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Too old at 21, you’re fired!

Minimum wage policies in Europe are making employees barely out of their teens too expensive. Are there lessons for Australia?

Last winter, a friend of mine lost his job in a large retail company in the Netherlands. He called me to sombrely explain the manager had informally told him he was getting too old, so they had to let him go.

Such a narrative may seem mundane as elderly employees are often the first ones to lose their jobs when a company goes through hard times.

But, in this case, I was taken aback. My friend was nowhere close to retirement – he had just turned 21.

TOO OLD AT 21?

Being considered too old at the age of 21 sounds outlandish – unlike the elderly, workers in their early twenties are likely to become more productive as they age, which should make them more valuable to the company. Nevertheless, what happened is not irrational. This is due to the design of youth minimum wage policies in the Netherlands.

Dutch labour legislation uses the concept of age-dependent minimum wage, which means the youth minimum wage rate increases with a worker’s calendar age. A similar system is maintained in Australia.

Minimum wage increases in line with workers calendar age in Australia and the Netherlands

The applicable rate increases each year until the adult minimum wage is attained at the age of 23. This means that each birthday workers earning minimum wage become more costly, thereby motivating employers to replace their older employees with younger ones.

My friend was, apparently, and unfortunately, one of these older employees.

HOW MANY PEOPLE ARE AFFECTED?

The effects of youth minimum wages are the focal point of current policy debates in the Netherlands. Labour unions are criticising the age-dependent design, and emphasising age discrimination that is embedded in the system. However, despite the media attention, a systematic analysis of this phenomenon has so far been lacking.

My econometric analysis confirms the existence of age discrimination, although the measured effects prove to be rather modest.

Out of 100 minimum wage workers who are approaching their birthday, one worker is predicted to lose his or her job due to the increase of the applicable minimum wage rate.

The magnitude of the effects varies with age and is particularly strong among workers who are about to turn 16 and 19. Strong effects for these two groups are not unexpected. In both cases, the workers are likely to lack work experience, which makes them easy to replace – 16th birthdays correspond to the youngest workers in the analysed population and 19th birthdays follow high school graduation.

Young workers about to turn 16 or 19 are most at risk of becoming unemployed due to minimum wage regulations. Picture: Shutterstock

Age discrimination also seems to be more prevalent in firms that offer jobs with lower skill requirements. An especially strong effect is found in the supermarket sector. Supermarket employees are twice as likely to be subject to age discrimination as workers in other sectors of the economy. This is particularly important given that supermarkets employ a sizable share (14%) of youth workers in the Netherlands.

Supermarket employees are twice as likely to be subject to age discrimination. Image: Shutterstock

LESSONS TO BE LEARNED

At the end of the day, most minimum wage workers are able to keep their jobs despite becoming more costly to firms.

One interpretation of this finding is that the increases in minimum wage rates are matched by increases in workers’ productivity, providing an incentive for employers to retain these experienced employees.

The effects observed in the supermarket sector then suggest that experience is a less important factor for roles such as cashiers and shelf-stockers.

However, some workers tend to learn faster than others and their respective productivities are likely to differ. The fact we do not see more terminations of employment around birthdays may, therefore, imply the applicable minimum wage rates are set too low (below the productivity equivalent of the majority of the minimum wage workforce).

Indeed, when expressed relative to the adult level, youth minimum wage rates in the Netherlands are among the lowest in the world.

Given the Australian design of the youth minimum wage system is so close to that of the Dutch, it seems more than reasonable to ask whether employed Australian youths are also subject to similar discriminatory practices. My answer to this would be, ‘Yes, most likely.’ This is because the Australian employers are presented with exactly the same incentives as the employers in the Netherlands. The magnitude of these effects is, however, hard to predict from the Dutch experience. The Australian system is much more complex, with sector-specific minimum wage rates and job protection policies, which makes any extrapolation very difficult.

If we hope to grasp the scope of age discrimination in Australia, we have to do so by analysing Australian data. My initial analysis draws on a massive administrative dataset collected by the Dutch tax authorities, which contains the employment history of each and every worker in the Netherlands.

Standard survey datasets would not have sufficient numbers of observations for identifying the minimum wage effects. This makes a strong case for the need to collect and examine administrative data in Australia.

Banner image: Shutterstock

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