I’ve been intending to trawl reports on UK youth unemployment to see how they consider the effect of the minimum wage. Since I already kicked the hornets nest I may as well now go all-in.
ACEVO describes itself as “the Association of Chief Executives of Voluntary Organisations” and “the leading voice for chief executives in the third sector”; they produced a study in 2011 named “Youth unemployment: the crisis we cannot afford” (pdf) from a commission chaired by David Miliband.
To their credit, the authors do seriously consider the effect of the minimum wage, and commissioned a short study by Jack Britton, who appears to be a postgrad at Bristol University. The study itself is delegated to an appendix, but the report says summarizes the conclusion like this:
Our analysis concludes that theories about the impact of immigration, work disincentives arising from beneﬁt rates and an overgenerous minimum wage are largely red herrings in the debate about youth unemployment.
I’ll quote a large passage from Mr. Britton’s study (pp.120 onwards) looking at how average wages moved between age groups, since it is worth reading, and I don’t want to cherry-pick:
The growth rates of the NMW are shown alongside the growth rates in overall earnings for each of the three age bands in Figure 11. The ﬁgure shows that wage growth for the three groups was very similar in both the 2004-2007 period and in the 1999-2004 period, despite the introduction of the minimum for 16-17 year olds in 2004. Because there is no unusual upward shift in wages of 16 and 17 year olds after the introduction of the NMW, it seems unlikely that the wage was set at a level that would signiﬁcantly affect employment. The same is true for 18-20 year olds; it seems unlikely that between 2004 and 2007 the minimum wage began to bite, as there is no unusual pattern in average wage growth.
However in the 2007-2010 period, the growth rates of average wages do begin to differ by age group; growth in wages amongst those aged over 21 is far higher than amongst the other two age groups. This is also reﬂected in Figures 10 and 11, which show respectively the proportion of 16-17 year olds and the proportion of 18-20 year olds in work being paid within various pay ranges. It is clear from both ﬁgures that the proportion of young people being paid the minimum wage for their respective age groups increased signiﬁcantly between 2007 and 2010. (This is shown by the increase in the size of the thick blue area in Figure 10 and the thick red area in Figure 11).
The evidence therefore suggests that companies made limited use of the NMW upon its introduction, but have started to in the wake of the 2008 recession. In other words, prior to the recession it seems the NMW was non-binding, but that it now is, or is starting to. This suggests that the NMW had a limited role in the pre-recessional rise in the NEET rate, but that it now might start to have an important inﬂuence.
That looks not unreasonable to me. But I am confused about how the report’s authors have taken a study which says the minimum wage “might start to have an important influence” since 2008, and concluded the effect of the minimum wage is “largely a red herring”. Those two phrases do not mean the same thing at all.
The second thing Mr. Britton looks at is sectoral shifts of job creation, where he says:
The table shows that the two sectors where the most jobs were created between 2004 and 2007 were the Public and the Financial Sectors. Although these sectors employ around 30% of 16-24 year olds between them, these people are typically less vulnerable to unemployment, as they are older (they employ 30% of 16-24 year olds, but only 20% of 16-21 year olds) and better qualiﬁed (the LFS data suggest 60% of people employed in these sectors have ﬁve or more GCSEs, compared to the sample average of 51%). The depression of jobs in sectors in which vulnerable young people typically work is likely to be more important; although it is difﬁcult to precisely estimate the proportion of the rise in the NEET rate since 2004, it seems that this sectoral shift is quite important; potentially contributing more than 30% of the overall rise.
Again, I am confused about how this might be interpreted as evidence that the minimum wage is “largely a red herring”. It seems to me that a “depression of jobs in sectors in which vulnerable young people typically work” would be a perfectly natural effect of raising the minimum wage for young people.
If the evidence for the absence of a link between youth unemployment and the NMW is so compelling, as many insist, I am left wondering why the ACEVO report commissioned a study which appears to provide evidence that there is such a link, and then, uh, “largely” ignores that result. My trawling will continue.
I liked the heading used in Draghi’s speech this week
Five years of monetary policy – the ECB has delivered
In the last five years, the ECB has continued to take the necessary measures with a view to maintaining price stability in the euro area.
