon. The real minimum wage increase is pretty substantial. Real take home income is higher than the CPI would have you think, unless you're looking at December-quarter results (where the GST hit has washed out).

Most importantly, it's substantial relative to generalized wage movements. The latest figures from the Labour Cost Index show salary and ordinary time wage rates were up about 2% on average from December 2010 to December 2011.* The minimum wage hike is 1.9 times as large as average year on year average salary growth.

The 2012 New Zealand Income Survey isn't due 'till June quarter (October release). But if median hourly earnings wind up being up 2% up on the June 2011 results, they'll be around $20.79. The minimum wage will then be 65% of the median. This is more than high enough to start ringing alarm bells about disemployment effects.

To summarize:

• The minimum wage increase of 3.8% is well in excess of average LCI wage growth. Describing it as miserly ignores the context of recent wage and price growth in New Zealand. 
• The minimum wage is on track to hit 65% of the median wage. This is very high. Recall that American minimum wage campaigners have been trying to get the minimum wage to half of the median wage. The current US minimum wage, $7.25/hr (federal; individual states do vary upwards), is about 38% of the median US wage. While it's plausible that changes around that level within the US have had little effect on aggregate employment figures, it is reckless to extrapolate from those findings to minimum wage rates that are, relative to median wages, far higher.

I'm going to second what Ryan Avent blogs at The Economist. Minimum wage increases are a bad policy for poverty reduction relative to wage subsidies and are an especially bad idea in periods of high unemployment and low inflation.

And yet I can't find anybody quoted in the press saying anything other than that National's here being stingy. Tracy Watkins at Fairfax finds lots of folks calling it paltry. Radio NZ quotes a united opposition saying it isn't enough and the unions whining. The Herald's Amelia Romanos follows the same narrative. Same in the Yahoo poll Seamus cited. Nobody seems to have checked whether the minimum wage increase was above, below, or about the same as growth in median wages over the last year. It's not like that number's a secret; Stats New Zealand released it the day before the minimum wage hike was announced. Big headline "Wage rate growth steady at 2.0%". But hey, who cares about the real numbers. All that matters is reporting on the political horse-race and how outraged the opposition is.

Any minimum wage increase shy of giving into the opposition's demands for a $15 minimum wage would be met with the same scorn from the media and from the opposition. If Key takes as much stick for a fifty cent increase as for a zero cent increase, the marginal cost of his doing the right thing and following the advice Treasury gave him last time around really isn't high. Shame he rarely decides to do that.

* Hit Table 3.3 at the XLS file above. Series ref LCIQ, SH41Z9 at tab 3.3 or, better, SI511-515 at tab 5.3 that counts the percentage increase of salary and ordinary time wage rates by skill level. The lowish percent increase I'm quoting here clearly isn't because of any miserliness in prior minimum wage increases as it's the same across the board in skill levels (the SI511-515 series). I'm using the LCI here rather than QES because LCI gives figures adjusted for changes in workforce composition and skill - how much an employer needs to pay in salary for a fixed quantity and quality of worker. I think this is the relevant comparison for assessing the generosity, or otherwise, of minimum wage increases; the increase doesn't affect the quality of an incoming minimum wage worker except perhaps through disemployment of the lower tail of the productivity distribution. The unadjusted LCI figure is 3.2%, still less than the "stingy" increase in the minimum wage.

Yahoo Poll on the Minimum Wage

Every fibre of rationalism in my body tells me that I shouldn't ever look at the results of on-line polls on popular media sites, but sometimes I can't help myself. So I checked out today's poll at Yahoo New Zealand, concerning yesterday's announced increase in the minimum wage.

Of course, the results of these polls tell us nothing at all about either appropriate policy or public opinion. But in this case, the way the question is phrased tells is revealing. The question is

What do you think of the minimum wage raise?

And the possible answers that one can choose are

• It's a good move forward
• It's not enough for the people who depend on it
• Baby steps...
• I don't know.

What! No opportunity to express the view that the social costs of youth unemployment outweigh any redistributive benefits? No opportunity to state that the burden for helping the poor should be on all of society, not just employers? What hope is there for a sane debate about costs and benefits of policies if one prominent viewpoint amongst policy wonks is not even considered to be a possible answer?  I guess the good folks at the Yahoo news site don't read Offsetting, which makes me sad.

Minimum wages and living wages

Tim Harford argues that debates over the minimum wage are a sideshow relative to the larger problem: that some workers' output is insufficient to justify a living wage.

But if a young adult cannot produce enough of value to justify being paid a living wage, nothing we do to the minimum wage will help. He, the institutions which trained him and the society in which he lives, have far bigger problems

Harford's certainly right that the longer term solution to low pay is productivity increases; you can't mandate paying people more than their marginal product as firms will simply shift to more capital-intensive processes or to solutions through offshore outsourcing of labour-intensive components.

But not all wages need to be living wages. The 16 year old living at home working part time while going to school doesn't need one; and, his marginal product probably isn't enough to finance a real living. But the kid is learning valuable skills about workplace culture, showing up on time, dealing with customers - things that will help him be more productive in future. Note further that the minimum wage only counts pecuniary benefits; health insurance that comes bundled with many, but not all, US jobs is an increasing proportion of the overall salary package.

