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Unemployment: real action, not vague promises needed

Written By: - Date published: 4:41 pm, February 6th, 2010 - 43 comments
Categories: education, minimum wage, unemployment - Tags:

The Herald reports:

“[Key] also raised the 15 per cent Maori unemployment rate, saying improving education outcomes for Maori children would help address that.”

Improved education sounds good but:

1) how is Key going to actually lift Maori educational achievement? Not by cutting millions from the education budget like he did last year. Not by national standards – as Labour’s Kelvin Davis, a former teacher and principal, says ‘repeatedly measuring a pig doesn’t make it fatter. Talk is cheap, I want to see some action or even details of what the action will be.

2) education is not responsible for the Maori unemployment rate sitting at 15.4%. A year and a half ago, it was 8.1%. An economic crisis and a do nothing government are responsible for the near doubling of Maori unemployment, not education standards.

3) better education is great but the pay-offs are decades in the future. We obviously should be investing in that future but we also need government job creation to bring down unemployment now.

On a related note, National Party pollster David Farrar has played the ‘blame the minimum wage’ card to try to excuse the shocking level of unemployment. He claims that the abolishment of the lower youth minimum wage in 2008 is somehow responsible for higher unemployment. His ‘evidence’ is that gap between 15-19 year olds unemployment and 20-24 year olds has grown. Of course, the real reason it has grown is that 15-19 year olds always have a higher unemployment rate and, so, as general unemployment increases you would expect there’s to increase faster. If you look at the ratio of 15-19 unemployment to 20-24 unemployment, it’s pretty steady.

We don’t need to blame the minimum wage to explain the growing rate of 15-19 year old unemployment. Groups with normally higher unemployment always get hit the hardest by recession. Is Farrar going to blame the abolishment of youth rates for the greater gap between Maori unemployment and Pakeha unemployment too? Because you could using exactly the same argument he made for 15-19 year old unemployment.

The reality is, the Right hates the minimum wage because it means businesses have to give the working poor a better wage than they otherwise could get away with paying, and that money comes out of profits and executives’ salaries.

43 comments on “Unemployment: real action, not vague promises needed ”

  1. Offsetting Behaviour discusses the youth unemployment stats, see here.

    • Marty G 1.1

      same idiot explanation that Farrar is selling.

      Come on Paul. You at least are smarter than this. You know that looking at the absolute gap is pointless, you need to look at the ratio. And the ratio kicks a hole in Farrar’s crappy excuse to rant against the minimum wage a mile wide.

  2. I have been wondering about quality of labour, rather than price, as a cause of the particular impact on youth unemployment (if there has to be an explanation other than youth rates’ movement). Employers have been facing serious skill shortages for a decade and more. Going back to the ‘hoarding’ debate, it is plausible that they are holding on to skilled labour, dispensing with younger (less-skilled?) labour and not making space for new entrants. Established behaviours in previous downturns, but perhaps exacerbated in this.

  3. Robert Winter.

    I think this is consistent with what Matt Nolan’s was saying in his comment at Offsetting Behaviour. “If the justification for labour hording was the fact that hiring employees is like an investment, then it is likely that older and more experienced employees would be kept on while younger people are let go.” The older more experienced workers are also the more skilled workers. However I think I would argue with Eric’s response to Matt, “it would have to be a heck of a lot of hoarding as compared to the prior recession to drive the difference.”

  4. Some anecdotal information bears out the argument about retaining skilled labour, and collective shifts in employer behaviour are plausible. I don’t buy the argument about partucular legislative shifts and their impact on youth unemployment. I hear ideological noise.

    • Firstly it doesn’t have to be either or, you could well have both effects. Second, from what we know from the empirical studies, despite the fact they use overseas data, we would expect to see increased unemployment as a result of the legislative changes.

  5. Rex Widerstrom 5

    We obviously should be investing in that future but we also need government job creation to bring down unemployment now.

