One of the more puzzling features of the Canadian labour market in the last few years recovery has been the stubborn refusal of youth employment rates to recover from the recession:
There may a relatively simple (partial) explanation. This is taken from a recent Statistics Canada study on trends in the minimum wage:
There seems to be a broad consensus around "small increases in the minimum wage will have small effects on employment", but this is not a small increase: the CPI-corrected Canadian minimum wage increased by 12.9% between 2008 and 2013. So in this post I'm going to try to put together some back-of-envelope numbers about what sort of effect this increase has had on youth employment.
The counterfactual I'm going to consider is: What would have happened to youth employment if Canadian real minimum wages had simply increased in line with the CPI since 2008? That is to say: what were the effects of that extra increase of 0.1215 ( = log[1.1292]) in the log of the minimum wage between 2008 and 2013?
recent evidence based on different data sets and methodologies generally finding that a 10 percent increase in the minimum wage reduces employment by about 3 to 6 percent for teens and slightly less for young adults.
In other words, the elasticity of the minimum wage on Canadian employment is between -0.3 and -0.6 for those teenagers, and (say) between -0.2 and -0.5 for those in their early 20s. He's made use of the same assessment in other studies, so that should be good enough to go on for the purposes of this post.
Let's look at teenagers first. Applying the estimates (-0.3, -0.6) to an increase of 0.1215 the log of the minimum wage results in a reduction of log employment of between 0.0364 and 0.0729. Total employment of those aged 15-19 in 2013 was 822,000, so employment would have been between 30,000 and 62,000 higher under the counterfactual of no real minimum wage growth. Here's what this means for teenage employment rates:
Teenage employment rates are about seven percentage points below the 2008 peak, and the higher minimum wage does explain some of the gap. But the explanatory power here is limited: at most 40% of the gap can be explained by the higher minimum wages.
Repeating the exercise with slightly smaller - in absolute value - elasticities in the range of (-0.2,-0.5) leads to reductions of log employment of between 0.0243 and 0.0607 for those between the ages of 20 and 24. Total employment in this group was 1.6 million in 2013, so employment would have been between 40,000 and 102,000 higher under the counterfactual of no real minimum wage growth. Here's what this means for 20-24 employment rates:
This looks quite different. The weak-elasticity counterfactual explains almost half of the 2008-2013 employment rate gap, and the strong-elasticity case generates employment rates that are higher than those observed in 2008. Of course, one of the reasons it looks different is that the drop in the employment rate for 20-24-year-olds was much less pronounced than for teenagers.
Now to put the two together. The 'lower elasticities' case is based on the sum of the two lower bounds, and the 'higher elasticities' case uses the sum of the two upper bounds.
The 15-24 employment rate in 2013 was 4.6 percentage points below was it was in 2008, and between one-third and four-fifths of this gap - equivalent to between 70,000 and 164,000 jobs - would have been closed if the rate of growth in the minimum wages had been limited to the rate of growth in the Consumer Price Index.