20 Nov 2015

In the shadow: The unintended consequences of abolishing the minimum youth wage in the Netherlands

Cox writes*

Recently, the minimum youth wage in the Netherlands has come under public scrutiny. Calls for abolishing the youth wage are omnipresent among the youth, political parties and various unions. The Netherlands is one of the four countries in the European Union that has a lower, age specific minimum wage for the youth from the age of 15 till 22. The Bijenkorf and the municipalities of The Hague and Heerlen have already taken initiatives to abolish the minimum wage for workers older than 18 years. I will look at these consequences.

Those in favor of abolishing lower wages for 18+ workers give three main arguments. First, they argue that there should be equality among employees fulfilling the same tasks. Secondly, they argue that the current minimum wage is too low for the youth above 18 to be able to financially support themselves. Finally, they argue that there is age discrimination. For example, at the Albert Heijn, mostly younger people are employed because they are cheaper.

However, I think that abolishing this minimum wage will also have a set of unintended consequences which may actually outweigh the benefits. Due to the different minimum wages per age every age group has a different supply and demand curve. The merger of the 18-22 year-old work force with the older workforce (in terms of equal wage floors) means:
  1. The demand for 18-22 year olds will decrease due to an increase in the wage of an employee.
  2. The supply 18-22 year olds will increase due to the attraction of the higher wage.
Thus, 18-22 year old unemployment will most likely rise due to the fact that the youth are less productive; they are after all less experienced.

Second, higher minimum wages may lead students to drop out of school, lowering quality in the  Dutch knowledge economy  and increasing competition on the labor market.

Third, age discrimination will remain. The preference for under-18s will now be even stronger... assuming they can do the jobs.

Empirically, abolishing youth minimum wages in both New Zealand [pdf] and Canada has led to an increase in youth unemployment and is likely to have the same impact in the Netherlands according to the Dutch Bureau for Economic Policy Analysis [Dutch PDF]

Bottom line: Abolishing the youth minimum wage will increase unemployment among 18-22 year olds because they have to compete with more experienced workers; more youth will try to work rather than study; and age discrimination (in favor of even younger workers!) will be even more intense.

* Please comment on these posts from my microeconomics students, to help them with unclear analysis, other perspectives, data sources, etc.


Feriha Ibriyamova said...

I agree to some degree with your points, however, the conclusion I am having some problems with. I think this is the perfect example of why raising or even having a minimum wage only hurts the people who it is supposed to help and is only beneficial to unions.
This can be examined for the 18+ group as raising the minimum wage which introduces the problems of people who's skills are insufficient will be unemployed as business owners would have to engage in charity if they hire them as they will have to pay them more than what they are qualified for. The real purpose of minimum wages has always been to make it easy to keep wages high and to reduce competition for the trade unions and their privileged members. In addition to your comments I would say that other consequences that employers will invest less in training, cut back on fringe benefits and invest more in labour-saving devices this in its way will lead to unskilled, teenagers, elderly and low-wage workers to be cut this will lead to increase of people on welfare as usually minorities and uneducated people are the ones to lose their jobs (families below the poverty level) first and people who would benefit are people who are in the middle (families with upper income and secondary earners) Employers will also start hiring illegal aliens to do the jobs as they are unlikely to report any violations to the labour laws. This will also have an overall effect on the economy as employers will have to pay higher wages and this will cost them more which means that this will cost more for consumers with will raise inflation in the economy. The fact that minimum wages will stay different for people under the age of 18 is also not helping as this makes it mush more likely that employers will hire a 17-year-old instead of an 18-year-old. Discrimination will not only stay with it will change and become stronger as before it was discrimination within the age groups and depending on the skills required for the job however now there will be the age discrimination but within the group of 18+ discrimination will become even hire based on many factors.Having said that I am not sure how this will affect education to lower as people who want to get a job will have to go to university if they want a job as otherwise they won't be able to get it and please tell me how it works in the Netherlands but where I come from if you are under 18 your parents have to sign documents in order for you to be able to work as an underaged person. Meaning raising and having the minimum wage as it is right now in the Netherlands will only hurt low-income families, unskilled workers and minorities. The people it should help. However, I agree that the whole point of having a minimum wage is to not have discrimination and having different wages for different age groups is discrimination.

Feriha I.

Cox Bogaards said...

Thanks for your comment! I would like to reply to two of the comments you made.

First, you argue that it would hurt low-income families, unskilled workers and minorities. However, the status quo hurts them even more, because people below the age of 22 are cheaper and therefore favored, assuming they can do the jobs. I do agree with you that for some jobs where a minimum age is necessary these people will be worse off because they now have to compete with these youths whilst they did not have to do so before.

Second, in the Netherlands, you have to go to school till the age of 16. From that moment onward there is a 'kwalificatieplicht' which means that you have to have a minimum level of schooling. This does not include universities and universities of applied sciences. My argument is that less people would attend those which as a consequence leads to less educated people - I should have been more specific on that.

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