At least, as Harford notes, the UK Low Pay Commission, which advises on minimum wages, has let youth minimum wages stay relatively low. Workers aged 21+ are on a minimum wage of £6.08; workers aged 18-20 on £4.98; 16-17 year olds on £3.68; and, there's also an apprentice rate of £2.60.

Here in New Zealand, National's making it a bit to get younger folks onto the lower New Entrants' Wage; otherwise you have to pay the 16 year old, on his first day of work, no less than you'd pay any other minimum wage worker: $13/hour, (US $10.30 or £6.73).* Our youth unemployment rate isn't pretty, at least partially as consequence of the prior Labour government's decision to bring 16 and 17 year olds up to the adult minimum wage.

We can mandate that all wages are living wages, but we can't mandate that all the people who'd like to have work at that pay are able to find jobs.

And I worry Harford packs a bit into "market power" here when explaining Card & Krueger's results on minimum wages and employment in New Jersey:

If employers have market power in the labour market then they might actually offer a lower wage than the balance of competitive supply and demand would produce. Some workers would rather keep looking or sign up for welfare payments, and so employment is lower at this level. Introduce a minimum wage and both wages and employment increase, while profits fall.

Imagine a remote mining town with one big employer who pays the same basic wage to everybody. If you can't pay the new guy more than your existing workers, then you have incentive to abstain from hiring somebody whose output would cover his salary but wouldn't cover the amount you'd have to pay in salary increases to all your other workers. So increases in minimum wages can increase employment and wages in places with monopsonistic employers and low labour market mobility. But in low-skilled retail in suburban New Jersey where there's no way that hiring an additional student to stock shelves at the 7-11 forces you to push up your other workers' wages? Any retailer who's stuck with a labour shortage at current wage rates and the chance to hire an additional worker for a wage less than the worker's marginal product but above prevailing rates has incentive to defect from any cartel of employers. And remember that the theoretical argument works by having people enter the workforce in pursuit of the new higher minimum wage who were outside of the workforce previously; if we start with unemployment - people in the workforce who cannot get jobs at the prevailing wage - the theory can't really apply. I'm not sure that many of our current problems come from too many folks voluntarily sitting outside the labour force because prevailing wages are too low.

* At last report, median hourly earnings were $20.38 (average $24.78). Our minimum wage is 63% of the median wage or 52% of the average; at these levels, we expect reasonable disemployment effects, especially among youths.

Dignity of work

Most of the time, I'll count work as a bad rather than as a good. We shouldn't evaluate policies on whether they make or kill jobs, except where they are specifically labour-market policies. Green policy shouldn't be judged on its job-creation propensities but rather on whether it achieves environmental objectives most efficiently.

But I'll make a slight exception for sheltered workshops. Employers finding ways to provide employment to the mentally disabled provide a sense of self-worth that's more valuable than wages paid. Where wages reflect marginal revenue product, they'll often be very low. But that's not the point. The business, whether charitable or commercial, has to at least not make losses if it is to survive. Absent strong wage subsidies, whether from government or from civil society, paid wages will have to be low where marginal product is low.

And so changes to New Zealand minimum wage legislation extending minimum wage protection to those in sheltered workshops, and lobbied for by advocates for the disabled, did harm when they, in conjunction with policy shifts at IHC, led to the closure of sheltered workshops.

Meanwhile, in Manitoba, Bill Redekop reports on the success of Mountain Industries, a sheltered workshop in the village where I went to elementary school. Manitoba sheltered workshops are allowed to pay sub-minimum wages, though there's some pressure to eliminate those provisions. I don't know whether Mountain takes advantage of sub-minimum wage provisions or whether those provisions will be eliminated. But I do hope that Mountain remains able to provide valuable opportunities for their workers.

I have an incredibly hard time seeing what public purpose is served by requiring that severely disabled workers be paid the minimum wage; an alternative policy instead providing wage subsidies for those workers achieves any reasonable equity objective sought by minimum wages but spreads the burden equitably across the community.

Treasury on minimum wages [updated]

Patrick Gower says:

Everyone knows it’s got bloody hard to live on the minimum wage - even John Key admits that. His defence is that a rise from $13 to $15 an hour will cost jobs. Key has used this defence in a televised debate, and he's used it to workers on the shop floor at McDonald's as seen in my story last night. But what Key doesn't want to admit, is that this claim is not the full picture and may just be fear-mongering - a rise may not cost jobs at all. That's what Treasury says in this advice from March 2010 obtained by 3 News under the Official Information Act.

Gower should spend less time reading single analysts' emails and more looking at what Treasury's actually said. He's citing a 2010 email released under the Official Information Act (don't the italics make it all seem secret and hidden and stuff?); here's Treasury in 2010 recommending that Key keep the minimum wage at $12.75 instead of raising it to $13. It's in the regulatory impact statement [ht: Greg Dwyer]. What does Treasury give as reason for recommending keeping the minimum wage at $12.75?