The narrative for 2011 is fun:
Initially, while the economic impact of the sovereign debt crisis was limited and largely confined to vulnerable economies, the rapid global recovery put upside pressure on energy prices. This drove up inflation also in the euro area. We decided to raise interest rates in early 2011 given upside risks to the medium term inflation outlook stemming from energy prices and from ample monetary liquidity.
So you raised rates to fight an energy supply shock and “ample monetary liquidity”. How did that work out?
However, the sovereign debt crisis deepened and the euro area entered a second recession.
Oh. ”However” is a bit out of place, don’t you think? ”Naturally” would work better. We raised interest rates and naturally the Euro area then entered a second recession.
The inflationary pressures that had emerged before receded.
What a relief, bonuses all round, job well done.
The ONS published the first nominal GDP figure for 2013 Q4 this week, and so we have calendar 2013 too. Quarterly nominal growth rates continue to be erratic with revisions appearing to move nominal growth around between quarters; so I think we should not to put too much emphasis on the quarterly growth rates. However, the good news is that NGDP growth has picked up to 4.5% over the year to Q4, from a sub-2% low in the second half of 2012.
Here are the annual growth rates for the last six years, nominal, real and deflator growth, with nominal GVA at basic prices (and deflator) included to show the distortions from indirect tax changes:
This graph shows year-on-year quarterly growth:
Contrary indicators do remain for the “strong nominal growth revival” thesis: growth of nominal imports is fairly slow (2.4% ex oil over 12 months to Q4), as is growth of income tax receipts (OBR says 3.2% ex special factors), and the labour market slowed a little in December, though the LFS monthly sampling effects may distort this.
On that last point, Ben Chu tweeted a good chart showing how unemployment has changed for each of the three cohorts surveyed; the headline unemployment rate being a rolling 3m average. The fall in the headline rate is driven by two of the cohorts seeing a 0.6% and 0.7% fall in unemployment over just three months to October and November respectively. Which seems almost too good to be true. The collapse in the claimant count is perhaps the most convincing reason to believe that the labour market really is doing so well.
Looking forward, the ECFIN ESI confidence indicator rose in February to its highest level since 1989. Should we call it the Carney boom… or the Osborne boom? You decide. But where is that 4%+ output growth?
For me one of the most important lessons for British economic policymakers over the last six years should be to fear the interaction of micro with macro, supply-side policies with demand-side policies.
I do not think it is a merely a co-incidence that the worst fall in nominal demand since the 1920s occurred at the same time as a supply-side shock (collapse) in 2008. All recessions in British history have been driven by tight money aimed at lowering inflation. Was this time different? It’s not obvious why… CPI rate, September 2008? 5.2%.
And I do not think it is merely a co-incidence that the worst recovery in demand on record has occurred at the same time as inflation has sometimes hovered, sometimes soared above the inflation target. CPI rate, September 2011? This is during the time when the Darling/Osborne austerity drive “sucked demand out of the economy.” That CPI rate in September 2011 was, again, 5.2%.
Here is MPC hawk Martin Weale writing this week:
If wage growth picks up more rapidly than I expect, it will be an indication of inflationary pressure in the economy and Bank rate will need to rise sooner. If wage growth remains subdued, Bank rate should rise more slowly. Because the future is uncertain, we cannot make any promises about where Bank rate will be in a year or two years.
Raising the minimum wage by 3% at a time when hourly wage inflation is 1-2% at best, and is one of the indicators preventing the Bank from screwing up the demand side again… that would surely be an incredibly foolish gamble.
What, exactly, have policymakers learnt from six years of negative supply shocks and disastrous demand-side outcomes? Have we even learnt anything about wages, nominal shocks and employment? It does not appear so.
So sure, let’s try another supply shock. Maybe we’ll get “lucky” and the labour market tightens enough this year that hourly wages pick up, so that a 3% NMW raise doesn’t hurt many more people. Maybe.
