1 Introduction
Until recently, it had been widely believed by economists that the imposition of a binding wage floor, e.g. minimum wage, would reduce the employment of younger and less-skilled workers. Both simple theoretical models of competitive labour markets and time-series evidence on the relationship between minimum wages and youth employment supported this consensus (Brown, Gilroy and Kohen 1982). However, recent empirical research relying on quasi-experimental evaluations of cross-sectional and longitudinal data, in particular Card (1992) and Card and Krueger (1994), has failed to find negative employment effects for young or low-wage workers in the United States. The inherent complications with quasi-experimental evaluations have led some researchers to question the results in these papers (Burkhauser, Couch and Wittenburg 2000; Neumark and Wascher 2000).[1] Still, it seems safe to say that the consensus has been broken and that the empirical evidence indicates, in certain situations, an increase in the minimum wage may not reduce employment.
In this paper, we analyse the effects of a large reform in the minimum wages affecting teenage workers that occurred in New Zealand since 2001. Prior to this change there was an adult minimum wage that applied to workers over the age of 20, and a youth minimum wage, set at 60% of the adult minimum, that applied to 16-19 year-old workers. The 2001 reform involved two components: first, it lowered the eligibility age for the adult minimum wage to 18, resulting in a 69 percent increase in the minimum wage for 18 and 19 year-olds; and second, the youth minimum wage was raised in two annual steps to 80% of the adult minimum, resulting in a 41 percent increase in the minimum wage for 16 and 17 year-olds over this two year period.[2]
These large and focused changes provide an ideal opportunity for studying the effects of minimum wage policy on the youth labour market. Using data from the New Zealand Household Labour Force Survey (HLFS) for the period 1997—2003, we examine changes in the labour market experiences of the two groups of teenagers that are directly affected by the reform and compare these to the changes experienced by young adults, aged between 20 and 25. We focus primarily on the impact of the policy reform on employment and hours worked by teenage workers, but also examine its impact on a variety of related outcomes: namely educational status, unemployment, inactivity (defined as neither employed nor studying), benefit receipt, labour earnings, and total income.
Our analysis in section IV begins by describing the changes in the wage distributions for both groups of teenage and young adult workers following the minimum wage reforms. This shows there have been significant shifts in the lower tails of the wage distributions for both 16-17 year-olds and 18-19 year-olds since 2001, but little change in the distribution for 20-25 year-olds. However, we also document a significant increase in minimum wage non-compliance for teenage workers since the reforms.
Next we present simple difference-in-differences estimates that compare the average employment and hours worked for both 16-17 and 18-19 year-olds relative to those of 20-25 year-olds before and after the policy reform. We then extend this approach to examine the impact on employment and the other outcomes of interest using regression analysis to control for observable characteristics of the various age groups that may differ. Contrary to standard economic model predictions, these analyses provide no robust evidence of adverse effects of the minimum wage changes on youth employment or hours worked. In fact, we find stronger evidence of positive employment responses to the changes for both groups of teenagers, and that 16-17 year-olds increased their hours worked by 10-15 percent following the minimum wage changes. However, we do find some evidence of a decline in educational enrolment, and an increase in unemployment and inactivity, although these results depend on the specification adopted. Not surprisingly, given the absence of any adverse employment or hours worked effects, we find significant increases in labour earnings and total income of teenagers relative to young adults.
