Hey, Dude, Where's My Job?
Minimum Wage Jump Teaches Teens Harsh Lessons
August 4, 2010
For better or worse, young people today are getting one heck of a crash course in economics. Prime time debates on deficit spending, Facebook appearances by Ben Bernanke, John Rich lamenting job losses in Detroit — it sure beats the classroom. All the musty old theories — from Keynes, Hayek, Galbraith, Stockman — have come to life; welcome to the Jurassic Park of economics.
The Supply and Demand Problem
Unfortunately, teens are also learning personal lessons about price theory and supply and demand. While America’s youth were busy downloading the latest iTunes, those running the country savaged their job prospects. In July 2009, a month distinguished by the then-highest unemployment rate among teens since at least 1948, the latest of three hikes in the minimum wage pushed through by Congress in 2007 went into effect. As a consequence, the cost to hire part-time or unskilled workers jumped to $7.25 per hour, a full 41 percent increase from the 2007 going rate of $5.15. Some considered the hike overdue; a decade had passed since the prior increase. Others argued that carrying through with such a hefty jump was ill conceived, especially in light of the recession. The bottom line: The sharp rise in the minimum wage has almost certainly contributed to an equally harsh increase in unemployment among those not yet old enough to vote.
Why? Because teens account for a disproportionate number of those paid bottom-of-the-barrel rates. In 2009, for example, teens made up 6 percent of all workers paid by the hour, but 23 percent of those paid at or below the minimum rate. Put another way, some 5 percent of the nation’s hourly workers received minimum wage or less; nearly 19 percent of teens fall into this category. At last count, nearly 26 percent of all teenagers were unemployed, up from 24 percent a year earlier. This is a decidedly worse showing than the rate for adult men, for instance. In June, unemployment for men totaled 9.9 percent, actually down slightly from 10 percent the year before.
That higher minimum wages could lead to lower employment isn’t a shocking concept.
Naturally, the recession caused millions of all ages to lose their jobs. However, the disproportionate hit taken by young people can also, according to a recent study, be laid directly at the door of the hike in minimum wage. Economists William Even of Miami University and David MacPherson of Trinity University compared teen job losses in states impacted by the minimum wage hikes with states that were not affected. (Some states had independently passed a minimum wage as high or higher than the national level, thus rendering the federal hike irrelevant.) They conclude that the increase in minimum wage raised teen unemployment by 114,000.
Not only has high teen unemployment been bad for young people, it has also hurt the economy. Money flows out of teen hands like rain down a gutter. Abercrombie & Fitch, Apple and Starbucks — all favorite teen brands, have felt the impact.
Another lesson being taught to our nation’s youth is that staying in school pays off. While overall teen employment in states impacted by the rise in the federal minimum wage fell by 6.9 percent, the drop for those with less than a high school diploma was 12.4 percent. For the country as a whole, some 4.5 percent of college grads were without work in June, compared to 13 percent of those without a high school degree. Next time Junior pushes to quit school and take up professional bungee jumping, these figures could convince him to keep his feet on the ground.
Minimum Wage Alternatives
That higher minimum wages could lead to lower employment isn’t a shocking concept. Classic price theory says that raising the price of nearly anything lowers demand. Consequently, trying to help poor people by raising the minimum wage has long been controversial. A study by economists John Formby and Hoseong Kim from the University of Alabama and John Bishop from East Carolina University show that other approaches can more effectively raise income for those at the bottom of the economic ladder. For instance, their work indicates that increasing the Earned Income Tax Credit (EITC) or rebating the Federal Insurance Contributions Act (FICA) would both be more powerful income boosters. Specifically, they conclude that the higher minimum wage raised 780,000 Americans above 150 percent of the poverty line; a FICA rebate or higher EITC would have accomplished the same thing for 1.65 million people or almost 2 million people, respectively.
Hiking the minimum wage has relatively little impact because so many of those affected are not among the nation’s poor. A great many are middle-class teens working part time. Government data shows that part-time workers account for 28 percent of all those being paid by the hour, but nearly two-thirds of those receiving minimum wage or less. Indeed, the Formby study suggests that 86 percent of all the nation’s poor families, 35 million folks, received no benefit at all from the increase in minimum wage.
Why, then, would Congress focus on this apparently inefficient and possibly harmful approach to combating poverty? Because raising the minimum wage is popular. On the campaign trail President Obama promised to raise the minimum wage to $9.50 per hour by 2011. This is the third and possibly most painful lesson currently being taught to our country’s young people: Politicians don’t always do the right thing.