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Youth Unemployment and the National Minimum Wage

The Adam Smith Institute has recently created a ‘shit storm’ by advocating the abolishment of the National Minimum Wage. I’m going to be controversial and say that the Adam Smith Institute is theoretically correct in its advocacy.

In a perfectly free society with a perfectly free market, there is no need for wage protection, or in fact any protection. Therefore the NMW is not needed. However, we do not live in a perfectly free society, nor do we have a perfectly free market. Therefore labour protection is necessary to counter the exploitative practices that spring up from an imperfect society and market.
Now, proponents of the free market will say here that the market doesn’t exploit and the ‘guiding hand’ of the market will shelter the vulnerable. My retort to that: only in a perfect society and market.

The Adam Smith Institute’s research was into how the NMW should be abolished to reduce youth unemployment. Since the NMW was introduced 10 years ago, Youth Unemployment has been stubbornly high. The Institute attribute the unemployment to the NMW. NMW does have a role to play. However, there is a systemic problem with has resulted in a high youth unemployment rate.

The first problem: education. Education in this country is not ideal for supplying the labour market. The courses are either too academic, too practical or neither. In short, education fails the labour market and thus students.

The second problem: high debt levels.
Businesses are not going to hire if they have a high debt burden, nor are those occupied in the labour market willing to sell their labour because of the unpredictability of the market and their own debt burden.

The third problem: lack of diversity.
The economy is lacking in diversity. The largest contributor to GDP, the financial sector, whilst being capital intensive is not labour intensive. Manufacturing, on the other hand, is labour intensive yet also a smaller contributor to the economy.

The NMW does impose a barrier to entry, yet in the grand scheme of things it only plays a tiny part.

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Categories: Uncategorized
  1. Ust Oldfield
    January 23, 2012 at 10:19

    Reblogged this on The Guerrilla Economist.

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