Youth wages unfair

All parties supporting the governing coalition campaigned to abolish youth pay rates before the election. Now that he is in power and has the Treasury whispering in his ear, Workplace Relations Minister Iain Lees-Galloway is sounding more equivocal.

‘‘It is something that we will include in our policy development and we will work with our government partners on,’’ he says.

Not surprisingly, Treasury is 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 minimum wage is due to rise from $15.75 to $16.50 an hour in April, meaning that young workers who can now legally be employed at $12.60 an hour will get a pay rise to $13.20.

A teenager in his or her first six months of continuous employment, who has been on certain benefits, or who is undertaking industry training, can be more than $3 an hour cheaper for employers to hire.

The justification for youth rates is that they give employers an incentive to hire young workers, particularly if the latter need to learn on the job. This supposedly gives people 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 fast-food 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 multinational, companies that 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.

It says 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 with 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.

The youth rate lets employers take on cheaper workers, says Treasury.