Professor Richard Croucher, Middlesex University Professor Geoff White, University of Greenwich

Professor Richard Croucher, Middlesex University Professor Geoff White, University of Greenwich

Minimum Wages and Young Workers 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 those aged 18 21 (reduced to 20 in 2010). A further lower rate introduced for 16/17 year olds in 2004. An Apprentice minimum introduced in 2010. Low Pay Commission concern about the effects of minimum wage upon young people s employment, training and participation in education.

Context Current 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 1 October 2012. The apprentice rate will increase to 2.65. * The Apprentice Minimum Wage applies to those apprentices under the age of 19 and those aged 19 and over in the first 12 months of their apprenticeship.

Context While statutory minimum wages existed in 17 OECD countries in 1998, there were substantial differences in the way they were set and operated (OECD 1998). The main differences between the systems in different countries concern: the level of the minimum relative to average wages; the extent of differentiation by age or region; mechanisms for indexation; and the roles of governments and the social partners in setting them.

The arguments Governments in the developed world have placed strong emphasis upon the training and education of young people. Concerns that that application of the minimum wage to young people may have negative effects upon their employment opportunities, investment in their training and on their participation in further and higher education.

Employment effects The major concern about the receipt of minimum wages by young people is that this can deter employers from employing such young workers. Neumark and Wascher (2008) postulate that minimum wage increases disproportionately reduce employment opportunities for teenagers who have already dropped out of school. This in turn leads to the pricing out of young workers in competition for jobs with older workers.

Employment Effects Contrary argument is that employers prefer young workers because they are more flexible and malleable to employer wishes. They can also assist brand image and relations with young customers (e.g. in retail). But looking at the direct employment effects is only one concern. In-work training opportunities and the effect of participation 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, the minimum wage will prevent workers from finding a job and from receiving any training. 2. For those who find employment, the opportunities of receiving training decrease because the firm cannot offset training costs by offering a lower wage.

In-Work Training Contrary arguments have been put by those who argue that neo-classical assumptions about labour markets as perfectly competitive are inappropriate. Minimum wages may therefore actually increase the amount of training of all types that employers are prepared to undertake, including general training. Where labour has a specified minimum cost, this may raise employers propensity to invest in them, since turnover may be reduced because labour is more easily retained. In short, the level of employer-employee interdependence,as Whitley (1999) describes it, is increased.

Participation in Education An argument exists that minimum wages, if sufficiently attractive, can pull school students out of education. Leighton and Mincer (1981) argued, however, that the effect of the minimum wage on schooling can be positive if additional investment in education increases the workers returns above the minimum wage. However, the immediate attraction of higher wages could induce young workers to leave education and enter the labour market.

Minimum Wage Arrangements In general, the incidence of minimum wage work in all countries studied in this research is highest among youth, women and part-time workers. These employees also tend to be concentrated in similar industries and in smaller rather than larger employing organisations. While young workers are disproportionately affected, significant numbers of older workers are also covered.

Minimum Wage Arrangements There is some variation in the age at which compulsory school education ends from as low as 14 in Portugal to 18 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 age 25 (raised in 2010 from 15) in Greece. Youth unemployment for those aged 15 to 24 varied from 11.6 per cent in Australia to 37.9 per cent in Spain and 36.5 per cent in the USA. Participation rates in post-compulsory education for 15 to 19 year olds ranged from over 90 per cent in Belgium and 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, Portugal and Finland). All the other countries have a youth sub-minimum rate and in several there is a scale of wage for age rates up the full adult rate (Australia, France, Belgium, and the Netherlands). In some cases, the relationship to the adult rate is a fixed proportion according to age (USA, Australia, New Zealand, France, Belgium and the Netherlands). Only in the UK is there no fixed relationship although, until recently, the two lower rates have kept pace with the adult.

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 large body of literature with a view to creating a synthesis. We used country experts to inform our literature search from its origins to the final result, an approach borrowed from systematic review. We created a review protocol for all reviewers, that asked standard questions about each publication reviewed, seeking to accord some methodologically sound works more 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 been described as liberal market economies (LMEs) and those that can be considered as coordinated market economies (CMEs) (Hall and Soskice, 2000). We included Australia, Canada, New Zealand, the UK and the USA in the former category. In the latter grouping we included Belgium, France, Greece, the Netherlands, Portugal, Spain and Finland.

Research Findings The size of employment effects from the introduction of a minimum wage, or of increases in existing minimum wages for young people, in general are extremely small and on the margins of statistical significance in the great majority of studies surveyed. There is some evidence that negative employment effects, where they exist, may disappear as the worker ages. In some cases, employment is increased by the existence 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 no separate sub-minimum (minima) for younger workers, as for example in Spain. There is some evidence that the very small employment impacts can be mitigated and in some cases be positive if 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 of minimum wages for younger workers even when given the opportunity to do so,

Research Findings The method by which the minimum wage is set is relevant, with systems which set rates by collective bargaining less likely to experience negative employment effects. Minimum wages for young people may also have a less negative or indeed nil impact where there are strong labour market interventions by Government to support employment for young workers. Effects on employer training are less studied than the other topics. There are contradictory estimates of the effect of minimum wages on training, 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 evidence that minimum wages for 16-17 year olds have exerted a negative influence on continued school participation. The legal school minimum leaving age is an important determinant of continued participation. Schooling effects appear to be as dependent on school leaving ages and other factors conditioning individual decisions as on minimum wages.

Conclusions The overall findings of our review are as follows: that the impact of minimum wages upon the youth labour market is more likely to be negative where there is no separate subminimum(s) for younger workers. The effect appears to vary across social groups and not simply across age bands. The method by which the minimum wage is set also appears to have an effect, with systems which set rates by collective bargaining less likely to experience negative effects, mainly because such systems are more aligned to economic changes than indexation systems.

Conclusions Minimum wages for young people may also have a less negative or indeed non-existent impact where there are strong labour market interventions by Government to support employment for young workers.