    Even though it may seem that way, Marty, I’m not shooting holes in what you’re saying… I realise this is just a blog post (and one which is better researched than most, which is why I always enjoy your stuff).

    But “investing in the future” is the kind of motherhood and apple pie statement always made by those in the political sphere when talking about unemployment. In theory, we’ve been doing that since at least the 80s, when it became a catchphrase, under multiple Labour, National and mixed breed governments.

    And “government job creation” (which can be genuinely useful or can be Depression-era “dig a hole and fill it in again” make-work) seems a hugely ineffective way of addressing the problem (though I’m not denying, as I said, that some of it can be of genuine benefit to the country and of course every such job is of benefit to the employee).

    So what else is there? Surely we’ve got answers beyond a long-term vague goal (“make them all smarter”) and a short-term mop-up (“let’s rebirth the Ministry of Works”)?

    [I address this rhetorical enquiry, of course, to the greater Standard community of thinkers, not just Marty]

    • Ari 5.1

      Just a question on government job creation- I assume you’re talking about jobs in the public service? Because the government certainly can be very effective in creating policy that builds employment in the private sector.

      Trying to fight unemployment just by expanding the public service would certainly be stupid, but I’m not sure anyone would seriously suggest that.

      • Rex Widerstrom 5.1.1

        In agree totally. Government policy that incentivises private sector job creation is one of those “other” options I’m hoping to garner some thoughts on… I’m not sure whether Marty was including that in his definition of “government job creation” or not.

  6. Jared 6

    How many employers actively pay minimum wage? every job ive worked at has been above minimum wage and reflective of my experience/training. If someone was on minimum wage it wasn’t long until they moved up the pay scale.

  7. I see Offsetting Behaviour has taken another look at the issue, see here, and argues against just the ratio being important.

    • BLiP 7.1

      Economists and their conclusions, eh?

      • Paul Walker 7.1.1

        If you disagree with what he has done, show what is wrong with it.

        • BLiP 7.1.1.1

          Nah. Some economist will stick his beady-eye head from out the darkened interior of his ivory tower shouting “eureka” in a couple of weeks claiming the opposite. I guess that’s why its an Art’s subject. Let me know when there’s a consensus.

          • Paul Walker 7.1.1.1.1

            Actually economics is an arts, commerce and science subject here. And yes there is a consensus, an increase in the minimum will reduce employment of those groups affected by the minimum wage. Greg Mankiw has a list of things that economists agree on in chapter 2 of his first year textbook. Number 12 on this list is “A minimum wage increases unemployment among young and unskilled workers’ and 79% of economists agree. So this result is widely accepted by economists.

            • Bright Red 7.1.1.1.1.1

              Paul. Your concensus fell apart over the last 30 years. http://en.wikipedia.org/wiki/Minimum_wage#Surveys_of_economists Over quarter of economists disagree with your claim and less than 50% fully agree.

              Maybe Mankiw needs to update or you need a new edition.

              • Actually thing haven’t changed that much. Your article opens by saying

                “According to a 1978 article in the American Economic Review, 90 percent of the economists surveyed agreed that the minimum wage increases unemployment among low-skilled workers”

                but then adds

                A 2000 survey by Dan Fuller and Doris Geide-Stevenson reports that of a sample of 308 American Economic Association economists, 45.6% fully agreed with the statement, “a minimum wage increases unemployment among young and unskilled workers”, 27.9% agreed with provisos, and 26.5% disagreed. The authors of this study also reweighted data from a 1990 sample to show that at that time 62.4% of academic economists agreed with the statement above, while 19.5% agreed with provisos and 17.5% disagreed. They state that the reduction on consensus on this question is “likely” due to the Card and Krueger research and subsequent debate.

                So the 90% is not comparable to the later figures. Also note that in the 2000 survey 73.5% agreed, fully or with provisos, with the statement. The 1990 figure is 82% so the drop isn’t as large as you seem to want to imply. The Mankiw figure is 79% which is not out of line with these two figures.

