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How to Bolster Youth Employment

July 22, 2020

We need to ensure our kids are not priced out of the labour market. 

 

 

In response to the COVID-19 crisis, many jobs have been lost, some forever.  Many people are unemployed or underemployed, surviving on the government welfare of the JobKeeper and the JobSeeker schemes. These schemes are finite. Before they end, we will need to create many new jobs. We will need to encourage entrepreneurs in new and existing businesses to find economic ways to employ the available talent, especially our youth. 

 

I propose a policy, let us call it JobCreator, to facilitate this process.

                                                                                                                                                                            

When it comes to unemployment, the young are particularly disadvantaged. In most Western countries the unemployment rate for those under 25 years of age is typically double the average. If unemployment is 5%, then 10% of the young are unemployed. If our unemployment in general reaches 15%, then 30% of the young will be unemployed. This is not good for them or for society. “Idle hands are the devil's workshop.” Gangs form and with them a drug culture and antisocial, violent behaviour.

 

Politicians talk of policies to create jobs, but that is not how it works. Jobs are created by entrepreneurs and mainly in small to medium businesses. Someone has an idea of how to make a new or a better product or service which she tests by making a few and seeing if anyone will buy at a price that exceeds the cost to produce. It is a risky business. Profits must be made to cover those risks, to create capital for further growth and to contribute taxes to cover the costs of running a modern society. Expenses are definite; revenues not so assured.

 

Often the margin for success or failure is quite small. Few businesses make a profit of more than 5% of revenue. Micawber was right “Annual income twenty pounds, annual expenditure nineteen [pounds] nineteen [shillings] and six [pence], result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”

 

If we want entrepreneurs to succeed, if we want more people to try, if we want to encourage people to create jobs, then we shall have to make the conditions more conducive to success.

 

In particular, we shall need to ensure that potential employers are not obliged to pay more than a market wage. What I am going to say next will not be popular. For most of you, it will challenge your belief system. We may need to consider whether the minimum wage is keeping young people out of the workforce.

 

Stanford economist, Thomas Sowell, writing about the American experience said:

“Back in 1948, when inflation had rendered meaningless the minimum wage established a decade earlier, the unemployment rate among 16-17 year-old black males was under 10 percent. But after the minimum wage was raised repeatedly to keep up with inflation, the unemployment rate for black males that age was never under 30 percent for more than 20 consecutive years, from 1971 through 1994. In many of those years, the unemployment rate for black youngsters that age exceeded 40 percent and, for a couple of years, it exceeded 50 percent. The damage was even greater than these statistics might suggest. Most low-wage jobs are entry-level jobs that young people move up and out of, after acquiring work experience and a track record that makes them eligible for better jobs. But you can't move up the ladder if you don't get on the ladder.” (Thomas Sowell, www.creators.com , May 31, 2016)

 

Most of us find it easy to understand that if a retailer has too much of something, she can quit the excess by putting the goods on sale, by reducing the price. But we have difficulty applying this to labour. Yet our own experience should make it easy to understand. If a student offers to mow your lawn for $100 you may baulk, but for $10 you accept with alacrity.

 

As Henry Hazlitt wrote in his 1946 classic Economics in One Lesson, “We cannot distribute more wealth than is created. We cannot in the long run pay labor as a whole more than it produces. …  So government policy should be directed, not to imposing more burdensome requirements on employers, but to following policies that encourage profits, that encourage employers to expand, to invest in newer and better machines to increase the productivity of workers  - in brief, to encourage capital accumulation, instead of discouraging it – and to increase both employment and wage rates.”

 

At present, the minimum wage is $1,508 per fortnight. JobKeeper, which enables employers to keep someone on the payroll during a temporary loss of revenue, is $1,500 per fortnight – about the same – dropping to $1,200 per fortnight after 27 September. JobSeeker, a temporary increase on Newstart for the unemployed, is $1115 per fortnight dropping to $815 per fortnight then too.

Using the fourth quarter figures, we see that the gap between the unemployed and the employed is a minimum of $693 per fortnight.  The young person whose productivity is not worth $1,508 per fortnight must be unemployed and so receive only $815.  That is $693 per fortnight less.

 

Young people, in their first job, are often not the most productive employees. They may not have acquired the essential work practices of punctuality and reliability. They may not know how to do everything and will require the time of supervisors to teach them. They will not be as proficient; they will take longer to do many tasks. Their productivity is lower and they may not be worth $1,508 per fortnight. They will not be employed. There will be no job.

 

But if the employer were able to offer a wage that was commensurate with the employee's productive output then there would be a job. The employee would be on the ladder and able to develop her skills and soon advance to a better job at a higher wage.  What could be wrong with that? Well two things. Firstly, the employee is open to being taken advantage of – being paid less than she is worth - and secondly, she will not earn enough to live on. Let us deal with this one at a time.

 

The first problem is known as monopsony. Monopsony power exists when one buyer faces little competition from other buyers for that labour or good, so they are able to set wages and prices for the labour or goods they are buying at a level lower than would be the case in a competitive market. An example might be a small town with only one major employer. But it is not the case, in general, in a large city where there are multiple employers and where those who pay well will attract the best employees. Good baristas are hard to find.

 

If you do not believe this, examine the basis of your prejudice. Do you believe that employers, as a class, are scoundrels? If we wish to create jobs, then we must honour the entrepreneur.

 

The second problem relates to a confusion between a wage and an income. If our society considers that a person's fortnightly wage, from their own exertions working to the best of their ability, is insufficient for them to live on, then we have an obligation to top it up. We may do that through charity or taxation. We should not expect that this is an obligation for the employer.

 

This brings me to my conclusion. The JobCreator program.

 

Unless we can unwind the minimum wage construct, and also make it easy to fire the non-performing or dishonest employee, then there will be too few jobs for our youth and they will be unemployed and never progress up the ladder. But I appreciate that unwinding minimum wage laws may be politically impossible.

 

I have an alternative. Let us create a scheme administered similarly to the JobKeeper scheme, that is, through the existing tax system. For twelve months, let us pay every employer $300 per fortnight for every new employee under the age of 25 added to the payroll after 27th September. Let us call it JobCreator.

 

For the entry-level employee we effectively lower the minimum wage by 20 percent. Here is an incentive for employers to create more jobs for young workers. It gets them out of the gangs and into the workforce, onto the first rung of the ladder, at a cost of about half the Newstart allowance.

 

 

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Henry Hazlitt`s classic Economics in One Lesson has been in print for over 70 years. Simply and clearly written, it is the best exposition of economic theory you could find. A new edition is out soon. Don`t miss it.

 

 

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