Raising the minimum wage is bad news
Commentary: Teens and low-skill workers will suffer
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Feb. 22, 2013, 7:01 a.m. EST
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WASHINGTON (MarketWatch) — The unemployment rate for teens is at 23%,
and the rate for unskilled workers is at 12%. Why does President Obama
propose raising the minimum wage to $9 per hour and indexing it for
inflation, as he stated in his State of the Union Address?
Obama and his advisors seem to believe that if the minimum wage were
raised and then indexed, all workers would retain their jobs. But this
is not the case.
Between 2007 and 2009, the federal hourly minimum wage rose to $7.25 in
three steps from the $5.15 rate that had prevailed for a decade. If the
wage were raised to $9 and then indexed for inflation, it would rise
every year.
It sounds compassionate to alleviate poverty by mandating that employers
raise wages, but employers often replace low-skill workers with
machines. Think self-checkout machines in supermarkets, or computerized
call centers.
Or, try a thought experiment — would you have your job if the minimum wage were $50 an hour? Probably not.
At its current level, the minimum wage disproportionately affects teens
and low-skill workers, many of whom qualify only for entry-level slots.
University of California (Irvine) economists David Neumark and J.M. Ian
Salas, together with Federal Reserve Board economist William Wascher,
have written extensively on the effects of the minimum wage on
employment. In a National Bureau of Economic Research paper published in
January, they conclude that “minimum wages pose a tradeoff of higher
wages for some against job losses for others.”
They specifically mention that a higher minimum wage results in more unemployment for teens and low-skill workers.
Why is it that some studies, such as those by Obama’s Council of
Economic Advisers chairman Alan Krueger, have found that increases in
the minimum wage do not affect employment in the restaurant industry?
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Two reasons, according to Neumark and his coauthors. First, many
restaurant workers are paid above minimum wage. Second, a higher minimum
wage can encourage employers to substitute more-skilled employees for
less-skilled employees, so that total unemployment in that industry does
not decline substantially.
Minimum wage workers are overwhelmingly young and work part-time. LinkTextChunk((LinkChunk)chunk)
Two-thirds of minimum wage earners worked part-time in 2011, the latest
year available. Only 3% of hourly wage earners earn minimum wage or
less.
Workers under the age of 25 made up about half of the 3.8 million
workers who earned at or below the minimum wage in 2011. Employed
teenagers are seven times more likely to be among the minimum wage
earners than workers older than 25.
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Another 11 million workers earned between $7.26 and $8.99. Some will be
in danger of losing their jobs if the minimum wage is increased.
In his State of the Union Address, Obama said that a full-time
minimum-wage worker makes $14,500 a year. That’s 1.3 million workers, in
a labor force of 156 million, about eight-tenths of 1%. But this
understates actual income, because it does not include transfer
payments.
As Michael Saltsman of the Employment Policies Institute has shown, the Earned Income Tax Credit adds to the minimum wage. Read Michael Saltsman.
In addition to the EITC, the value of the Supplemental Nutritional
Assistance Program, formerly food stamps, has risen over the past 20
years, increasing the resources of low-income workers. (See chart.)
In 1992, the hourly minimum wage was $4.25. For a family with one parent
and two children, the value of the earned income tax credit was 69
cents, and the value of food stamps was just over a dollar, for total
income of $5.96 an hour. (Other possible benefits include housing and
Medicaid, depending on the state.)
Fast forward to 2012. The minimum wage was $7.25 an hour. For the same
family, the EITC rose to $2.62, and the food stamps program added $1.67,
for a total of $11.54. Assuming 2,000 hours of work annually, and
including the EITC, the family makes not $14,500, but $19,736. This
family also qualified for food stamps, bringing the total family income
to $23,072.
Unlike increases in the minimum wage, these government transfers do not discourage employers from hiring.
The minimum wage of $7.25 an hour, plus the mandatory employer’s share
of social security, unemployment insurance, and workers’ compensation
taxes, brings the hourly employer cost to $8, even without benefits.
Raising the hourly minimum wage to $9 will bring the cost to employers
to about $10.
And in 2014, employers with more than 49 workers who do not offer the
right kind of health insurance will have to pay a penalty of $2,000 per
worker per year, further increasing costs and discouraging hiring. Many
are already cutting back or reducing workers’ hours, because no penalty
is owed on those working less than 30 hours weekly.
Unemployment rates for teens and low-skill workers rose faster than
others in the recession. The adult unemployment rate stood at 7.3% in
January 2012. That’s over 3 percentage points higher than the 3.8% rate
in December 2007, five years earlier, at the start of the recession. But
the January 2012 unemployment rate for teens was about 6 percentage
points higher than December 2007, at 23%.
Employers now only employ workers who can produce $8 an hour or more of
goods or services. Under Obama’s proposal, they would employ only those
who could produce $10 an hour, an amount that would rise every year. The
government can mandate steadily rising minimum wages, but not steadily
rising teen skills and productivity.
As minimum wages rise, employers change technologies or hire more skilled workers.
Forbidding employment of those whose skills aren’t worth $10 an hour
prevents workers getting their foot on the bottom of the career ladder.
Obama is essentially proposing to take away the right to work for
low-skill workers.
Most American employers have to pay more than minimum wage just to
attract and hold the workers they need. Almost 140 million workers now
earn above minimum wage, not because of federal or state law, but
because that is the only way that firms can attract and keep employees
with skills.
Instead of more money for youth employment, why not expand the federal
minimum wage exception for teens? Under federal law, employers are
allowed to pay teens $4.25 an hour for 90 consecutive calendar days, or
until their 20th birthday, at which point the wage has to revert to
$7.25 an hour.
The law is not simple. Employers have to show that teen workers don’t
displace others. If the state minimum laws don’t specifically include
the teen exception, then teens have to be paid the regular minimum — and
the large states, such as California and New York, don’t mention teens.
Ninety calendar days might cover a summer job, but if teens want to
continue the job during the school year, employers have to pay them the
standard wage.
Youth unemployment is a serious social problem in some European
countries, such as France (27%), Spain (55%), and Italy (37%). These
governments have taken every possible step to discourage the young from
working short of criminalizing work: wages are regulated to be high, and
it is costly to hire a new worker and even more costly to let one go.
In these countries, young people have a much harder time getting started
up the career ladder than their American counterparts.
America does not want to go down this road. Working at an early age
teaches useful skills, transferable to future jobs, such as getting to
work on time, staying the whole day, and putting up with unpleasant
colleagues.
Increasing the hourly minimum wage to $9 and indexing it for inflation
is bad news for teens and low-skill workers who deserve a better
opportunity, and it is bad news for America where we cannot afford to
further cripple our economy.
Diana Furchtgott-Roth, a former chief economist
of the U.S. Department of Labor, is a senior fellow with the Manhattan
Institute.
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