The economic recovery is slow and the labour market remains volatile

Overheating in China and commodity prices in Australia may increase vulnerabilities for New Zealand over the next 12 months

Increasing the minimum wage in this environment could create wage pressures (both directly through increased wage costs and indirectly through pressure on wage relativities) for employers who retained their workforce during the recession, and employers who are expanding their workforce as the economy is recovering

The Department of Labour estimates that keeping the minimum wage at $12.75 may lead to an employment gain of between 1360 and 1960 jobs

Treasury further comments:

As a proportion of the median wage, New Zealand’s minimum wage is the second highest in the OECD (in 2008)

The minimum wage has increased significantly since the late 1990s. In real terms by 63% for adults and 128% for 16 and 17 year olds since 1999 (the latter is largely likely to be due to the abolition of the youth minimum wage in 2008)

Let's recap. Gower paints Treasury as supporting a two dollar increase in the minimum wage when in fact they fought against a twenty-five cent increase in 2010.

I weep for journalism in this country. [Part one of Gower nonsense on minimum wages] Update: Here's Treasury in the Cabinet Papers from the 2010 review.

Treasury has some concerns that increasing the minimum wage may constrain employment growth and impose costs on businesses, particularly given the subdued labour market recovery, minimum wage increases over the last decade, and the level of the minimum wage relative to the average wage. There are also fiscal costs associated with an increase in the minimum wage.

While unemployment is decreasing, New Zealand’s labour market has been volatile in recent quarters. Treasury considers that increasing the minimum wage in the current economic environment would create wage pressures for employers (both directly through increased wage costs and indirectly through pressure on wage relativities) who have retained their workforce during the recession, and limit the opportunity of employers to expand their workforce as the labour market recovers.

There is also a risk that increasing the minimum wage could exacerbate New Zealand’s high youth unemployment. The unemployment rate for 15-19 year olds was 23.3 per cent in the September 2010 quarter. (New Zealand’s youth unemployment rate is four times as high as the adult unemployment rate, and the ratio is high compared to other OECD countries). International evidence indicates that increases in the minimum wage leads to employers substituting non-skilled workers (such as youth) for low or semi skilled workers, as non-skilled workers become relatively more expensive. Youth unemployment is of particular concern because it can have long-term consequences in terms of lower income and poor labour market outcomes. Ministers may wish to ask the Department of Labour to carry out more analysis on the impact of the minimum wage on youth unemployment.

New Zealand’s minimum wage has increased substantially in the last decade, increasing in real terms by 36.6 per cent for adults and 128 per cent for 16 and 17 year olds since 1999 (the latter rise is largely due to the abolition of the youth wage in 2008), compared to a 35 per cent increase in the average wage. New Zealand’s minimum wage is also high compared to other OECD countries. In 2008 New Zealand’s minimum wage as a proportion of gross median wages was the second highest in the OECD (see minimum wage review 2010 Regulatory Impact Statement, page 30, figure 4).

Treasury considers that the total fiscal costs are likely to exceed estimates provided in the paper. Other agencies are likely to be impacted by increases in the minimum wage, and bargaining by state sector employees to retain wage relativities could contribute to the fiscal cost of a minimum wage increase. ...

Odds Gower will have any shame and retract his slur on Treasury?

Minimum wage nonsense

I love it when journalists think that their crappy interpretation of an OIAed email from Treasury gives them a scoop that overturns basic economics. Here's Patrick Gower:

Everyone knows it’s got bloody hard to live on the minimum wage - even John Key admits that. His defence is that a rise from $13 to $15 an hour will cost jobs.

Key has used this defence in a televised debate, and he's used it to workers on the shop floor at McDonald's as seen in my story last night. But what Key doesn't want to admit, is that this claim is not the full picture and may just be fear-mongering - a rise may not cost jobs at all.

That's what Treasury says in this advice from March 2010 obtained by 3 News under the Official Information Act.

SEE THE TREASURY EMAIL THAT SAYS A MINIMUM WAGE RISE WON'T COST JOBS

Yes, that's right - the Treasury.

The Treasury are the big guns - Government's quasi-independent economic advisers.

And the Treasury says the "claim" (yes Treasury calls it a "claim") a minimum wage rise may cost jobs - "has not been true in the past".

Ok, so Gower's claiming that Treasury says a minimum wage increase from $13 to $15 will have no employment effect.

Go read the Treasury email and you'll find Treasury's Tony Burton wondering about the rise in youth unemployment through 2010. What "has not been true in the past"? That changes in the youth minimum wage hitting 18 & 19 year olds a decade ago resulted in increased youth unemployment - the Hyslop and Stillman study found no effects. The period of study saw some of the lowest adult unemployment on record in New Zealand, so it's not exactly the kind of period in which we'd expect strong disemployment effects. Burton then wonders about other things that might have affected youth unemployment rates through 2010.

But it's insane to extrapolate from anything in that Treasury email to claim that Treasury supports an increase in the minimum wage from $13 to $15. I hope that somebody at Treasury steps up to make that clear.

Gower tries to frame this as a scrap between Treasury and the Ministry of Labour over estimates of the disemployment effects of minimum wages.

So the Department of Labour report actually mentions about 6000 forecast new jobs that might not happen under a theory that the Treasury doesn't believe.

But absolutely nothing in the OIAed email from a single Treasury analyst speaks to the Ministry of Labour's estimates. Nothing.

Brash's assessment of Gower seems about right.

TVHE comments as well, but as usual, is too kind. Update: It gets worse. See here for Treasury's very clear opinion in the 2010 minimum wage review that raising the minimum wage from $12.75 to $13 was a bad idea.

