Executive Summary

Key findings

The study found that the introduction of the New Entrants (NE) minimum wage was largely ignored by businesses and that most 16 and 17 year old workers were moved on to the adult minimum wage. Combined with a 75 cent increase in the adult minimum wage at the same time, this led to a 28.2 percent increase in the effective minimum wage for 16 and 17 year old workers.

This research found that this minimum wage increase accounted for approximately 20–40 percent of the fall in the proportion of 16 and 17 year olds in employment by 2010. Overall, this implies that the introduction of the NE minimum led to a loss of 4,500-9,000 jobs for 16 and 17 year olds (employment of 16 and 17 year olds fell from 61,400 to 39,500 between 2007 and 2010).

The introduction of the NE minimum wage did not have a significant impact on unemployment of 16 and 17 year olds, because employment losses occurred entirely among students who were combining study with part-time employment.

Introduction

The study examined the impact of the 2008 youth minimum wage reform that replaced the youth minimum wage for 16 and 17 year old workers (set at 80 percent of the adult minimum wage) with a New Entrants (NE) minimum wage (also set at 80 percent of the adult minimum) applicable for the first three months or 200 hours of employment, after which the adult minimum applies.

The repealing of the youth minimum wage in 2008 had a significant impact on the wage distribution of 16 and 17 year olds. In 2007, approximately 70 percent of 16 and 17 year olds reported hourly wages below the adult minimum wage. After the introduction of the NE minimum wage, around 20 percent of 16 and 17 year olds reported hourly wages below the adult minimum wage and 40 percent reported receiving the adult minimum wage.

The NE minimum wage was largely ignored by businesses and most 16 and 17 year old workers were moved on to the adult minimum wage, which resulted in an increase in the effective minimum wage of 28.2 percent (adjusting for inflation) for this group. This led to a rise in average hourly earnings of 8.5 percent for this group. The adult minimum wage, in comparison, only increased by 2.5 percent in 2008.

Research methodology

The study used survey data from the quarterly Household Labour Force Survey (HLFS), and the annual June-quarter Income Supplement to the HLFS, also known as the NZ Income Survey (NZIS).

The focus of the analysis is on the impact of the 2008 youth minimum wage policy change on the employment and other labour market outcomes of 16 and 17 year olds. The HLFS is used to measure wage and salary employment, weekly hours worked, self-employment, studying, unemployment, and inactivity and the NZIS provides measures of hourly wages, receipt of non-student benefits, weekly earnings, and weekly total income.

The analysis estimates the impact of the 2008 minimum wage reform on the labour market outcomes of 16 and 17 year olds by comparing their outcomes, before and after 2008, to a comparison group of 20 and 21 year olds. The comparison group was selected because they were not directly affected by the 2008 reform and are considered to have been less-affected by the policy change than 18 and 19 year olds.

While 18 and 19 year olds were not directly affected by the 2008 reform, it is possible they were indirectly affected by the adult minimum wage constraining their wages or by employers hiring them instead of 16 and 17 year olds.

A regression model is used to control for other factors that may be related to changes in labour market outcomes, such as differences in outcomes that exist between different age groups and because of differences in the demographic and socio-economic characteristics of individuals. The model also controls of changes in outcomes caused by seasonal changes in the labour market and the impact of a growing or declining economy, and allows these effects to differ by age.

Labour market impacts of the 2008 youth minimum wage reform

The research found that the minimum wage increase lowered the proportion of 16 and 17 year olds in employment by between 3 and 6 percentage points in the subsequent two years (there was no impact on employment immediately following the policy change), which accounted for between 20 and 40 percent of the fall in the proportion of 16 and 17 year olds in work over this period (a loss of 4,500–9,000 jobs). The remaining 60 to 80 percent of the fall in employment can be attributed to the deteriorating economic conditions.

The introduction of the NE minimum wage appears to have impacted primarily on the employment prospects of 16 and 17 year olds who were combining study with part-time employment (80 percent of 16 and 17 year olds are in part-time jobs).

The finding that the minimum wage increase adversely affected the employment of students is likely to explain why the study did not find a strong negative impact on unemployment. The study finds some evidence that the proportion of 16 and 17 year olds unemployed increased in 2009 by 1.4–2.6 percentage points because of the minimum wage increase, but the negative impact on unemployment was not evident a year later in 2010.

The NE minimum wage appears to have encouraged more 16 and 17 year olds to stay at school or continue their education (this effect is in addition to an increase in studying due to the economic downturn). This may explain why the impact on unemployment had disappeared by 2010 and why the minimum wage increase was associated with lowering inactivity among 16 and 17 year olds. The research also found that, relative to 20 and 21 year-olds, average hours worked by 16 and 17, and 18 and 19 year olds fell after 2008, as did their earnings and total incomes.

Comparison with the 2001 youth minimum wage reform

Compared with the 2001 youth minimum wage reform, repealing the youth minimum wage in 2008 resulted in a smaller increase in the effective minimum wage for 16 and 17 year olds (28.2 percent, compared with 41 percent in 2001/02), but had a larger negative impact on their employment prospects.

The study of the 2001 reform found no evidence of an adverse effect on youth employment immediately following the reform, but some weak evidence of employment loss two years later in 2003. Changes in hourly wages, hours, and employment led to significant increases in earnings from work and total income for teenagers relative to young adults.

The stronger fall in employment in 2008 can be attributed to a larger proportion of 16 and 17 year olds being impacted by the minimum wage increase (60–70 percent, compared with 10–20 percent in 2001) and that the 2008 reform occurred immediately prior to a downturn in the economy. The current analysis cannot judge the relative importance of these two effects. In addition, the 2008 reform moved 16 and 17 year olds onto the same minimum wage as adults, which could have encouraged employers to replace them with older more mature workers.

The 2001 reform study did find evidence of a decline in educational enrolment and an increase in unemployment, inactivity, and benefit receipt, which suggests that while the 2001 reform increased the labour supply of teenagers, this was not matched by as large an increase in the supply of jobs from employers.

 

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