Home > Minimum Wage > ACEVO on the Youth Unemployment Crisis

ACEVO on the Youth Unemployment Crisis

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.

Categories: Minimum Wage
  1. W. Peden
    March 7, 2014 at 09:55

    Perhaps “largely a red herring” means “not a red herring, but someone who has eaten so much red herring that their body is significantly made up of matter that was one red herring?”

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