This paper analyses the impacts of the 2008 policy reform which replaced the youth minimum wage for 16-17 year-old workers, previously set at 80% of the adult minimum wage, with a new entrants minimum rate applicable for the first three months or 200 hours of employment, after which the adult minimum applies. This resulted in a 28% increase in the real value of the minimum wage faced by 16-17 year-old workers, making the minimum wage substantially binding for this age group. We estimate the impact of this reform on 16-17 year-olds employment and related labour market outcomes, by comparing the average outcomes of this group, before and after 2008, to those of 20-21 who were not directly affected by the reform. Although 18-19 year-olds were not directly affected by the 2008 policy change, they were potentially indirectly affected either by the adult minimum wage constraining their wages and/or by employment substitution effects from 16-17 year-olds; for this reason, we consider 2021 year-olds a potentially less-affected comparison group.
We first show that, by 2008, minimum wages had a substantial effect on the wages of 16-17 year-olds and, to a lesser extent, 18-19 year-olds. Although we find no evidence of adverse employment effects immediately following the policy change in 2008, we conclude that it lowered the employment rate of 16-17 year-olds by 3-6 percentage points in the subsequent two years. Most of this employment loss was borne by students: in fact, the employment rate among non-students increased, there is no evidence of an increase in the percentage of 16-17 year-olds who were unemployed, and the overall inactivity rate of this age-group decreased following 2008. We also find evidence of employment substitution towards 18-19 year-olds, again largely among students. In addition, relative to 20-21 year-olds, we estimate the average hours worked by 16-17 and 18-19 year-olds fell after 2008, as did their earnings and total incomes.
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, selfemployment, 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.
Key Results
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 4,5009,000 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.