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The Minimum Wage and Youth Unemployment

    This morning John Prescott led a Twitter counter-attack against the Adam Smith Institute, which had suggested that the national minimum wage for young people should be abolished as a means of helping to cure the UK's youth unemployment problem.

    Their argument was simple: high youth unemployment is a symptom of employers not thinking young people are worth paying the regulated wage of £4.92 per hour (18-20 year olds).

    When the Institute for Fiscal Studies carried out a detailed study into whether the minimum wage caused unemployment, they were not able to find any supporting evidence. Indeed, a quick look at a chart of youth unemployment rates from April 1999 (when the NMW was introduced) shows that the staggeringly high rates of youth unemployment have largely been a direct consequence of the recession - although there had been a slower upward trend before this.

    Given that the NMW has existed throughout the period, the current higher levels of youth unemployment appear to be a result of firms laying off younger workers - who are less skilled, experienced and so more easily dispensable - as demand shrank. On this, the ASI appears to agree with me. However, I do not share their belief that abolishing the minimum wage would suddenly lead to firms hiring more young workers. Wages would still need to be at a level to provide an incentive to move into work from benefits, and the prior existence of a minimum wage would probably mean that most young people would judge employers offering them lower as unacceptable to maintain a reasonable standard of living.

    The ASI are therefore right in that the NMW is a labour market restriction - but there is already an effective labour market restriction in the form of the Job Seekers Allowance and other means tested benefits. Even if firms did want to higher more young workers, at lower wages - there needs to be a strong enough incentive for young people to want to work.

    In the tight financial climate, employers are deciding against hiring new workers (of which young workers are by far the largest component), in favour of retaining their experienced employees.

    The only solution to this is economic growth. Once more new firms set up and existing firms expand, we should see the youth unemployment rate fall to more historic levels. To acheive this, we should all be hoping that the government pulls a large supply-side rabbit out of its hat come the 23rd March.

    Ryan joined the Centre for Policy Studies in January 2011, having previously worked for a year at the economic consultancy firm Frontier Economics.

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