Minimum Wage and Youth Unemployment

25/07/2014

Miguel Marin is director of Economics and Public Policy of FAES Foundation

 

Recently, in the agreement establishing a minimum wage reached by the coalition of Conservatives and Social Democrats currently in the German government, exceptions have been established which set young people as a group which can be hired at a lower wage than the minimum, as a way to facilitate their hiring and match their level of productivity to the real wage earned by them. The International Monetary Fund has also pronounced itself in a similar way in its annual report on the euro area, known as Article IV, where it recommends European countries to open the debate on a special minimum wage for young people in order to increase the demand for employment of people under 25.

The fact that the youth unemployment rate doubles the general unemployment rate is not a problem unique to Spain. In fact, this is a statistical reality that has been taking place for decades in a large majority of OECD countries, regardless of the economic situation and the labour market conditions–whether more flexible or rigid–analysed. Behind this constant statistical data lie the greatest relative difficulties–albeit normal–to enter the labour market for this segment of the population who, in general terms, have less experience, less relative training and therefore, a lower productivity.

The real problem in Spain is the very high levels of youth unemployment today. It is clear that once it exceeds a certain level, youth unemployment acts as a drag on the potential growth of the economy in the long term and, therefore, on the possibility of sustaining the welfare model. It also seems clear that Spain, with a 50% rate of youth unemployment, has exceeded this threshold. This is increased by what might be called 'the trap of productivity', a kind of vicious circle which traps the young unemployed, who have no access to the labour market due to their low productivity, which is further hampered as time goes by without work. After five years of severe economic crisis and with prospects for a solid recovery but prolonged in time with moderate levels of growth, it seems that many of our youth are losing some of the best years of their working life immersed in this trap.

With these two circumstances, i.e., the structural difficulties of young people to access employment and the perverse effect that this creates in the overall functioning of the economy, it would seem that establishing an exceptional regime for the hiring of young people with regard to the general system of recruitment for the rest of workers is nothing but common sense. This was one of the main conclusions reached by the report on the labour market recently published by FAES Foundation. Given that the minimum wage is currently becoming an almost insurmountable barrier for many youths, establishing a lower minimum wage to facilitate the recruitment of this group with obvious problems of inclusion would be a positive step which, as we have seen, is supported by the international experience of other partner and competitor countries and by prestigious international organizations.

The guidance contained in the report of FAES Foundation, which is also intended for other groups of difficult labour inclusion, adds the consideration of setting a time limit to these exceptions until the level of productivity required is reached and complements them with subsidies for social contributions and welfare benefits by the State in order to ensure a minimum level of welfare. The goal is simply to allow our young people into the market as soon as possible and work to eradicate the harmful idea that if the salary is not enough it is desirable to keep our young people on the dole rather than working, gaining experience, helping society, attracting future productivity and, ultimately, launching a project of autonomous life. We all want quality and stable jobs for our children, but while the economy is unable to generate them at a sufficient rate, let us assume that there is nothing more precarious than staying unemployed when there is real potential to reverse that situation. Precarious for the young and precarious for a country like Spain that cannot continue to allow the draining of talent that we have been suffering from the onset of the economic crisis.