Thinking Carefully About Youth Rates

One of the biggest problems that economists face is explaining mean policy to people who are not economists. The introduction of youth rates – which allows employers to pay 16 to 19 year olds $11/hr as opposed to the $13.75/hr minimum wage is a very mean policy if you view the world through the oppressor/oppressed prism. But we have to think carefully about what youth rates mean for youth.

First, we have to remember that the wage rate is a price. According to the law of demand, when the price of a good or service falls, we demand more of it. The introduction of the youth rate for the first six months of employment will increase the rate of youth employment – employers will have an incentive to take a chance on 16 – 19 year olds that are currently “priced out” of the labour market.

But there are perverse incentives at play here too. The sorts of jobs that youth primarily go for are also being competed for by non-degree holders or single mums returning to the workforce. These people will lose out to kids still living at home. The number of people who are underemployed will increase because at the margin, a fast food worker or retail assistant will face additional competition from younger people whose productivity under-performance is outweighed by the 20% discount.

Because of economists being high on the autistic spectrum, they also ignore the psychological costs of youth rates. For a teenager who is fortunate enough to get a 6 month stint at the youth rate, and make the transition to full minimum wage, it is unlikely that they will be “grateful” or “thankful” for the opportunity. My generation and the next one are ridiculously entitled. They will resent the fact that they were underpaid for doing the same work and they will be ripe for the picking by unions and the left.

I can’t really blame them. Because of the high turnover rates of younger employees, and the 20% labour discount in the form of youth rates, employers who need low-skill workers will be able to invest more in capital goods and productivity improvements.

Funnily enough, this reduces the likelihood that low-skill jobs that could keep a teenager plugged into the workforce and signalling a work ethic to future employers will actually have low skill jobs in 5-10 years. This is because economists, again, over-estimate how good the market is at creating new jobs for zero marginal product workers. One of the reasons young people currently struggle to find work is that most of them are zero marginal product workers.

Think about the rise of self-service checkouts. Then think about how Z Energy is the only service station (to my recollection) that has forecourt attendants. For dessert, think about how fast food restaurants are primarily staffed by immigrants. Add all of these different things together and you’ll realise that the introduction of youth rates will hardly be a nirvana for youth unemployment and underemployment.

While firms figure out how to take advantage of “20% off for six months” it will be interesting to see what employment strategies they pursue. It will also be interesting to watch what happens in the realm of Employment Court. The 90 day trial period has generated some absolute zingers of bad bosses – for the lower end of the labour market, youth rates will be a good indication of what employers really think about young people.

As a university student with part-time employment, I am fortunate to not fall into the category of the labour market that will be affected by this. But for students who are over the age of 19, this will not help them get more hours at cafes, bars or retail stores when their younger colleagues are “on sale”. Hardly anyone working part-time under the age of 30 actually wants to be working part-time!

I do not believe that youth rates will work out because the maze of incentives faced by firms are completely opposite to what would assist young people to get into the labour market. Why do policies which make logical sense never work out in the real world?