Policy change? Youth minimum wage edition

National has, much to my surprise, promised some policy changes around the youth minimum wage. I'm not optimistic that the changes will have substantial employment effects, but they could lead to changes that would. Let's parse things quickly as I have grading to finish.

First, let's recall my prior work, consisting of simple difference-in-difference forecasting models, showing that youth unemployment rates were about eight percentage points higher than expected subsequent to Labour's abolition of the differential lower youth minimum wage.

The Department of Labour commissioned Hyslop and Stillman to look at the changes in the youth minimum wage. They found big decreases in the number of youths in employment, but this was largely offset by increases in the number of youths in education, at least some of whom, by reports from school principals on Radio New Zealand, would really have been better off had they been able to leave school and enter employment.

Hyslop and Stillman also found that very few employers took up the New Entrants' Wage policy that would allow them to hire youths on a lower wage for the first few months of their employment; employers viewed it as not being worth the hassle.

Under Labour's policy, 16 and 17 year olds could be paid 80% of the adult minimum wage for their first three months or first 200 hours of employment (as well as workers aged 16 and up engaged in 60 credits per year of industry training). And few employers bothered with the paperwork hassles. Here's Hyslop and Stillman:

Although not definitive, we believe these patterns suggest the new entrants wage was largely non-binding after 2008. In addition, we suspect that, in practice, there may be significant issues associated with the information employers require on young workers employment experience and wage equity across their workers that inhibit employers using the new entrants rate. Below, we also show that, after 2008, the adult minimum wage appears to have a substantial binding effect on the wage distribution of 16-17 year-old workers. For these reasons, in our subsequent analysis we will assume that the adult minimum wage is the relevant minimum wage for all 16-17 year-olds after 2008. 

Ok. So the prior New Entrant wage was effectively useless in getting kids started in employment.

So what has National promised to do? Expand eligibility for the New Entrant's wage (now called the "Starting-Out Wage").

The starting-out wage will be set at 80 per cent of the adult minimum wage and three groups of people will be eligible:

• 16- and 17-year-olds in their first six months of work with a new employer.
• 18- and 19-year-olds entering the workforce after more than six months on a designated benefit.
• 16- to 19-year-old workers training in a recognised industry course involving at least 40 credits a year.

What's the sum total of the changes then?

• 16 and 17 year olds get an additional three months' eligibility for the training wage. Maybe this is enough to make employers deem the transactions costs worthwhile, maybe not;
• 18 & 19 year olds have access to the starting out wage - this is new;
• Youths in training only have to be doing 40 instead of 60 credits per year.

In short, there's not much there there. Or at least not much that could be expected to yield any substantial employment effects. [Update: it looks like the paperwork for employers wishing to use the new entrants' wage is simpler, which could start yielding some results.]

Even a complete reinstatement of the former youth minimum wage would only have had slow effects on youth unemployment rates. The best we can hope for on this one is that it opens the door to more substantial changes later on.

Unemployment and the youth minimum wage

I'd noted, initially with a couple errors, some of the differences between my findings and Hyslop and Stillman's on youth minimum wages. Where I'd found big effects of the youth minimum wage change on the youth unemployment rate, they found only small and statistically insignificant changes on the percentage of youths who are unemployed. I was a bit puzzled why they ran things on the latter measure - percentage of youths unemployed is hardly a headline HLFS result. But, thinking more on it, and subsequently clarified by email with Steven, there's really good reason for it.

Hyslop and Stillman start by asking what the effects of the youth minimum wage change are on the likelihood of being employed (recall that they're using individual-level data at a StatsNZ data centre, not aggregates). They find a reasonably large and statistically significant decrease in the likelihood of a 16 or 17 year old's being employed consequent to the change in legislation - about a six percentage point decline, or about a 9,600 person decrease in employment.

They then ask what happened to those kids - if the employment rate is down, where are they? The percentage of youths unemployed is the best way of answering that question. The likelihood of being unemployed went up a couple of percentage points, but the result wasn't statistically significant. They find instead that most of the effect was reduction in the employment rate of students who had been working part time, who would then drop out of the labour force rather than show up as unemployed or as "inactive".

As Matt Nolan over at TVHE points out, the welfare effects of this are a bit more ambiguous than the Greens have been suggesting. The Greens have been arguing that the minimum wage increase was great - no significant increase in unemployment and more kids stay in school. But that's entirely too quick. The drop, according to Table 6, has mostly been among students who combined work and study. So students are perhaps shifting to a stronger focus on their studies, but they're also going to be poorer and they're not going to be accumulating human capital in the form of experience that may well be complementary to human capital gained through education.

If our working model is that kids are short-sighted idiots (possible) who ought to be forced to accumulate human capital in the form of education only rather than in the form of work experience mixed with education, even if they have demonstrated that they believe the work experience to be valuable, then the change might not be awful.  If our working model is that kids are heterogeneous in converting education and experience into human capital, and have reasonable expectations about their individual marginal human capital increase coming from education or from work experience, pushing kids from higher valued work experience into lower valued education isn't all that great a deal.

Hyslop and Stillman also find significant negative effects on hours worked for 16-17 year olds in 2009 and 2010 on the order of 1-2 hours per week. While they're earning more per hour, they're getting fewer hours.

It's a bit fun to compare the number they get with the fancy techniques and individual-level data with what I get with my low-tech approach and aggregate data.

