A Study of Sub-Minimum Wage Rates for Young People Elish Kelly, Seamus Mcguinness
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January 2017 A STUDY OF SUB-MINIMUM WAGE RATES FOR YOUNG PEOPLE ELISH KELLY, SEAMUS MCGUINNESS FO NCE R PO DE LI VI C E Y A Study of Sub-Minimum Wage Rates for Young People Final Report to the Low Pay Commission Elish Kelly and Seamus McGuinness January 2017 Available to download from www.esri.ie © The Economic and Social Research Institute Whitaker Square, Sir John Rogerson’s Quay, Dublin 2 ISBN 978-0-7070-0416-7 The ESRI The Economic Research Institute was founded in Dublin in 1960, with the assistance of a grant from the Ford Foundation of New York. In 1966 the remit of the Institute was expanded to include social research, resulting in the Institute being renamed The Economic and Social Research Institute (ESRI). In 2010 the Institute entered into a strategic research alliance with Trinity College Dublin, while retaining its status as an independent research institute. The ESRI is governed by an independent Council which acts as the board of the Institute with responsibility for guaranteeing its independence and integrity. The Institute’s research strategy is determined by the Council in association with the Director and staff. The research agenda seeks to contribute to three overarching and interconnected goals, namely, economic growth, social progress and environmental sustainability. The Institute’s research is disseminated through international and national peer reviewed journals and books, in reports and books published directly by the Institute itself and in the Institute’s working paper series. Researchers are responsible for the accuracy of their research. All ESRI books and reports are peer reviewed and these publications and the ESRI’s working papers can be downloaded from the ESRI website at www.esri.ie. The Institute’s research is funded from a variety of sources including: an annual grant-in-aid from the Irish Government; competitive research grants (both Irish and international); support for agreed programmes from government departments/agencies and commissioned research projects from public sector bodies. Sponsorship of the Institute’s activities by Irish business and membership subscriptions provide a minor source of additional income. The Authors Elish Kelly is a Research Officer and Seamus McGuinness is a Research Professor at the Economic and Social Research Institute. Dr Kelly and Dr McGuinness hold adjunct research positions at Trinity College Dublin, and Dr McGuinness is also adjunct Associate Professor at the National Institute of Labour Studies, Flinders University Australia. Acknowledgements The work carried out in this report was funded by the Low Pay Commission and we would like to thank all individuals within the Commission who provided assistance during the project, along with valuable comments on earlier drafts of the report. In particular, we would like to thank Dr Donal de Buitléir, Chairperson of the Low Pay Commission; Commission members Mary Mosse, Brian Ring and Donal O’Neill; and Máire Ni Chuirc and Maeve White, the Commission Secretariat. We would also like to thank the Central Statistics Office for access to the data used in the study. Finally, we are grateful to Alan Barrett who provided comments on an earlier draft. This report has been peer-reviewed prior to publication. The authors are solely responsible for the content and the views expressed. Table of Contents | i Table of Contents EXECUTIVE SUMMARY ................................................................................................................................. iii CHAPTER 1 LITERATURE REVIEW OF SUB-MINIMUM WAGE RATES FOR YOUNG PEOPLE ....................................... 1 1.1 Introduction ............................................................................................................................ 1 1.2 International Overview of Existing Minimum Wage Rate Practice ......................................... 1 1.3 Minimum Wage Rates for Young People ................................................................................ 5 1.4 Apprenticeships and Trainee Workers .................................................................................. 10 1.5 Evidence on the Economic Impact of Youth Minimum Wage Rates .................................... 15 1.6 Early School Leaving in Ireland.............................................................................................. 18 CHAPTER 2 PRIMARY DATA ANALYSIS ON MINIMUM WAGES IN IRELAND ......................................................... 20 CHAPTER 3 SUMMARY ............................................................................................................................. 25 REFERENCES ............................................................................................................................................. 27 APPENDICES Appendix Tables .................................................................................................................................... 30 Data Appendix A: National Employment Survey .................................................................................. 43 Data Appendix B: Description of Variables for Model (1.1) .................................................................. 44 Data Appendix C: Description of Variables for Model (1.2) .................................................................. 45 ii | Primary Data Analysis on Minimum Wages in Ireland List of Tables Table 1 Meta-Analysis Studies of the Effects of Minimum Wages on Employment ..................... 18 Table 2 Economic Status of Young People1 who attained a Lower Secondary Qualification the Previous Year (%) ....................................................................................................... 19 Table 3 Estimates of the NMW Incidence 2009 ............................................................................ 21 Table 4 Incidence of NMW by Selected Worker Characteristics .................................................. 22 Table 5 Percentage of Employees in Receipt of the NMW by Worker Profile .............................. 22 Appendix Tables Table A.1 Countries with Subminimum Wage Rates for Young People ............................................ 30 Table A.2 Detailed Information for Countries with Youth Minimum Wage Rates ........................... 37 Table A.3 Select List of OECD Countries with Apprentice / Trainee Pay Rates ................................. 40 Table A.4 Probability of Workers Earning the NMW in 2009 ........................................................... 41 Table A.5 Probability an Employer will Hire any Workers at the NMW in 2009 .............................. 42 Executive Summary | iii Executive Summary This report provides an overview of sub-minimum wage rates for young people, in terms of both incidence and impact. The study relies primarily on a review of the relevant international literature and also provides contextual analysis specific to Ireland by analysing relevant available datasets, namely the Quarterly National Household Survey (QNHS) and the 2009 National Employment Survey (NES), both of which are compiled by the Central Statistics Office. SUB-MINIMUM RATES Over two-thirds of OECD countries have statutory minimum wages and, of these, just under two-thirds have special rates for young people. The evidence demonstrates that, in terms of their construction and design, youth rates are predominately expressed as some proportion of the adult minimum wage rate. While most sub-minimum wage rates for young people are age-based, there are a few exceptions, such as France where the young person’s experience levels are also taken into account. Where OECD countries have apprenticeship/trainee pay rates, the rates tend to be separate from their sub-minimum wage rates for young people. In addition, the rates are not restricted to youths. In relation to the economic effects of sub-minimum wage rates, as with the international literature on minimum wages generally, the effects of the policy on young peoples’ employment or continued education decisions, whether positive or negative, have been found to be small and weak, and sometimes insignificant. It has been argued that paying all workers, irrespective of age, the same statutory national minimum wages would incentivise early school leaving (OECD, 2015b). We find that the variation in early school leaving rates in Ireland follows a cyclical movement, rising when employment and earnings is high and falling when they are low. However, it is unclear to what extent the pattern relates to changes in the general levels of earnings, changes in minimum wages, variations in the unemployment rate, some combination of all three, or some other factors. THE INCIDENCE AND DETERMINANTS OF MINIMUM WAGE EMPLOYMENT The Irish data from 2009 suggest that the incidence of the adult minimum wage ranged between 5.3 and 6.8 per cent. A very small percentage, typically less than 0.5 per cent, of employees were in receipt of either the training or youth rates of iv | Primary Data Analysis on Minimum Wages in Ireland the National Minimum Wage (NMW). Furthermore, the data revealed that less than 6 per cent of employees aged below 18 were in receipt of the youth rates. According to the data, 29 percent of employers in 2009 hired at least one worker on the NMW. While personal and job characteristics such as age, education, gender, contractual status or being employed in particular sectors do impact an individual worker’s likelihood of being in receipt of the NMW, such factors only increase the level of risk by very