False economy of youth wages
urging the Government to back away from its pledge to do away with the discriminatory provision which allows employers to pay 16 to 19-year-olds at 80 per cent of the adult minimum wage under certain conditions.
The justification is that this gives employers an incentive to hire young workers, particularly if they need to learn on the job. This supposedly gives people just starting out in the workforce and those with low skill levels a chance to get on the bottom rung of the employment ladder.
Treasury advises that the lower wage rate is currently not used widely by employers, so the consequences of keeping it are low.
That may be so, but it is a fair bet that many of the teenagers working in supermarkets and fastfood outlets are being paid less than their older workmates. A counter-argument may be that the consequences of abolishing youth rates will be partially borne by large, sometimes multi-national, companies who can readily absorb the costs.
Treasury warns, more pertinently, that in an economic downturn, the youth rate provides a ‘‘safety valve’’ for employers – in other words, a way for them to cut costs by taking on cheaper workers when trading conditions are tight.
Treasury warns that young people will miss out during such times if the lower rate is abolished. As jobs become scarcer, they will be squeezed out if employers can hire a more experienced older worker at the same hourly rate.
There is some evidence that this is true. Economist Eric Crampton, in a 2012 article, demonstrated that following the global recession of 2008, youth unemployment rates rose as high as 27 per cent, while the adult unemployment rate never exceeded 5.4 per cent.
The reason for the difference, Crampton wrote, was an earlier Labour government’s decision to do away youth wage rates – an example of good intentions having negative unexpected consequences.
However, economic conditions are cyclical. Downturns are generally short-lived. Treasury seems to be asking successive cohorts of young people to carry the burden of significantly lower wages permanently to insure against future temporary downturns.
Economists also tell us that people will act in their best interests if they have incentives to do so. We could start by encouraging young people into the world of work by paying them a proper wage.