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Britain's Minimum Wage Short-Changes Young Workers

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Tags Global EconomyCalculation and KnowledgePrices

07/21/2016

The national minimum wage introduced in 1999 by the Blair government was seen as one of the best policies to tackle exploitative work and the conditions of low pay. What better than to create a floor under which no one can fall? Well it seems that floor was not so stable, as young people have borne the brunt of this misguided policy. Effects as serious as rising youth unemployment, significant underemployment and a range of masking effects have led to a situation of under-saturated labour markets and the continual need for young adults to seek other activities such as university education and government-based training schemes, or simply drop out of the labour market altogether. It has also had the effect of de-skilling young people and making them reliant on the welfare state and low-skill, low-pay employment through Jobcentres and Jobseekers Allowance schemes.

British labour markets have never resembled anything close to a free market. Rather, they have been under the control of corporatist management networks and centralised trade unions. The national minimum wage is simply a continuation of this franchise, with control held by the Low Pay Commission (the LPC, a collection of large employers and trade unions) and varying governments with their misguided policies.

Growing Youth Unemployment 

These policy trends of the past 17 years have led to a situation of growing youth unemployment. It has been rising consistently since 2001, despite a growing economy. "In the last 12 years, the number of 18 to 24-year-olds who are out of work has risen by 78 per cent, while unemployment across all age groups has increased by 42 per cent."1 This trend of increasing youth unemployment became particularly prevalent during 2004, the height of the economic boom. During the Great Recession, these trends were obviously exacerbated, with the Low Pay Commission noting that the minimum wage was having an onerous effect on youth unemployment rates. However, even with the move away from negative growth in the UK around 2012, youth unemployment has not fallen below pre-recession levels but has only leveled out at around 16 percent.

This is due to the bite effect of the minimum wage, defined by the LPC as "the minimum wage as a proportion of median earnings." In the case of 1–20 year olds, the bite effect has been at around 65 percent of average earnings, well above the danger level of a 50 percent bite. Again, this has been a consistent trend since 2004, with the youth development rate (the minimum wage for 18–20 year olds) outstripping real average earnings. Overall, "there has been a continuous decline in their (18–21 year olds) employment rate since 2000, accompanied by a steady increase in their inactivity rate and, since 2004, a sharp rise in their unemployment rate. Overall, 554,000 or 32.2 per cent of 18–21 year olds not in FTE were unemployed or inactive, compared to 26.3 percent in 2000." It must be noted that these statistically significant trends have been during periods of high economic growth. Thus it cannot be explained away by lackluster economic performance, but must instead be due to a weakened labour market created by the minimum wage's negative effects.

This leads onto cycles of long-term unemployment amongst the young, and concentrates them within low-skill work with minimal prospects of being up-skilled. Instead, labour-labour substitution occurs where "employers will substitute away from less-skilled workers toward more-skilled workers after a minimum wage increase."  For SMEs, this leads to lower business growth and expansion, with FSB surveys showing that due to minimum wage increases small businesses have to cut back on employment levels. In effect, a monopsony market is created with undue levels of market power being given to established employers. Entrepreneurs and start-ups are unable to access higher-skilled employees, and are unable to up-skill low-skilled employees due to the costs of the minimum wage. Thus entry barrier effects are created which further the restrictions present in unfree labour markets.

As a general trend "higher minimum wages relative to median wages comes with higher youth unemployment by 0.4–1.2 percentage points" and "young people have, on average, been at a disadvantage in countries where the minimum wage is relatively high as a percentage of median pay." Young people are restricted in their access to employment opportunities and the ability to develop skills, and entrepreneurs are restricted in their access to willing labourers.

