Eric Crampton: Excess unemployment

Here's the data and program I've been using to generate measures of excess youth unemployment in New Zealand since the abolition of the differential youth minimum wage. [note - the files may still be coming up 404. Our new-and-consequently-worse-than-the-old server doesn't recognize odd file types like .dta and .do, but they're working on it.]

I've modified things a bit since the last time I wrote about it. As we have more and more quarters under the new regime, including those quarters' data in the estimation of parameters starts messing with the estimates if the point is figuring out what youth unemployment would look like if it had followed its prior trend relative to the adult rate.

It's a very simple model. I take the youth unemployment rate as a function of the adult unemployment rate and the square of the adult unemployment rate (to capture non-linearities) for all quarters prior to Quarter 90: June 2008. I then ask Stata to predict the youth unemployment rate given the estimated parameters (and the adult unemployment rate) and to measure the difference between the predicted results and the observed results in all quarters. Then, I ask it to tell me what the largest difference was in any quarter prior to June 2008. I subtract that difference from the residuals from June 2008 onwards and call that excess youth unemployment. That tells me how much worse youth unemployment is now, relative to the adult rate, than it was in the worst possible quarter prior to mid 2008. I multiply that excess unemployment rate by the youth labour force in each quarter from June 2008 onwards to get the number of kids unemployed who would have been employed had the youth unemployment rate been no worse relative to the adult rate than it had been in the worst quarter prior to June 2008.

The table below has the number of kids, in thousands, who were unemployed and who would have been employed had the youth unemployment rate performed no worse relative to the adult rate than it had in its worst quarter prior to the abolition of the differential youth minimum wage.

Excess youth unemployment peaked at just over 13,000 youths in December quarter 2009, dropped to just under 7,000 at September quarter 2010 and rose again to over 10,000 in December quarter. And again, excess here is defined relative to the worst possible performance of youth unemployment (as compared to adult) experienced between 1986 and 2008, including more than a few periods in which adult unemployment rates were far in excess of those currently experienced.

Any reasonable explanation has to say why things are so different this time than in prior recessions. The abolition of the youth minimum wage seems the most plausible explanation.

Eric is Senior Lecturer at the University of Canterbury. He blogs at  Offsetting Behaviour