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.


Anonymous said...

Nice entry! It would be good if you said in the article about the actual amount of the minimum wages (i.e. how many euros exactly) so readers could have a better idea about the whole situation :)

Simon van der S said...

Hi there anonymous! I don't think that the exact size of the minimum wage is that relevant for my post, other than that it is important that the minimum wage is high compared to other countries, and that YMW is low both internationally and compared to the minimum wage. . Anyway, as I said in the article, the YMW depends on your exact age. The minimum wage is €6,78 if you make 36 hours per week, €9,26 if you work 38, and €8,80 if you work 40 hours. Hope this helps ;)

David Zetland said...

Here's the whole table of wages at different ages:

Paul said...

Hey Simon!

I very much agree with the arguments you raise. I am also very skeptical towards a minimum wage. Germany just introduced one of 8,50€ with exceptions only for interns. In big cities this is quite okay and even necessary. But in Eastern Germany this will definitely cost jobs. The per capita GDP over there is at the level of Chile or Latvia and I have no idea how restaurants and barbershops will cope with this price hike on labor.

Nevertheless, I think the Netherlands' youth minimum wage (YMW) is too low. Especially for 18 year old university students 4,11€ an hour (2014) is ridiculous if one has to study full time for instance at LUC. To be sure, Dutch students get very good benefits but those are often a waste of money because they subsidize rich students just as much as poor ones with no additional benefit.

How high should it be then? In Germany I worked for 6,50€-7€ an hour when I was 16 and for 7,50-8€ an hour when I was 18. This was in a city about as expensive as the Hague and unemployment is still rather low over there.

My point is: just as the proponents of minimum wages can make bad arguments about the benefits of raising wages opponents tend to overstate the damage to the economy. We end up with a for-or-against mentality which may do more harm than good.

I personally think that the Netherlands are ready to raise YMW to 50-70% of MW (rather than 30-50 for 16-18 year olds). I think there are very few jobs (I am looking at you Albert Heijn) where the actual value created by these workers is only 4,11€ an hour. I think that it is time to change that.

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