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.