                The interesting bit in the article you refer to are these bits,

                “Surveys of labor economists have found a sharp split on the minimum wage. Fuchs et al. (1998) polled labor economists at the top 40 research universities in the United States on a variety of questions in the summer of 1996. Their 65 respondents split exactly 50-50 when asked if the minimum wage should be increased. They argued that the different policy views were not related to views on whether raising the minimum wage would reduce teen employment (the median economist said there would be a reduction of 1%), but on value differences such as income redistribution.”

                and

                “In 2007, Daniel B. Klein and Stewart Dompe conducted a non-anonymous survey of supporters of the minimum wage who had signed the “Raise the Minimum Wage” statement published by the Economic Policy Institute. They found that a majority signed on the grounds that it transferred income from employers to workers, or equalized bargaining power between them in the labor market.”

                So support for the minimum wage is not being driven by the disemployment effects, which is the issue here, but by income distribution effects.

              • Pascal's bookie

                Yep. So it looks like what I’ve been saying about the decrease in unemployment effects being a not very good argument against minimum wages, is an idea shared by about half of professional economists.

                But to be pedantic, agreeing with provisos, is not agreeing.

              • Eddie

                pretty weak ‘consensus’ no matter how you cut it, and getting weaker.

                Man, imagine if the Right so unquestioningly accepted the view of 99%+ of climatologists as they do 46% of economists (plus some more with provisos)

            • BLiP 7.1.1.1.1.2

              Eeeek!!

              I didn’t realise the RWNJ take over of our education was so complete that ideology was printed in first year textbooks as fact. Its been many moons since I was scuttling about the lecture halls but, let me tell you, in my day, the student body wouldn’t have put up with that bland statement without supporting documentation – even in the first year. What on Earth is in store for us all if the current crop are just swallowing it all up?

              Mankiw has a bad habit of making vapid comments when there’s no peer review. His contribution to the measurement of unemployment by conflating service and manufacturing, thus obscuring reality, doesn’t fill me with great confidence in his ability with regards to obtaining an accurate measure. His new-Keynes buzz and “stickyness” looks interesting, though. Alas for him, however, his tenure as Dubya’s Chairman of Economic Advisers in the lead up to the 2008 meltdown cements his position as the first economist against the wall after we’ve dealt to the lawyers.

              But, thanks, for responding. I’ll certainly have a look at that 79% figure you’ve provided – for economists that is high; but, 79% of which economists.

              🙂

        • BLiP 7.1.1.2

          One tiny thought – what percentage of the “Youth” as defined by your boffin is Maori/PI and, given that it is a high percentage, isn’t this little statistical shell-game just a reflection of the fact that a higher percentage of the unemployed come from that ethnic classification?

          • Paul Walker 7.1.1.2.1

            But the unemployment rate for Maori/PI is greater in all age groups. And even if the result is driven by that group it doesn’t make the result wrong, it may just explain that result. An increase in the minimum wage is particularly bad for Maori/PI.

            Eric has updated his estimates here.

            • BLiP 7.1.1.2.1.1

              The ratio is much higher in your boffin’s cohort than others – that indicates to me that there are other, more significant, factors at play in relation to the impact of a minimum wage tweak.

              Its probably just the hormones but some research I have seen indicates that the feeling of alienation amongst those on the margins of society are most acute during the late-teens early twenties. Leaving school feeling like failures but able to survive thanks to the largess of their own community and a meagre dole, significant numbers of Maori and PI are not interested in even seeking employment. There’s also now a dearth of suitable interesting opportunities – apprenticeships, support for artistic endeavours etc – who, really, is working at McDonalds because they want to?

              In short, I would look to a combination of sociological as well as economic factors rather than a single contributor. Yes, I know, more Arts but . . .

