Thursday, October 21, 2010

Minimum wages and youth unemployment

On average (but not now), unemployment rates in most European countries are higher than in the United States. This has been blamed on more generous unemployment insurance, high firing costs, lack of mobility, high taxes, union power, too specific education, and measurement. One possibly neglected aspect, at least as far as I know is the impact of minimum wages. Few people actually work at or close to the minimum wages, but these tend to be entrants on the labor market, and what happens to the young tends to persist for many years after the look for work.

Aspen Gorry uses a suddenly popular labor search model that differentiates between those seeking a first job (the young) and those that have experience (the old). Varying the level of the minimum wages from American to French levels, he finds that about 50% of the gap between youth unemployment rates can be explained. What this is implies is that the minimum wage prevents some of the young workers to find their first job. And this lack of experience implies that they enjoy only later the job stability of an incumbent. Thus the impact of the minimum wage adds up quickly for the aggregate unemployment rate.

Two additional comments. First, this model does not explain European countries that have high unemployment yet no minimum wage, such as Germany. Second, while the minimum wage is binding for very few jobs in the US in normal times, it may be more binding now, thus giving another reason for the strong surge in unemployment (and presumably its rapid shrinking once things get back to normal).

1 comment:

Jarda said...

"high unemployment yet no minimum wage, such as Germany"

Not quite correct. Although there is no national minimum wage, many industries in Germany have legally binding minimum wage levels. Currently about 55-60% of workers work in industries with binding minimum wages, and I believe that binding minimum wages are set specifically in industries where they really matter (construction, nursing care, ...). So this still has an effect.

However, since the minimum wage levels are set differently in different industries (and even professions), this can potentially give you an interesting source of variation in studying their impact.