Growing Youth Underemployment

Another significant effect of the minimum wage, with similar consequences to those of youth unemployment, is underemployment amongst 18–21 year olds. "The effect is most evident among the youth group, where we find that the upratings reduced basic weekly hours by around 3–4 hours. However there is little evidence that this impact was greater during the recession than in the pre-recessionary period," showing that the overall effect of the minimum wage is consistent in periods of growth and recession. For 16–24 year olds, 1 in 4 are involuntarily in part-time work. This rises above 1 in 4 if you include those involuntarily in temporary work. Looking at one specific outgrowth of the underemployment phenomenon, zero-hours contracts, we see that 39 percent of 16–24 year olds desire to either work longer hours or attain a more secure contract. Even more perversely, evidence points to hours being decreased by employers due to minimum wage increases, with zero-hours contracts and temporary work being used more and more by monopsonistic firms. The bite effect has not only increased unemployment, it has also led to consistent levels of underemployment irrelevant of the wider economic trends.

It leads to a labour market whose competitiveness is stunted. Instead of a dynamic market of continual training for employees and large competitiveness between expanding and start-up firms, many firms aren't able to get up off the ground as labour costs are made artificially high by short-term government responses. Instead of a floor which no one can fall beneath, there is a ceiling which no one can rise above. Employees are placed within monopsonistic markets with price setting by established, monopolistic firms. There is a reason why the Confederation of British Industry enthusiastically supports the national minimum wage.

Labour markets become massively distorted and, as a result, unfree. This leads to many other negative effects, chief among them the NEET phenomenon. NEET stands for not in employment, education or training. Such a phenomenon has hit the young the hardest, with 11.6 percent of 17–19 year olds classified as NEET from 2011 to 2015. The recession's effect on labour markets, combined with the minimum wage's effect of weakening labour markets for young adults, has helped create and expand this phenomenon. Because of the incentives the minimum wage creates, young workers are disproportionately pushed into the position of having to accept government training schemes, artificially inflated higher education or simply leaving all of these to become inactive. Their skills and attributes are lost due to political intervention.

Employers Can No Longer Afford to Train Unskilled Workers

Training for unskilled and low-skilled employees is now being taken up by government programs rather than market firms. Government-led apprenticeship schemes have increased massively since 2010, pushing millions into training schools. However, unlike firm-led apprenticeships, many of these government schemes are based in schools and outside of a workplace. Instead of young labourers receiving on-the-job skills, they are instead given basic skills which aren't getting them employed. And because of the entry barriers created by the minimum wage (as well as many other perverse government interventions) they aren't starting their own businesses. Further, because of the limited labour market opportunities afforded to young people, they are increasingly going into university and higher education. The ONS has noted that "at the onset of the recession in 2008 there were further increases in young people choosing to remain in mainstream education, as the labour market started to weaken and limit job opportunities." Such a trend continued through 2012.

One Way to Help: Decentralise 

The UK's minimum wage has had largely negative effects on the UK's young adults, destroying their prospects on overly-regulated, restricted labour markets. They can neither become entrepreneurs or skilled workers as perverse incentives are created which monopolise firms and limit competition. However, the minimum wage has proved an extremely popular government policy despite its short and long term consequences. Intelligent policy reforms are then needed. One such proposal is the decentralisation of the minimum wage toward local areas, such as cities and counties in the UK. This then makes the minimum wage potentially more flexible in its responses to entrepreneurial activity and the needs of differently skilled regions and populations. As a short-term proposal, this can lead toward its eventual decentralisation into the hands of employers and employees, as all economic transactions should be.

The destructive consequences of the UK's minimum wage are there for the world to see. Only a political class as stupid and stultified as that in Westminster could seriously ignore it for as long as they have. From major youth unemployment and underemployment, to the creation of extremely unfree, non-flexible labour markets, the young people of the UK have been disadvantaged by short-term political strategies with long-term consequences.

  • 1. Worstall, T. "Message to the TUC: the minimum wage causes youth unemployment," 2012.

Chris Shaw is a master's-degree student at the University of Warwick, as well as being an independent researcher and political blogger. He describes himself as a libertarian anarchist. His blog is available here.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
Image source: Howard Lake www.flickr.com/photos/howardlake/
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