              Still, slice and dice it anyway you like, and perhaps I am an economic version of the CCD’s, I still don’t buy it. Well, not until I’ve checked out your consensus information anyway.

    • Bright Red 7.2

      No, Paul. All offsetting writes is:

      “Some folks reckon the better measure is the ratio: the youth unemployment rate will always be some multiple of the adult rate. If you measure the ratio of the two over time, the current ratio is high, but there isn’t an obvious break point in 2008.”

      Of course, Marty didn’t argue that “the youth unemployment rate will always be some multiple of the adult rate” – he compared the 20-24 and 15-19 rates like Farrar did and never said the ratio can’t vary. Offsetting doesn’t show why the realtively stable ratio of unemployment rates isn’t a complete explanation in itself, he just finds some number tricks to play that make a jump appear in 2008 (and still can’t show how that the cause is the end of youth rates).

      He claims there is a big jump in ‘residuals’ but this is the key part:

      “residuals are the difference between the model’s expected youth unemployment rate and the actual youth unemployment rate. A positive residual means that youth unemployment was higher than the model predicted; negative means it was lower.”

      It is all dependent on his model making sense. He hasn’t explained why his model is the right one to choose, whereas ratios makes obvious sense. So I suspect the problem is with his model.

      • Paul Walker 7.2.1

        What he writes is,

        “We’ve ruled out the “it’s just ratios” argument – there is a constant term in there; we’ve also ruled out that it’s just a level shift because the coefficient is significantly greater than 1.”

        Thus as I said he rules out the just ratio argument. He also rules out the just level shift effect as well.

        “”residuals are the difference between the model’s expected youth unemployment rate and the actual youth unemployment rate. A positive residual means that youth unemployment was higher than the model predicted; negative means it was lower.’

        It is all dependent on his model making sense. He hasn’t explained why his model is the right one to choose, whereas ratios makes obvious sense. So I suspect the problem is with his model.”

        He also tried a few different variations allowing the constant and the slope to shift for high and for low levels of adult unemployment. But none of that made any substantial difference. The point about the jump in the residual is just how big it is. It is along way from what the model predicts, which is troubling.

        But as Eric also writes,

        “This remains very much a first cut: something I may someday assign as an honours project for more thorough sorting out. The econometrics here are very simplistic and do nothing to account for differences in labour force participation rates or the obvious problem of serial correlation in the time series data. But the simple model is still pretty telling. If we allow youth unemployment rates to vary both as a level shift above the adult rate and as a multiple of the adult rate, which is what we’re doing when we run the simple regression with a constant term, we still have a jump in the current youth unemployment rate that is well above that seen in prior recessions.”

        As I said to BLiP above,

        “If you disagree with what he has done, show what is wrong with it.”

        That’s how our understanding develops. Also check out Eric’s new estimates here.

        • Bright Red 7.2.1.1

          Sorry, missed that. But it’s a strawman, he claims the ratios arguement is based on all adult, whereas the discussion here and on kiwiblog has been in comparison to 20-24 year olds.

          I don’t know enough econometrics to be able to argue with the details of his claims but I have to say it looks pretty bollocks when he is doing ‘implied unemployment rates’ and such stuff. I want to see an explanation of the real world numbers. And the ratios argument seems to do that – youth unemployment remains a rough ratio of 20-24 unemployment throughout the period there is data for.

          Maybe if offsetting would actually share the model he is made up people with the maths skills could examine it and its assumptions.

  8. BLiP 8

    There is no broad consensus amongst economists as to whether or not changes to the minimum wage impact on unemployment. The “non-proviso” split is pretty much 50/50 Keynesian vs Monetarist, and even then there are significant differences within those two covens. Accordingly, until such time as there is a consensus, take what they have to say as partisan and only a minor part of the big picture in relation to the minimum wage issue.

    Instead, lets keep the focus on equity – no, not “the difference between the market value of a property and the claims held against it” but “the state, quality, or ideal of being just, impartial, and fair”.

