Alasdair David Thompson ACA, PGDipPP, JP

For the past 11 years Alasdair has been CEO of the Employers & Manufacturers Association (Northern) and a member of the Business New Zealand Management Board.

Formerly his career has included service as Mayor of the Thames Coromandel District Council from 1989 to 1998, a member of the Auckland Regional Land Transport Committee 2002 – 2004, and a member of the Waikato Regional Council Land Transport Committee 1989 – 1998.

In 1990 he was awarded the Queen’s New Zealand Commemorative Medal.

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NZCPR Guest Forum
Alasdair Thompson
12 June 2011

Young people need youth rates of pay

Six years ago when the Labour government was planning to abolish minimum pay rates for youth, our organization, the Employers and Manufacturers Association, said the move was certain to hurt the very people it was intended to help. So it has proved.

In 2005 EMA said if the Bill introduced to Parliament on February 22^nd became law, the unemployment rate then at 12 per cent for 15 to 19 year olds, was very likely to rise. Regrettably our prediction was way off beam. Youth rates of unemployment have more than doubled to 27.5 per cent of those unemployed.

They are still rising; over the past year the youth unemployment rate went up 2.3 per cent from 25.2 per cent in 2010, at a time when unemployment overall declined slightly.

This rate of unemployment for young people represents a terrible risk for the future of all of us. Its coming at a time of life for these young people when they need to establish regular work habits and learn the basic skills needed to hold down a job with prospects.

When young people leave school they find it hard enough to get started; earning a minimum youth rate often got a teenager’s career underway.

Besides, for an employer with a choice between an experienced worker and an inexperienced worker it makes sense for them to take on the experienced worker every time.

EMA surveyed its members on the issue in late 2004 to find 14 per cent of employers were paying youth rates. Some of them said they would not hire school leavers at all if youth rates were unavailable; they would look for older workers instead.

They said this because their experience of employing 16 and 17 year olds who have little or no regular work experience, is they often need a lot of supervision, and that adds to the costs of any business. Then, as well as the lack of experience and skills, there’s their teenage issues.

All in all unless there is some sort of incentive for an employer to take on them on, young people will continue to be over represented in the unemployment numbers.

The statistical evidence that employers’ fears are well grounded is strong.

In her 2006 PhD thesis Gail Pacheco’s independent research studied the impact of removing the minimum wage. She analysed huge amounts of data drawn from Statistics New Zealand’s Household Labour Force Survey and Income Survey from 1986 to 2004 to find the impact of raising the minimum wage would fall most adversely on 15- 19 year olds. Overall she calculated that job opportunities for all teenagers would reduce by nearly 20 per cent if youth rates were abolished.

Gail Pacheco study of those earning the minimum wage was by looking at their demographic characteristics to see how employment and/or unemployment impacts vary when the minimum wage applies to them. The results are clear.

Her report says when the minimum wage is allowed to rise the higher ‘minimum’ wage “becomes significant, negative and usually large in magnitude.”

The study not only confirmed the value of youth rates, but also detailed what would happen if there was a large increase in the minimum wage. Labour is saying they will increase it to 15% if elected.

The most adversely affected groups in the study were 16-19 year olds. It reported that a 10% rise in the real minimum wage resulted in a 19.3% and 10.2% cumulative fall in the employment propensity for 16-17 and 18-19 year olds respectively.

Other findings from the study showed equally grave concerns, for example Maori stand out as a subgroup most adversely affected by a higher minimum wage. Maoris earning minimum wages experience significant falls in their employment propensity along with drop in their usual total weekly hours worked. Specifically, a 10% rise in the real minimum wage results in Maoris on the minimum wage suffering from a 15.8% point drop in employment propensity.

Where even small positive impacts on employment propensity were found, minimum wage workers were still usually found to experience a significant decline in their usual total weekly hours worked.

In addition, a higher minimum wage reduces the labour force participation rate of those aged 16-29 years on the minimum wage.

To top all this off, the research concluded that individuals that leave the labour force aged between 16 and 19 years tend to become more inactive, neither working nor studying.

When the recession arrived in 2008 the trends identified in the Pacheco research were exacerbated. Their negative impacts compounded.

Now its scarcely surprising that employers agree youth pay rates should be re-introduced.

The abolition of them in the first place was a fair weather idea. Now it’s pretty obvious why we had them in the first place.