From the TUC

“Message to the TUC: the minimum wage causes youth unemployment”

19 Jun 2012, by in Labour market

“Message to the TUC: the minimum wage causes youth unemployment”  says Tim Worstall, senior fellow at the right-wing Adam Smith Institute in his Daily Telegraph blog today.  Fortunately, the evidence  does not back up this supposition.

It seems that our finding that  long-term youth unemployment has risen by 874% since 2000  has exercised Tim. He is certainly right to be upset about this state of affairs, however, it seems to me that we do not need to look any further for the real culprit than a long, deep recession which has been made worse by Government policy .

One key source of evidence on the lack of impact of the minimum wage is that the Low Pay Commission has completed a series of research projects looking specifically at young people and employment. These have not been able to identify any statistically significant effects on youth employment at all. In fact, there is actually no evidence at all the the UK minimum wage has ever had any negative effect on the employment of people from any age group.

I think that Tim simply misreads how pay-setting works. To quote his blog:

“if you raise the price of something then people will buy less of it. Raise the price of labour and fewer people will be employed.”

This statement is much too simplistic. When it comes to pay, some enterprises are “price-makers” that use their power to set wages below “market-clearing rate” predicted by the neo-classical economic model. This sad state  is known as “monopsony”. As a bit of a pessimist, i’m not at all surprised that some employers  pay as little as they can get away with rather than  pay as much as they can afford,whether or not this actually constitutes the optimum labour market strategy for their business.

It is also the case that a sensible legal minimum floor on wages can help employers to break out of the “race to the bottom”. For example, before the advent of the NMW, hotel chains were  running with massive vacancies because they were afraid that raising wages to hire more staff would give short term advantage to their competitors. Hotel employment fell after wage deregulation (1993). After the NMW was introduced (1999) hotel employment rose again.

Finally, Tim’s idea that NMWs that are greater than 45% of average wages cause jobs losses reflects one view in a highly contested US/ Canadian debate that stems from Card and Kreuger’s 1995 book “Myth and Measurement: The New Economics of the Minimum Wage”. Card and Kreuger found that the measurable employment effects of minimum wages are “centering around zero” and some neo-classical economists have never forgiven them for spoiling their supply and demand graphs with real data. In my view, the anti- minimum wage side of this debate are actually better at proving the unsurprising conclusion that relatively low minimum wages have no effect on jobs  than they are in dealing with the higher minimum wage examples that we find in parts of the EU and the antipodes.

The Spanish minimum wage of 37.6% of average earnings certainly reminds us that low wages are not any sort of route to economic success.

One Response to “Message to the TUC: the minimum wage causes youth unemployment”

  1. Tim Worstall
    Jun 21st 2012, 12:46 pm

    “it seems to me that we do not need to look any further for the real culprit than a long, deep recession which has been made worse by Government policy .”

    Well, we do need to look further. For what we’d like to work out is why has long term youth unemployment risen so much more than general unemployment?