Again, I regress outcomes for 16 & 17 year olds on outcomes for other cohorts for the period prior to the minimum wage change then predict outcomes subsequent to the change given the performance of the comparison cohort. When I use 18 & 19 year olds as comparison cohort (Hyslop & Stillman use both 18 & 19 and 20 & 21 year olds; I haven't the latter data), I get a nine percentage point drop in the employment rate in 2010.

If you work backwards from their figures, you can piece out the expected change in the unemployment rate among 16 & 17 year olds - it looks to be about a four percentage point increase that's due to the youth minimum wage if you use average 2007 against average 2010, or five points if you use Q4 in each. Their result on unemployment isn't significant but their result on employment is; I'm not sure whether they'd then have a significant result on the unemployment rate driven by the likely significant drop in the denominator.

When I run things against 20-24 year olds, I get a 10.5 percentage point increase in the unemployment rate for 16 & 17 year olds in 2010; against 18-19 year olds, I get a 10 percentage point increase.

There are a few reasons for the difference. First, I always get larger effects when I use all adults as the baseline comparison rather than the 20-24 year old cohort. It's not crazy to then expect smaller effects if I were able to use a baseline cohort of 20-21 year olds.

Instead of conditioning a model on the early period and projecting forward, I've also run things using dummy terms and interactions for different regimes. Specify three regime periods and two regime variables. Regime 1 runs 1986 through 2001Q2. The second regime begins 2001Q2 - 18 and 19 year olds become subject to the adult minimum wage. Finally, regime three begins 2008Q2 - 16 and 17 year olds become subject to the adult minimum wage. I'm dropping the squared terms from the specifications because there are only thirteen quarters in the final regime period. And here's what I get*:

	(1)
	Unemployment rate, 16-17
Unemployment rate, 20-24	0.808***
	(9.42)
ur2024 * Regime2	-0.284
	(-0.81)
ur2024 * Regime 3	1.471***
	(4.76)
Regime 2	2.028
	(0.74)
regime 3	-9.816*
	(-2.37)
Constant	8.714***
	(8.59)
Observations	102
t statistics in parentheses * p < 0.05, ** p < 0.01, *** p < 0.001

In 2010, when the unemployment rate among 20-24 year olds averaged 12%, the effect of being in Regime 3 was (1.471*12) - 9.816 = a 7.9 percentage point increase in the youth unemployment rate for 16 and 17 year olds. In 2010Q4, when the unemployment rate among 20-24 year olds was 11.2%, the effect was a 6.7 percentage point increase. And that's close to the 5 percentage point increase you can back out of the Hyslop and Stillman figures for 2010Q4. [Note: if I drop the regime2 variables so I can keep the squared terms on unemployment, the effect of Regime 3 gets bigger, not smaller - a ten percentage point increase.]

I'm still a bit puzzled by a couple of things. Why does the percentage of cohort unemployed stay roughly constant while cohort labour force participation plummets? In other words, why is it the employed that jumped over into education rather than the unemployed? I've been saying about 10 points of the run-up in unemployment has likely been due to changes in the youth minimum wage; Hyslop and Stillman say about five points (though that may not be statistically significant). If Hyslop and Stillman are right, what then accounts for the massive disproportionate increase in the youth unemployment rate relative to the older cohorts' rates in this recession as compared to prior ones?

* esttab in Stata is awesome. You type "esttab, label html" and it spits out html code for regression tables.

Hyslop and Stillman [updated]

Dean Hyslop and Steve Stillman have updated their prior work on the youth minimum wage in New Zealand to look at the most recent changes.

Here's the briefest synopsis of why I think we find divergent results on unemployment. Where I have everywhere been using the unemployment rate - the fraction of those in the labour force who are unable to find work - they are instead using the percentage unemployed - the fraction of the population cohort who are unable to find work, regardless of what proportion of that population wishes to be in work. As the labour force participation rate among sixteen and seventeen year olds over the period did not drop as quickly as did employment, the unemployment rate increased greatly relative to the percentage unemployed. The two measures answer very different questions. But skip straight to the end for the graphs showing this.

Recall that their prior study found no particularly bad outcomes consequent to the year 2000 changes to the youth minimum wage that brought 18 and 19 year olds up to the adult rate, despite some evidence of employment decreases among that group by 2003.

In the current study, they find that bringing 16 and 17 year olds up to the adult minimum wage resulted in substantial decreases in employment - they say 20-40% of the drop in employment among that age cohort, or between 4,500 and 9000 jobs losses, can be chalked up to the regulatory change. But, they argue this had no significant effect on percentage of unemployed 16 and 17 year olds because most of the employment losses were among students combining study and part time work. They've a rather more complicated econometric model than the simple one I've been using; my simple one finds substantial increases in unemployment among 16 and 17 year olds as well as decreases in employment.

First, a quick tour through the main results I've been finding and posting here on the blog before going through Hyslop and Stillman's.

Until very recently, I was using HLFS data on the 15-19 year old cohort for youth unemployment; I hadn't access to more finely grained data. But, StatsNZ kindly sent over data splitting each age group in that cohort. Here's what the unemployment numbers look like.

