Professor Richard Croucher, Middlesex University

Professor Geoff White, University of Greenwich

Minimum Wages and YoungWorkers The context

The arguments

Minimum wage arrangements

The research

Key findings

Context UK Minimum Wage introduced in 1999.

Two levels – adult and ‘development rate’ for thoseaged 18 – 21 (reduced to 20 in 2010).

A further lower rate introduced for 16/17 year olds in2004.

An Apprentice minimum introduced in 2010.

Low Pay Commission concern about the effects ofminimum wage upon young people’s employment,training and participation in education.

ContextCurrent hourly UK Minimum Wage rates are as follows (as at 1

October 2011): Adults (21 and above) £6.08 Development Rate (18-20) £4.98 16/17 year olds £3.68 Apprentices* £2.60

The development rate and 16/17 rate will be frozen from 1October 2012. The apprentice rate will increase to £2.65.

* The Apprentice Minimum Wage applies to those apprenticesunder the age of 19 and those aged 19 and over in the first 12months of their apprenticeship.

Context While statutory minimum wages existed in 17 OECD

countries in 1998, there were substantial differencesin the way they were set and operated (OECD1998).

The main differences between the systems indifferent countries concern: the level of the minimumrelative to average wages; the extent ofdifferentiation by age or region; mechanisms forindexation; and the roles of governments and thesocial partners in setting them.

The arguments Governments in the developed world have placed

strong emphasis upon the training and education ofyoung people.

Concerns that that application of the minimum wageto young people may have negative effects – upontheir employment opportunities, investment in theirtraining and on their participation in further andhigher education.

Employment effects The major concern about the receipt of minimum

wages by young people is that this can deteremployers from employing such young workers.

Neumark and Wascher (2008) postulate thatminimum wage increases disproportionately reduceemployment opportunities for teenagers who havealready dropped out of school.

This in turn leads to the ‘pricing out’ of youngworkers in competition for jobs with older workers.

Employment Effects Contrary argument is that employers prefer young

workers because they are more flexible andmalleable to employer wishes. They can also assistbrand image and relations with young customers(e.g. in retail).

But looking at the direct employment effects is onlyone concern.

In-work training opportunities and the effect ofparticipation in education are also important.

In-Work Training Hashimoto (1982) identified two ways in which the

minimum wage is likely to affect on-the-job training:

1. Given the negative effect on employment, theminimum wage will prevent workers from finding ajob and from receiving any training.

2. For those who find employment, the opportunitiesof receiving training decrease because the firmcannot offset training costs by offering a lowerwage.

In-Work Training Contrary arguments have been put by those who argue

that neo-classical assumptions about labour markets asperfectly competitive are inappropriate.

Minimum wages may therefore actually increase theamount of training of all types that employers areprepared to undertake, including general training.

Where labour has a specified minimum cost, this mayraise employers’ propensity to invest in them, sinceturnover may be reduced because labour is more easilyretained. In short, the level of ‘employer-employeeinterdependence’ ,as Whitley (1999) describes it, isincreased.

Participation in Education An argument exists that minimum wages, if

sufficiently attractive, can pull school students out ofeducation.

Leighton and Mincer (1981) argued, however, thatthe effect of the minimum wage on schooling can bepositive if additional investment in educationincreases the workers’ returns above the minimumwage.

However, the immediate attraction of higher wagescould induce young workers to leave education andenter the labour market.

Minimum Wage Arrangements In general, the incidence of minimum wage work in

all countries studied in this research is highestamong youth, women and part-time workers.

These employees also tend to be concentrated insimilar industries and in smaller rather than largeremploying organisations.

While young workers are disproportionately affected,significant numbers of older workers are alsocovered.

Minimum Wage Arrangements There is some variation in the age at which compulsory

school education ends – from as low as 14 in Portugal to18 in Belgium and the Netherlands.

The age at which the full minimum wage is paid varies –from 16 in Canada, Portugal, Spain and Finland to age25 (raised in 2010 from 15) in Greece.

Youth unemployment for those aged 15 to 24 varied from11.6 per cent in Australia to 37.9 per cent in Spain and36.5 per cent in the USA.

Participation rates in post-compulsory education for 15 to19 year olds ranged from over 90 per cent in Belgiumand Netherlands to just under 75 per cent in Australia.