    In my rummage around the net, I came across this . . . fascinating!

    A steady state economy is a positive alternative to the unworkable pursuit of endless economic growth. Economic growth is simply an increase in the production and consumption of goods and services. It is a means to some end, not an end in and of itself. A steady state economy provides a better means for current and future generations to achieve a high quality of life without undermining the life-support systems of the planet. The concept of a steady state economy is scientifically sound, as its framework and policies are informed by the most fundamental principles of physics and ecology.

  9. “There is no broad consensus amongst economists as to whether or not changes to the minimum wage impact on unemployment. The “non-proviso’ split is pretty much 50/50 Keynesian vs Monetarist, and even then there are significant differences within those two covens. Accordingly, until such time as there is a consensus, take what they have to say as partisan and only a minor part of the big picture in relation to the minimum wage issue.”

    How exactly did you come up this the Keynesain/Monetarist split? Who is in which group? Most economists today would not think in these terms. In particular labour economists are microeconomists for whom the macro groupings of Keynesain and Monetarist are meaningless.

    As to the consensus what does the empirical data tell us? Consider this abstract from a survey of the empirical studies that Mary G has referred us to previously:

    “We review the burgeoning literature on the employment effects of minimum wages in the United States and in other countries that was spurred by the new minimum wage research beginning in the early 1990s. Our review indicates that there is a wide range of existing estimates and, accordingly, a lack of consensus about the overall effects on low-wage employment of an increase in the minimum wage. However, the oft-stated assertion that recent research fails to support the traditional view that the minimum wage reduces the employment of low-wage workers is clearly incorrect. A sizable majority of the studies surveyed in this monograph give a relatively consistent (although not always statistically significant) indication of negative employment effects of minimum wages. In addition, among the papers we view as providing the most credible evidence, almost all point to negative employment effects, both for the United States as well as for many other countries. Two other important conclusions emerge from our review. First, we see very few if any studies that provide convincing evidence of positive employment effects of minimum wages, especially from those studies that focus on the broader groups (rather than a narrow industry) for which the competitive model predicts disemployment effects. Second, the studies that focus on the least-skilled groups provide relatively overwhelming evidence of stronger disemployment effects for these groups.’

    • BLiP 9.1

      Okay – I’ll play your silly game:

      Here’s Professor Bill Mitchell

      But in their recently published annual Employment Outlook, the OECD recants on their previous research findings and concludes that:

      . . . snip . . .

      – The level of the minimum wage does not impact on unemployment; and

      . . . snip . . .

      These conclusions (among others) withdraw the empirical authority used to justify the deregulation agenda of the Australian Government.

      It is now clear from research presented to the Conference that the Government’s policy position will not solve Australia’s woeful labour underutilisation problem and will entrench an underclass comprising around 20 per cent of our population.

      Your turn.

      • Paul Walker 9.1.1

        As I have pointed out many times changes in the minimum wage will have little effort on the overall unemployment rate. Notice from the abstract that Marty G pointed us to it says,

        “However, the oft-stated assertion that recent research fails to support the traditional view that the minimum wage reduces the employment of low-wage workers is clearly incorrect.”

        See the low-wage workers bit. Thus to say

        “The level of the minimum wage does not impact on unemployment”

        is to say nothing that most economists would not argue with.

        But it is difficult to say more since no reference is given to the OECD publication. I do note that the reference you give is from 2006 and refers to a “recently published annual Employment Outlook, the OECD”. Well from their 2003 Employment Outlook the OECD says

        “But non-employment is often due to the presence of barriers to labour market participation on both sides of the market. High minimum wages and regulations setting minimum quality thresholds for jobs have the potential to limit employment opportunities, especially for certain groups.”

        Don’t know if 2003 counts as recent or not. The 2006 Outlook says

        “Reassess the role of statutory minimum wages and either switch to better targeted redistributive instruments or minimise their adverse employment effects by introducing sub-minima differentiated by age or region and/or indexing them to prices instead of average earnings.”

