Ignoring the adverse effects of the minimum wage may cost taxpayers billions

Today the Obama administration issued a statement calling for a ‘First Job’ funding initiative to connect young Americans with jobs.

The statement laments how difficult it is for young people to find employment and emphasizes how important a first jobs is for future career success:

“After the worst economic crisis of our lifetimes, the United States is in the midst of the longest streak of private-sector job growth in our history, with more than 14 million new jobs created during the past 70 months. But for too many young people, getting a first job—a crucial step in starting their career—is challenging.

When a young person struggles to get their first job, it can have a lasting negative impact on her lifetime income as well as her motivation, pride, and self-esteem.”  

I brought up this same issue 3 months ago in a previous blog post that highlighted the differences in teenage unemployment across cities. And unsurprisingly there are substantial differences – in 2012 teenage unemployment was over 45% in Atlanta and only about 26% in Houston.

So what’s the proposal? A $5.5 BILLION grab bag of grants, skills investment, and direct wage payments to put young people to work. Naturally, the most obvious solution to the teenage unemployment problem is never mentioned – eliminating the minimum wage. In fact, nowhere is it hinted at that the minimum wage may be contributing to teenage unemployment, despite several recent studies affirming this theory.

From a 2013 study:

“Thus, for older workers, the two effects offset one another, and there is little impact on their long-term employment rate. For teenagers, the extra reduction in hiring implies that their employment rates decline. The results are very similar for males and females.”

From a 2015 study:

Using three separate state panels of administrative employment data, we find that the minimum wage reduces job growth over a period of several years”

From a 2015 study:

We find that a higher minimum wage level is associated with higher earnings, lower employment and reduced worker turnover for those in the 14–18 age group. “ (My bold)

From a 2015 study:

I apply the estimator to estimate the impact of the minimum wage on the employment rate of teenagers. I estimate an elasticity of -0.10 and reject the null hypothesis that there is no effect.”

This glaring omission is unconscionable in light of the abundant evidence that the minimum wage harms the least skilled, least experienced workers, which includes teenagers.

As a Prof. David Neumark stated in a recent WSJ op-ed:

“…let’s not pretend that a higher minimum wage doesn’t come with costs, and let’s not ignore that some of the low-skill workers the policy is intended to help will bear some of these costs.”

An all too common occurrence in US policy is that government intervention causes a problem that the government then tries to solve with additional intervention, completely ignoring the possibility that the initial intervention was the source of the problem. In this case, price controls at the bottom of the labor-market ladder have prevented young people from getting on the first rung, so now the government wants to wheel over a $5.5 billion dollar stool to give them a boost.

While this series of imprudent events is not surprising, it’s still frustrating.

5 thoughts on “Ignoring the adverse effects of the minimum wage may cost taxpayers billions

  1. William Farrell

    I find it mind-boggling that the minimum wage is still being advocated against. If an employer cannot afford to pay a bare-minimum salary—a salary lower than what can be survived on in most places—then that employer cannot afford to to hire an employee. Full stop. Saying that employers could hire more workers if only this inconvenient minimum wage wasn’t in the way is a trivial solution. Obviously you could hire more people if you didn’t have to pay them as much, but what good is it to anyone to offer a job that falls woefully short of every meaningful benefit of having a job in the first place?

    What we need is a stronger safety net to eliminate the non-choice between poverty by unemployment and poverty by slave wages. Are you not familiar with the concept of “race to the bottom?”

    1. Adam

      You seem to be assuming that all workers get a job in order to be self-sufficient. But teenagers usually live with their parents and get a job to join the labor market and gain skills, not survive. A relatively high minimum wage ensures that they are passed over for more experienced workers. What is just about that?

      Second, the minimum wage is a blunt tool for creating a safety net. It helps those who get and keep a job but harms those who can’t get a job since they earn $0 per hour. A safety net should provide a basic standard of living while not eliminating the incentive to better one’s condition.

      A better solution would be to allow firms to pay whatever wage they find profitable and subsidize the difference, with the subsidy varying by worker.

      For example, if a single mother of two can only find a job earning $7 per hour we could subsidize her wage by $9 to $16 per hour. As she gained skills and moved up the income ladder the subsidy would decline. Eventually she could become self-sufficient.

      Meanwhile, a teenager living at home with his parents making $7 per hour would get no subsidy.

      Obviously the devil is in the details, but such a plan would allow people to gain skills while not setting some arbitrary cutoff that prevents some from getting a job. If a basic standard of living is something that society thinks we should have, that burden should not be placed entirely on firms in the form of forced minimum wages. The minimum wage is one of the most ineffective, uncreative, and unjust tools out there for reducing poverty.

      1. William Farrell

        I agree with much of what you said, especially regarding the safety net and the obligations of the private sector to compensate for the state’s failure to provide an adequate one. With an adequate safety net, a low-wage worker will have the bargaining power to negotiate a fair salary for his or her labor, without the alternative being abject poverty.

        That said, in the US the prospects of universal health insurance, unemployment insurance, disability insurance, paid parental leave, and other vital components of the safety net are currently unlikely. So minimum wage, blunt as it may be, will remain an important part of poverty relief for the foreseeable future.

        I also think that the subsidy, as you propose it, may have the effect of disincentivizing advancement. If increased effort to earn more is offset by a commensurate decrease in subsidy, it eliminates all near-term benefits expending the effort required to gain skills and advance. For that reason, I prefer something more static, like a universal basic income, so that additional effort will pay off immediately. I understand many of the problems with UBI, and like you said, the devil is in the details, but on the whole I think it’s closer to an ideal solution.

        I think it’s difficult territory to get into when corporate pay scales are based on the employee’s need. Yes, perhaps a mother of two may need the money more than a teenager, but perhaps that teenager is the daughter of that single mother and putting this money directly back into the household. Without knowing the specific context, it is difficult to determine a need-based pay scale using simple metrics like age or number of dependents. I do agree that these considerations should be handled at the governmental level, not with the private company, but until the US has a sufficiently robust social safety net, then one of the only tools we have to work with is minimum wage.

        1. Adam

          Yes, the wage subsidy would have to be phased out less than one to one or it would not work. Corporate pay should definitely not be based on need – they would simply pay a wage. The subsidy would be applied for after obtaining a job and would be paid by general tax revenue.

          An effective UBI would be easier to administer and I go back and forth on my support for one. I think in theory it’s much more efficient and would ultimately be more effective and cheaper than the complicated, overlapping programs in place now. From a public choice perspective I get nervous since there is a strong incentive for politicians to promise a larger and larger UBI to gain votes. Once set and indexed to inflation it would have to be very hard to change, otherwise it could spiral out of control.

          I appreciate your comments, thanks for reading.

          1. William Farrell

            My pleasure, and thank you for responding to my concern. I apologize if my first comment come off a bit harsh, but I appreciate you taking the time to elaborate your position.

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