Relative Wages and the Youth Labour Market

The dramatic rise of youth unemployment in recent years in most OECD countries has led to the introduction of various policies targetted at youths. Although there are competing explanations of this phenomenon (as of aggregate unemployment), the British government (in particular) has been seduced by the explanation that the growth in youth unemployment is due to a rise in the relative wages of youths. The Prime Minister stated in Parliament (Hansard 27 July 1981, Cols 835–6) ‘[b]ecause the wages of young people are often too high in relation to those of experienced adults, employers cannot afford to take them on’. The Department of Employment produced a research paper (Wells, 1983) allegedly providing econometric evidence for this view. The Times gave this favourable publicity, and entitled an article ‘Pay Cuts Would Create Jobs for Young People’ (20 December 1983). In this chapter we review some of the evidence on the relationship between relative wages and youth (unemployment in Great Britain and then estimate a disequilibrium model of the youth labour market.