        The 2006 Outlook also says,

        “Simple economic reasoning indicates that a statutory minimum wage or labour costs set at too high a level will become a barrier to employment for low-productivity workers, reducing national output while also frustrating the equity goals motivating these measures. However, pinning down the size of the employment losses that result from minimum wages has proven to be difficult and there is considerable uncertainty concerning how many jobs might be lost due to minimum wages set at the levels actually observed indifferent countries. Indeed, the empirical evidence concerning a negative impact of minimum wages on employment is mixed, with some studies finding evidence of significant effects, particularly for youth (Neumark and Wascher, 1999; OECD, 1998, Chapter 2), while others do not detect any effects (Card and Krueger, 1995; Dolado et al., 1996; Elmeskov et al., 1998). In Bassanini and Duval (2006), no significant impact of the minimum wage on the aggregate unemployment rate is found. However, some evidence does emerge that higher minimum wages may lower the employment rate of youth (i.e. the 20-24 age group).”

        This looks very similar to the abstract I quoted before. Note the Bassanini and Duval (2006) comment: “no significant impact of the minimum wage on the aggregate unemployment rate is found. However, some evidence does emerge that higher minimum wages may lower the employment rate of youth (i.e. the 20-24 age group).”

        I don’t see much recanting going on in the OECD quotes.

    • BLiP 9.2

      No . . . don’t wanna play any more? Can’t say as I blame you.

      Here’s Roberto Rigobon of the Massachusetts Institute of Technology:

      The aim of minimum wage increases is to change the shape of the wage distribution without destroying jobs. While it is well established in the international literature that the minimum wage compresses the wage distribution, there is no consensus on the direction and size of the effect on employment.

      • kiwiteen123 9.2.1

        May I suggest that Paul, unlike both of us (:P), may have some sort of life away from The Standard.

      • Paul Walker 9.2.2

        This paper says,

        “The total effect is no more than −0.05 percent in the long run, and it
        appears to be dominated by the hours effect. In the short run, a 10 percent
        increase in the minimum wage appears to reduce total hours worked by no
        more than 0.16 percent, which decomposes into a 0.14 percent decrease in
        hours per worker, and a 0.02 percent decrease in jobs. Nonetheless, the last
        two estimates are not statistically different from zero.”

        Which means that for Brazil the effect on overall unemployment isn’t much. But we would expect that. So I don’t see your point.

        • BLiP 9.2.2.1

          Economists the world over can’t agree on the effect a change in the minimum wage has on employment.

          • Paul Walker 9.2.2.1.1

            My point that they can. But the real question is What do you mean by the effect a change in the minimum wage has on employment. Whose employment?

    • BLiP 9.3

      Okay – last one.

      Here’s Liana Fox of the Economic Policy Institute:

      There is a growing view among economists that the minimum wage offers substantial benefits to low-wage workers without negative effect. Although there are still dissenters, the best recent research has shown that the job loss reported in earlier analyses does not, in fact, occur when the minimum wage is increased. There is little question that the overall impact of a minimum wage is positive, as the following facts make clear:

  10. prism 10

    Education is presented as a panacea to upward mobility, better living conditions (and increased wealth and trade for nations).
    It certainly is important but also there is something that’s been named education inflation. Employers often use qualifications as a high jump bar to sort applicants so they don’t have to try and assess them all as to suitability for the job. That can rebound the other way – you can be assessed as being too highly qualified thank you, good luck and goodbye.
    Politicians can use it as macro policy which sounds good as a generalised statement of their nation-building, while the true efficacy of it on an individual basis is often not measured, just reported as separate carefully chosen anecdotes.
    One of the indicators of youth employability is what the parents do. Well-off or motivated parents make a difference, they may even provide an apprenticeship in their own business. And professionals and tradespeople’s children often follow their parents fields.

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