The red line hits at 2008Q2 - the first quarter in which 16 & 17 year olds are subject to the same minimum wage as that facing workers in all older cohorts. The blue line traces the unemployment rate for that group. Do note that the gap between the blue and red lines - divergent outcomes between 16 & 17 year olds and 18 & 19 year olds - only became persistently large starting around 2010Q3. Since that quarter, 16 and 17 year olds' unemployment rate has been ten points larger than that experienced by 18 and 19 year olds; the largest gap prior to 2008Q2 was about eight points in 1986. This will matter later when we look at the period of analysis in Hyslop and Stillman's paper. Note also that, according to the numbers Stats NZ gave me, the current unemployment rate for 16 & 17 year olds is higher than 30%.

What about employment rates? 

Youth employment rates tank after 2008Q2. Some of this is just the recession. But note how little the adult employment rate has moved compared to that for those aged 16 and 17. 

The very very simple model I've been running has taken unemployment outcomes for youths as a function of adult unemployment rates and the square of adult unemployment rates. I estimate the model over the period from 1986 through and including first quarter 2008. After that point, sixteen and seventeen year olds become subject to the adult minimum wage. I then ask Stata to predict the youth unemployment rate given the adult unemployment rate, both for the period of estimation and for the post-estimation period. The gap between the estimated and the actual unemployment rate is the residual. I do the same again for employment rates.

Now there can be a few problems with this kind of very very simple model. First off, out-of-sample prediction is always a bit of a mess; we need to check that the method isn't throwing spurious results. I do this by taking, in turn, each age cohort's unemployment rate as the dependent variable and putting the "everybody except for that cohort" unemployment rate (and its square) over on the right hand side. If the predicted unemployment rate diverges wildly from that observed for the post-2008 period, then I have a problem with my method. If the predicted unemployment rate only goes haywire for the group affected by the minimum wage changes, that lends weight to my method. If the predicted unemployment rate goes most haywire for the 16-17 year olds, rises less for 18-19 year olds, and rises less again for 20-24 year olds, that suggests, to me, that two things are going on: the youth minimum wage has worsened unemployment outcomes for the 16-17 cohort, and that groups with the highest proportion of members on the minimum wage have worse outcomes when the recession hits late in 2008. While 18 and 19 year olds have been subject to the adult minimum wage since 2001, overall unemployment rates were very very low through most of the 2000s. Once unemployment rose, the previously non-binding minimum wage on 18-19 year olds became binding. 

What happens when I check? Here's a plot of the residuals for each age cohort. The red line marks the start of the out-of-sample prediction period - 2008Q2 onwards. The blue line that reaches for the sky is the residual on the 16-17 year old unemployment rate. The red line that also tracks upward, albeit not dramatically, is the residual on the unemployment rate for 18-19 year olds. There's a slight increase in the residual for 20-24 year olds. If the blue and red lines weren't there, you would really not be able to tell that the red line marked the start of an out-of-sample prediction. So I'm pretty sure that the method I'm using isn't throwing up artefacts. 

Hyslop and Stillman use the unemployment rate among 20-21 year olds as the basis for their difference-in-difference estimation technique; I'm using the unemployment rate among everyone who isn't 16-17. Is that what's driving differences? No. Or, at least, I don't think so. I'm not sitting on a StatsNZ Data Centre,  as I expect Dean Hyslop was for rather a while while doing up this study, and so I don't have access to data on the unemployment rate facing 20 and 21 year olds. But I can run a set of other potential baselines for the simple regressions: the unemployment rate among everyone who isn't 16 or 17, the unemployment rate among everyone over the age of 19, the unemployment rate among 20-24 year olds, and the unemployment rate among 18-19 year olds. They all track pretty similarly, though the residuals are smaller in the post-2008 period when I use younger reference cohorts.

It's really not going to matter much which non-youth unemployment rate I use to predict the unemployment rate experienced by 16 and 17 year olds.

It's also worth noting that my simple technique is, nevertheless, a difference-in-difference technique. I'm looking at what happens to the youth unemployment rate relative to the adult rate (or various older cohort rates) subsequent to a policy change particularly affecting 16 and 17 year olds.

What happens when I do all the same fooferah for employment rates rather than unemployment rates? Recall that employment rates aren't just the inverse of unemployment rates; rather, the denominator is cohort population including those outside of the labour force while the unemployment rate counts only those in the labour force in the denominator. Well, here the choice of comparison group starts to matter. Here are the residuals:

Here, when I use employment rates among everyone else or among adults as baseline, relative employment rate outcomes for youths are worse in the post-2008 period than when I'm using younger cohorts as baseline. Either way, though, we get big declines in employment rates among 16 and 17 year olds, even relative to 18 and 19 year olds, in the period from 2008Q2 onwards.

So all my cards are on the table. Here's my .do file. And here's my .dta file. I don't think Hyslop and Stillman can put theirs up since they're using confidential HLFS individual-level data.

What do Hyslop and Stillman do? Instead of running a cohort's unemployment rate as the dependent variable the way I have, they set things up as a panel. Then, the unit of observation is the cohort-quarter with one observation for 16-17 year olds, one for 18-19 year olds, one for 20-21 year olds, and observations on others used to get business cycle effects. They then run panel techniques with age fixed effects, quarter fixed effects, and an indicator variable for whether the cohort was subject to the adult minimum wage. That's a lot of fixed effects to be throwing around when there are only twelve quarters of treatment period in their study. [No it isn't. They're using individual level data on thousands and thousands of individuals.]