Here is the Low Employment Commission report for 2008 (before the recession):
3.18 The decline in the labour market position of young people has been general across the UK. The proportion of young people not in FTE aged 16–21 who were in employment fell in almost all regions between 1998 and 2007, unlike those aged 22 and over who saw their employment share increase in all areas of the UK except London. However, by European standards, young people’s labour market position in the UK is relatively strong.
Good one! Our labour market may be doing badly, but just look at Spain! Those guys are really screwed. They continue:
Given that employment in the UK has been at record levels, it is difficult to explain why young people have not done better in the labour market. Two significant developments in the labour market in recent years have been the increase in the number of people of pension age becoming economically active and the arrival of predominantly young migrant workers from the European Union accession countries.
It’s “difficult to explain”… right. A total mystery. I can’t think what might have caused it, so let’s blame immigrants and old people, those are surely the most “significant developments” in the British labour market in the years to 2008. If anybody does have any better ideas about what happened, be sure to write to Card, Krueger, Dube, etc.
In the UK the spotlight is usually on the weekly wage measure produced by the ONS, Average Weekly Earnings. Scott Sumner tells us to focus on hourly wages. Why? I think the heart of the theory is that the hourly wage is a stickier price. Weekly wages can adjust via a change in hours, or the hourly wage rate.
In this post I’ll take a look at the hourly wage data. The ONS do not produce an “official” time series for mean hourly wages; but we can get to the data by a number of different routes:
- The Annual Survey of Hours and Earnings. This survey should provide the most reliable data for employed workers, and provides the gross mean hourly earnings (amongst others) from a survey of employers.
- The Labour Force Survey. Every quarter the Labour Market Statistics provide an update to a measure of mean gross hourly earnings (table “EARN08″) from the LFS. This data is known to underestimate the mean, it excludes workers earnings more than £100/hour.
- The monthly labour market update provides both an estimate of Average Weekly Earnings plus average weekly hours, again from the LFS. A simple matter of division should give us the mean hourly wage.
- The national accounts, combined with the Labour Force Survey. The national accounts tell us aggregate national wage income. The LFS data tells us total hours worked. From these two we can calculate mean hourly wages. I don’t know of any reason to doubt the LFS hours data. The national accounts do of course get revised. I am not sure how reliable this measure should be.
The ONS does also have an experimental Index of Labour Cost per Hour series. This data is also available from Eurostat as the Labour Cost Index. Annoyingly we are not given the underlying nominal data in either case, only the index level; I will ignore those series for this post.
This is what the four different sources of hourly wages look like:
I was pleasantly surprised that these estimates came out relatively close together; the data from the “EARN08″ table (green line) is as expected an outlier.
Comparing weekly with hourly wages it does appear that a reduction in weekly hours worked in 2009 contributed to the weakness of weekly wages. Here I’ll stick with the LFS data using average weekly wages/hours as the hourly wage:
Similarly the recovery in average weekly hours since 2011 explains why weekly earnings have grown faster than hourly wages.
On the ASHE measure the average annual growth rate of gross hourly wages was 4.1% between 1997 and 2007, falling to 1.5% between 2008 and 2013. Remember that 4.1% figure when you are told silly stories about how globalisation reduced wages in Britain, and remember the 1.5% figure when you are told that inflation is the “real threat”.
It is – or should be – astonishing that unelected technocrats get away with this madness without being immediately ejected from office. From the Riksbank’s latest:
In the forecast, CPIF inflation reaches 2 per cent in 2015. An even more expansionary monetary policy could lead to inflation attaining the target somewhat sooner. But a lower repo rate could also lead to resource utilisation being higher than normal in the long run and to the risks linked to household debt increasing further. The current repo-rate path is expected to stimulate economic developments and contribute to inflation rising towards 2 per cent, at the same time as taking into account the risks linked to household indebtedness.
Low inflation, low output, low employment – it’s simply a policy choice. They know it is a policy choice. They think low inflation, output and employment are the right policy choice, because rising household debt leads to, well, um, maybe low inflation, output and employment.
Via Mr. Svensson, still methodically attacking the madness.
This data is slightly better than was expected, output/hour rose in absolute terms.