fatvegan

I'd been planning to write about something I read in my macroeconomics textbook, and the Milton Friedman interview I mentioned earlier reminded me of it. One of the neoliberals' favourite hobbies is blaming the level of youth unemployment on the minimum wage. They say that it prices the least productive workers out of the market.

I've written about minimum wages plenty of times before and there are lots of reasons why I think the neoliberals (and the classical economists) are wrong. Or wrong enough, at least, that it would be a bad idea to implement what they're saying. But these guys like the high unemployment figures for youth because those figures are consistent with their theory. Youth are the most likely group to be presented as the victims of minimum wage policy as well. I suspect that is because "youth" is an easily conceptualised, homogeneous sort of group and it's hard to blame youth generally for being "lazy" - unlike the poor or chronically unemployed.

That's all fine. I've mostly accepted what they've said and have considered youth to be one of the victims of minimum wage. I believe the benefits of minimum wage are sufficient that it's worth temporary unemployment of a group that could (and perhaps should) easily find some form of tertiary training anyway. For a while youth are the victims of the policy but after a shortish stint they become the beneficiaries.

But last semester's macroeconomics textbook contradicts all this, oddly enough in an attempt to rubbish minimum wage laws. It quotes research claiming that for a 10% increase in minimum wage the youth employment drops by 1-3%. This a reasonably big shift since it's not a 1-3% increase in unemployment, which would be trivial. However, if you assume that a reasonably big chunk of young people are working for minimum wage this trade-off actually looks pretty damn good. The price goes up by 10% but the quantity sold only drops by 1-3%. If there was a totally dominant young people's union, that only cared about the welfare of its members it would jump at the deal. A deal that supposedly victimises this demographic more than any other.

As I've said before, I think the elasticities are such that minimum wage mostly transfers surplus from employers to workers. Or, if you assume that higher costs are passed on as higher final prices, you could look at it as a transfer from consumers in general to poor workers. Which is hardly a victimisation of the poor. Certainly total output will drop, and overall welfare will be lower, but you can't say the poor are worse off as a result. And this number is for young people, who are the most vulnerable (i.e., least profitable) of all minimum wage workers. You'd expect even better numbers for other minimum wage workers.

If the assumption that a large proportion of young people work for minimum wage is unreasonable then this would no longer be true. It's difficult to work out the exact numbers, but according to the ABS the median wage for full-time workers aged 15-24 was $496 in 2001. The current minimum wage for workers aged 21 and over is $504. So 50% or fewer of full-time workers work for minimum wage. But a very large proportion of young people work part-time (75% for 15-17 year and 50% for 18-19). Even if you assume only 50% of young people work for minimum wage (which I think is very conservative), then the 1-3% of all young people translates to 2-6% of all young minimum wage workers. But a 2-6% drop in employment in return for a 10% increase in wage is still a good deal.

Obviously not for the people who lose their jobs but perhaps that's one reason why those with jobs shouldn't complain about paying for unemployment benefits. Unemployment sucks, but so does a shitty wage. If I didn't know if I'd find a job or not I'd take the 86% chance of a job with good pay (youth unemployment is/was ~14%) over the 100% chance of a job with crap pay. I'm probably oversimplifying that more than I should.

After Ben so kindly suggested that my posts are usually short and sharp I ramble on like this. I think it just feels like such a significant point that I must be missing something and really need to persuade myself I've got it right. If the data is correct and representative and my fairly reasonable sorts of assumptions are correct then I'm not sure that anyone should be claiming the welfare of young people is what is at stake. Other important things are still at stake like efficiency, but what has made the minimum wage argument so unusual is that the economists claim to be the more compassionate and fair. They don't even have to mention efficiency to feel like they've made a convincing argument. But unless they're targeting sympathy at a very small group of the most vulnerable young people, I don't think there is a case that we need to abandon minimum wage for the sake of our children.