But, as best I can tell, Hyslop and Stillman aren't testing the unemployment rate in any of their work. They're testing the fraction of unemployed in the cohort population. Those are not the same thing. The unemployment rate takes as denominator the number of people of the age cohort that are in the labour force. They're instead using the ratio of the number of cohort unemployed to the total number of people in that cohort. The difference matters a lot. Here's a short plot of the two series.

The unemployment rate among 16 and 17 year olds spiked massively after 2008Q2 but the cohort's percentage of unemployed persons did not climb very much. Honestly, the only way I noticed that they were using the percentage of unemployed rather than the unemployment rate was because the summary stats reported at page 10 were just so way out from the dataset I've been using. They report an increase in the percentage unemployed from 8.1% to 13.5%; meanwhile, the unemployment rate increases from 14% to 27% over the same period. How do we get the divergent series results? The labour force participation rate among 16 and 17 year olds had to have been dropping less quickly than were the number of kids in employment. 

If I re-run stuff using the percentage unemployed as dependent variable rather than the unemployment rate, and take the 20-24 cohort as the basis for predicting outcomes here's the comparative residual plots:

I've added in a second red vertical line here. Why? Because Hyslop and Stillman only consider a two year window subsequent to the law change. The red lines mark the start and end of that period, inclusively. The red line traces residuals using the Hyslop and Stillman specification that has the percent unemployed as the outcome variable of interest. [Update: They run things through Q42010; their window is wider than I'd thought on a first reading] The blue line does the same for unemployment rates. After the second red line, outside the period of their analysis, the youth unemployment rate continues to skyrocket relative to expectations given the unemployment rate among 20-24 year olds. The percent unemployed climbs back up to the high levels experienced for some, but not all, of the period inside the red lines.

And that's why we get different results. I don't think it has anything to do with their fancier econometric techniques. If I thought that "number of unemployed over total population" were something more economically relevant than "number of unemployed over total labour force", then I'd also conclude that there wasn't a big effect. The residual jumps up, but hardly enough to make anything of. The residual over their estimation period is 2.2 points - the percentage of 16 and 17 year olds unemployed in that two year window is two percentage points higher than we would have expected over the prior period. If we extend the window to include all the potential observations (I have no clue why they truncate to a two year window either side when sufficient data is available for a three year window), the residual increases to 2.7 points.

I really am not sure why Hyslop and Stillman chose to use the percent unemployed rather than the unemployment rate. They're top notch guys and must have had a good reason for it. [Updated post follows here: they had good reason.] The two measures answer different questions. Their measure tells us "What is the effect of increasing the youth minimum wage on the percentage of sixteen and seventeen year olds who are unemployed?" My measure tells us "What is the effect of increasing the youth minimum wage on the percentage of sixteen and seventeen year olds who are unable to find work, among those who wish to be in work?" The latter tends, I would have thought, to be the more interesting question as the expectation of a higher potential wage will increase the number of kids (attenuate the decline in the number of kids) wishing to be in the labour force. The unemployment rate tells you the fraction of those whose wishes for employment are thwarted. The percent unemployed tells you the fraction of those in an age bracket who are unemployed, but without any measure of what portion of those in that cohort wish to be in employment. 

And now I expect political debate about the youth minimum wage to turn into quibbles about which definition of unemployment matters most: the one that StatsNZ regularly reports, or the one Hyslop and Stillman were commissioned to use. 

Further fine-grained results

Rob Salmond asks some decent questions in comments. I'm going to partially answer them with another set of regressions.

Here, I'm taking the unemployment rate as the dependent variable. In the first column, I run a specification on 15 year olds by themselves: the group one year too young to be hit by the minimum wage change. In the second, I pool 16 and 17 year olds: the group experiencing the change. In the third, I pool 18 and 19 year olds: the group who had been subject to adult rates well prior to June '08. Standard deviations in parentheses under coefficients.

	Unemployment
	15	16 & 17	18 & 19
Adult unemp rate	0.03	1.36	2.06
	[0.21]	[0.11]**	[0.11]**
Post June 2008 indicator	-7.36	-12.52	-1.4
	[6.14]	[3.10]**	[3.16]
Adult unemp rate * indicator	5.42	4.81	1.17
	[1.29]**	[0.65]**	[0.66]
Constant	18.23	9.51	4.39
	[1.21]***	[0.61]**	[0.62]**
R-squared	0.71	0.83	0.8

In all the stuff I've been doing, I've not been using interaction terms and indicator variables for the regime change; we only have a dozen quarters of data since the change.  That's why I prefer conditioning the model on the pre-June 2008 data, running projected unemployment rates going forwards, and just using an eyeball on the difference. But, here are the results instead using an indicator and an interaction term.


If we combine the level and interaction effects to get a net effect at a 5% adult unemployment rate, we get an unemployment rate among 15 year olds 19.7 points higher, 11.53 points higher for 16 & 17 year olds, and 4.5 points higher for 18 & 19 year olds.

Another way of running things: take the unemployment rate among 16 & 17 year olds as predicted by the unemployment rate among 18 & 19 year olds. In that case, when we have a 21% unemployment rate among 18 & 19 year olds, the combination of shift and interaction variables in that specification give us an excess unemployment rate among 16 & 17 year olds of 10.4 percentage points.

