30 Nov 2015

Law of Unintended Consequences: Why Raising the Youth Minimum Wage is Not Beneficial to All

Simon writes*

The Dutch labour union FNV, together with some of its political allies, argue in favour of abolishing the youth minimum wage (YMW). The YMW applies to employees who are between 15 and 23 years old, and increases from 30% of the general minimum wage (GMW) at age 15, to 85% of GMW at age 22. According to the labour union, the YMW is unfair because it is too low compared to the costs of living, and because it is lower than the YMW in neighbouring countries. Furthermore, it would be unfair to be considered an adult from age 18 in aspects such as voting, drinking and driving, but not in terms of minimum wage.

Notwithstanding above arguments, the YMW has two important benefits that should be considered. First and foremost is the positive effect of YMW on youth employment. Research has found that the employment effect of a minimum wage is small when the minimum wage is comparatively low. However, if the minimum wage is relatively high, this has harmful effects on employment. The YMW is low both in absolute and relative terms compared to other countries. This is important for young employees, because almost by definition they have little education and work experience, and are therefore relatively unproductive. But because they are also much cheaper than their more productive older counterparts, they still have a chance on the labour market. The Netherlands Bureau for Economic Policy Analysis (CPB) reports that the low levels of youth unemployment in the Netherlands compared to other developed countries is probably linked to the relatively low YMW. Another advantage of the YMW is that it stimulates young people to continue education. After all, the relative gains of working fulltime are lower and therefore it is more attractive to study.

Abolishing the YMW would effectively mean replacing the YMW with the Dutch GMW, which is among the highest in Europe. Whereas the employment effect were small in the case of a low minimum wage, a relative high minimum wage is likely to have negative effects on employment. Therefore the CPB warns that a significant increase of YMW will increase youth unemployment in the Netherlands. Furthermore, the positive ‘education-effect’ will be gone, or potentially even reversed as it is more rewarding to have a job. Another unintended consequence of abolishing the YMW is the increase in government expenditure on social welfare. Even if levels of employment would remain constant, government expenditure would increase, because the height of certain benefits (e.g. the benefit for handicapped young people) is connected to the YMW. This would lead to either increased taxes, higher budget deficit or to austerity measures.

Bottom line: Abolishing the YMW would be good for young people that already have secured a job, for their wage would increase significantly. However, for those currently looking for a job and for those with temporal contracts, abolishing the YMW could prove much less beneficial, since youth unemployment is likely to rise and those employees that suddenly become much more expensive might not get their contracts renewed. Abolishing YMW would also increase government expenditure.

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