Minimum Wage Arrangements Four countries provide the full minimum wage for all

workers, irrespective of age (Canada, Spain, Portugaland Finland).

All the other countries have a youth sub-minimum rateand in several there is a scale of wage for age rates upthe full adult rate (Australia, France, Belgium, and theNetherlands).

In some cases, the relationship to the adult rate is a fixedproportion according to age (USA, Australia, NewZealand, France, Belgium and the Netherlands). Only inthe UK is there no fixed relationship although, untilrecently, the two lower rates have kept pace with theadult.

The Research The method adopted drew on the principles of systematic

review without using any version of that approach fully.Systematic review is an approach to reviewing a largebody of literature with a view to creating a synthesis.

We used country experts to inform our literature searchfrom its origins to the final result, an approach borrowedfrom systematic review.

We created a review protocol for all reviewers, that askedstandard questions about each publication reviewed,seeking to accord some methodologically sound worksmore priority in our analysis.

The Research The research team was drawn from Middlesex and Greenwich

Universities’ Business Schools. The team consisted of the following: Dr. Ioannis Bournakis, Middlesex University Business School Mr. Peter Burgess, University of Greenwich Business School Professor Richard Croucher, Middlesex University Business School Dr. Denise Hawkes, University of Greenwich Business School Dr. Leandro Sepulveda, Middlesex University Business School Dr. Graham Symon, University of Greenwich Business School Dr. Eleni Tzouramani, University of Greenwich Business School Dr. Wim Vandekerckhove, University of Greenwich Business School Dr. Michela Vecchi, Middlesex University Business School Dr. Ulke Veersma, University of Greenwich Business School Professor Geoff White, University of Greenwich Business School

The Research We divided our review of countries into two main

groups of countries – those which broadly have beendescribed as liberal market economies (LMEs) andthose that can be considered as coordinated marketeconomies (CMEs) (Hall and Soskice, 2000).

We included Australia, Canada, New Zealand, theUK and the USA in the former category.

In the latter grouping we included Belgium, France,Greece, the Netherlands, Portugal, Spain andFinland.

Research Findings The size of employment effects from the introduction

of a minimum wage, or of increases in existingminimum wages for young people, in general areextremely small and on the margins of statisticalsignificance in the great majority of studies surveyed.

There is some evidence that negative employmenteffects, where they exist, may disappear as theworker ages.

In some cases, employment is increased by theexistence of a minimum wage.

Research Findings The impact of minimum wages upon the youth labour

market is more likely to be negative where there is noseparate sub-minimum (minima) for younger workers, asfor example in Spain.

There is some evidence that the very small employmentimpacts can be mitigated and in some cases be positiveif the sub-minimum rate is set at the appropriate level.

Where wide support exists in society for minimum wages,employers rarely take advantage of suspensions ofminimum wages for younger workers even when giventhe opportunity to do so,

Research Findings The method by which the minimum wage is set is

relevant, with systems which set rates bycollective bargaining less likely to experiencenegative employment effects.

Minimum wages for young people may also havea less negative or indeed nil impact where thereare strong labour market interventions byGovernment to support employment for youngworkers.

Effects on employer training are less studiedthan the other topics. There are contradictoryestimates of the effect of minimum wages ontraining, partly because effects are very small.

Research Findings There is only a relatively small literature on effects

on participation rates in education.

In the UK and the USA, there is very little evidencethat minimum wages for 16-17 year olds haveexerted a negative influence on continued schoolparticipation.

The legal school minimum leaving age is animportant determinant of continued participation.Schooling effects appear to be as dependent onschool leaving ages and other factors conditioningindividual decisions as on minimum wages.

Conclusions The overall findings of our review are as follows:

that the impact of minimum wages upon the youth labourmarket is more likely to be negative where there is noseparate subminimum(s) for younger workers. The effectappears to vary across social groups and not simplyacross age bands.

The method by which the minimum wage is set alsoappears to have an effect, with systems which set ratesby collective bargaining less likely to experience negativeeffects, mainly because such systems are more alignedto economic changes than indexation systems.

Conclusions Minimum wages for young people may also have

a less negative or indeed non-existent impactwhere there are strong labour marketinterventions by Government to supportemployment for young workers.