Rob asked about goodness of fit measures across the cohorts. I can't easily get that from Stata for OLS with Newey-West standard errors, so the above just has OLS. If we run the above regressions with Newey-West errors, results for 18 & 19 year olds become significant; the coefficients just are much smaller in absolute magnitude than for the younger cohort. But there's no particular action in R-squared above other than that we don't explain as much of the variance in outcomes for 15 year olds. Neither is there any particular action in the R-squared measures if this morning's regressions were run in OLS instead.

But let's go back to my preferred way of running things and just condition the model on quarterly data from 1986 to 2008 and use the established relationship between adult and youth unemployment rates to forecast what those would have looked like from June 2008 onwards had that prior relationship held up, recalling that the period from 1986 to 2008 included periods with adult unemployment rates substantially in excess of anything we have experienced in the current recession.

Unemployment, 16 & 17 year olds

Unemployment, 18 & 19 year olds

Big jump in unemployment rates for 16 & 17 year olds relative to their prior trend given adult unemployment rates; much smaller jump for 18 & 19 year olds. Note further that some unemployment among 18 year olds will be carry-over from having been unemployed when 17.

Rob also asks to what extent I can exclude the global recession. Prior recessions had far higher adult unemployment rates AND lower youth unemployment rates than the current recession. Any effect of the recession ought to be picked up in the effects of adult unemployment rates: recall that we're projecting youth unemployment rates from adult rates. If something in the current recession just has hit youths harder than adults relative to how things have operated in prior recessions, that could be driving things. But it would have to have hit 16 & 17 year olds particularly hard relative to 18 & 19 year olds, and it would have had to have been timed to match the change in the youth minimum wage.

The younger cohort drives it [updated]

Stats NZ has very helpfully provided some disaggregated HLFS data with results for 15, 16, 17, 18 and 19 year olds separated out. StatsNZ rocks. And so I re-ran things splitting the 15-17 cohort, who experienced a rule change in 2008, from the 18-19 cohort, who've been subject to the adult minimum wage for much longer.

The graph below plots the residuals from the very simple regression I've been running that predicts youth unemployment as a function of adult unemployment.

So, what do we see here? The blue line traces how youth unemployment outcomes for the 15-19 age group as a whole differ from predictions based on a model estimated on the period prior to the change in the youth minimum wage. The red vertical line marks the period break.  The green line tracks residuals for the 18-19 cohort; the red line for those aged 15-17.

As expected, there's a much bigger spike for the younger cohort who became subject to the new rules than for the older cohort who had previously been at the adult minimum wage. Outcomes for 18 and 19 year olds are worse as well, which I'd attribute to this cohort not having experienced this kind of labour market since they became subject to the adult minimum wage and to more eighteen year olds coming into age eighteen unemployed rather than in employment (note that the red line jumps higher and, importantly, earlier than the green line).

And, we can run a few other fun regressions.

Here, I take as dependent variable the number of employed persons in the age category (thousands) as a function of the population in that age category, the adult unemployment rate, an indicator variable equal to one for periods subsequent to the minimum wage change, and an interaction term between the adult unemployment rate and the indicator variable. For the 18 and 19 year olds, the indicator variable is insignificant and the interaction term is only barely significant at the 10% level. But the interaction term is significant at the 1% level for every age cohort from 15-17.

Each specification uses OLS with Newey-West standard errors for autocorrelation. (Newey in Stata, two quarter lag).

Recall that adult unemployment in the current quarter is 5%. So the interaction term (and the insignificant shift variable) for 17 year olds says that, after June '08, a 5% adult unemployment rate correlates with 11,100 fewer 17 year olds in employment than would have been the case prior to June '08 (17,500 fewer in employment from the interaction term, 6,400 more from the shift variable).

Employment is substantially lower for younger age cohorts - and the difference is statistically significant. For 19 year olds, there is no statistically significant difference in the post 2008 era. Eighteen year olds have a drop in employment, but the effect is smaller than for 15-17 year olds. And this is all about what we'd expect with a policy change affecting 15-17 year olds. In the prior period, some 17 year olds would carry through employment to age 18 and so fewer 18 year olds would be out on the market for the first time; employment among 18 year olds in the current era is then lower as well despite their not being directly subject to the change in policy.

There's more work yet to do. With the disaggregated data, there's now enough to make it worth writing up properly.

While we're talking youth unemployment, I'm going to be charitable and interpret John Key's assertion that, in the absence of minimum wages, youth pay rates would drop to a couple of dollars an hour as his just opening up room on the right for ACT. Employers do have to compete with each other for employees.

Update: 15 year olds are not subject to minimum wage legislation. Specifications looking at the unemployment rate for 15 year olds as a function of the adult unemployment rate find that the adult unemployment rate has no predictive power for the 15 year old unemployment rate except when we're looking at the period post the change. If the adult unemployment rate affects the number of 15 year olds in employment (second set of regressions) but not the unemployment rate for 15 year olds, it's doing it then through labour force participation rates: when there are no jobs going, the 15 year olds don't enter the labour market. And, as we'd expect that employers would worry about a massive wage hike when the 15 year old turns 16, that also directly depressed employment of 15 year olds subsequent to the change even if the change doesn't nominally affect 15 year olds.