Friday, March 05, 2010

Minimum Wage, Maximum Teenage Joblessness

From today's Wall Street Journal editorial "The Lost Wages of Youth"

"There's plenty of competition, but our vote for the recent act of Congress that has caused the most economic hardship goes to the May 2007 law raising the minimum wage in three stages to $7.25 an hour from $5.15. Rarely has a law hurt more vulnerable people more quickly.

A higher minimum wage has the biggest impact on those with the least experience or the fewest skills. That means in particular those looking for entry-level jobs, especially teenagers. And sure enough, as nearly all economic models predict, the higher minimum has wreaked havoc with teenage job seekers, well beyond what you would expect even in a recession.

Most Democrats won't bend on the minimum wage because it is a core union demand, but free thinkers ought to at least consider the teenage job problem. The long-term danger is that we are building in a higher level of structural unemployment as our least-skilled workers find it harder to climb onto the first rung of the job market.

Washington could at least establish a teenage, or sub-minimum, wage closer to $5 an hour. More than half of all minimum wage workers get a pay raise within one year on the job, so wages will rise naturally with experience and talent. More young people will be hired, and more will learn what it takes to get ahead in America."

MP: The charts above (top chart shows all teens and the bottom chart shows black teens) illustrate the adverse effects on teenage unemployment rates from the three increases in the minimum wage of 13% in 2007, 12% in 2008 and 11% in 2009, totalling to a whopping 41% from $5.15 in early 2007 to $7.25 by July 2009. Before the three-step increase, the teenage jobless rate was choppy from month-to-month but had been fairly stable within a range of between 14-18% over a number of years from 2002-2006.

But then just the first increase in the minimum wage to $5.85 drove teenage unemployment above 20%, and it's stayed there ever since, rising to almost 28% last year before gradually falling to 25% in February. The story is even worse for black teenagers by a factor of 2, since their jobless rates are almost twice as high as the overall teen rate, reaching a high of almost 50% last year, before "improving" slightly to 42% in February.

As the WSJ points out, the minimum wage can have long-term negative effects over a lifetime:

"Most readers remember the work habits they learned from their first job. Showing up on time, being courteous to customers, learning how to use technology—such habits are often more valuable than the actual paycheck. Studies have confirmed that when teens work during summer months or after school they have higher lifetime earnings than those who don't work. So raising the minimum wage may inadvertently reduce lifetime earnings."

Bottom Line: Artificially raising wages for unskilled workers reduces the demand for those workers at the same time that it increases the number of unskilled workers looking for work, which results in an excess supply of unskilled workers. Period. And another term for an "excess supply of unskilled workers" is an "increase in the teenage jobless rate." Despite the wishful thinking of politicians and labor unions, the laws of supply and demand are not optional.

28 Comments:

At 3/05/2010 5:33 PM, Blogger dan said...

you better read Ravi Batra before you go on about min wage. Maybe if you only offered $2/hr, more teens would work harder

 
At 3/05/2010 6:13 PM, Anonymous Anonymous said...

Look! The Democrats have created another hockey stick.

 
At 3/05/2010 6:36 PM, Blogger Paul said...

Ravi Batra? Wow, there's a name I haven't heard in ages. I read his book "The Great Depression of 1990" back in the late '80's.

I thought that slight error in forecasting finished him off.

 
At 3/05/2010 7:46 PM, Blogger PeakTrader said...

There aren't enough observations to be statistically significant, nothing to show causality (except the recession), ommited variable bias, etc. The article is completely unscientific. It makes climatologists look like scientists.

In the early '80s, the teenage unemployment rate was 24%, and in the early '90s, it was 23%, only slightly lower than today.

 
At 3/05/2010 7:52 PM, Anonymous Anonymous said...

Look, don't you get it? Minimum wage laws are immoral. What right do some govt. bureacrats have to tell you that you cannot cut your neighbor's grass or wash her car or any damn thing you can think of for a price you MUTUALLY agree on.
Liberty is dead in USA. that's why I left 20 years ago.

 
At 3/05/2010 8:28 PM, Blogger PeakTrader said...

Anon, then labor standards are immoral, for the same reason.

 
At 3/05/2010 8:30 PM, Blogger sethstorm said...

No, it disincentivizes unfavorable labor practices. Of course if you like locked in workers, company towns, killing off critics, safety violations as the rule, that is your future.

Kill off offshoring and bring back the work. No sense in giving them a way around realizing the value these people have.

Clothing that in "liberty" is very misleading. What moral right does a businessperson have to lord over people because of very limited choices?

 
At 3/05/2010 8:43 PM, Blogger PeakTrader said...

Seth, offshoring diversifies an economy. Facilitating unproductive or inefficient work, with a country's limited resources, may not be worthy.

 
At 3/05/2010 8:58 PM, Blogger bobble said...

peaktrader:" . . nothing to show causality (except the recession) . . . The article is completely unscientific. It makes climatologists look like scientists. "

exactly. considering we are in a recession, *every* population group will show increased unemployment from 2007 to 2010

look here's 35-44 y/o males . same curve

 
At 3/05/2010 9:03 PM, Blogger sethstorm said...


Seth, offshoring diversifies an economy. Facilitating unproductive or inefficient work, with a country's limited resources, may not be worthy.


That doesn't mean you accelerate it for the sake of economic efficiency. As I see it, it's being used as a end-run around responding to the US market.

If you want increased efficiency in locating work, do it when you have an equal efficiency in transitioning the displaced to fields beyond offshoring.

 
At 3/05/2010 9:25 PM, Blogger PeakTrader said...

Seth, when those limited resources, e.g. labor, capital, land, raw materials, energy, etc., are freed, that's when they can shift into new industries. They can't flow into new industries when they're locked in obsolete industries.

Of course, we can better help displaced workers. For example, more financial aid for fields in demand, e.g. in biotechnology (microbiologists, biochemists, engineers, etc.), particularly when the difficulty of those fields require more time to complete.

 
At 3/05/2010 9:54 PM, Blogger bobble said...

peaktrader:"we can better help displaced workers. more financial aid for fields in demand, e.g. in biotechnology (microbiologists, biochemists, engineers, etc.) . ."

actually PT, many of those jobs you mention are also being offshored. this is the problem right now, there are few fields where jobs cannot be offshored. this, "just get educated" is not really the answer.

the chinese, indians, etc are just as smart as we are and are rapidly being educated. they will work for 1/4 what U.S. workers get now.

anecdotally, the son of a friend of mine graduated with a masters in chem engineering from UCLA two years ago. he got a good job. then, a year ago, his job was offshored and he can't find anything. at the moment living with his parents and teaching sunday school . . .

 
At 3/05/2010 10:39 PM, Blogger PeakTrader said...

Bobble, there are some skills more in demand than others. Workers can be offshored too. However, there's a strong positive correlation between education and income.

If learning high-quality skills were cheap or easy, foreigners would also have deep and broad high-quality universities and corporations equal to the U.S.

China and India can graduate all the engineers they want. However, there are differences in quality, although the top universities in China and India are roughly equal to many U.S. universities.

 
At 3/05/2010 11:57 PM, Blogger bobble said...

PT, i'm sorry but your last post made absolutely no sense to me. can you restate it?

 
At 3/06/2010 3:11 AM, Blogger sethstorm said...


Bobble, there are some skills more in demand than others. Workers can be offshored too



this is the problem right now, there are few fields where jobs cannot be offshored. this, "just get educated" is not really the answer.

Truer words not said on the matter.

Offshoring has moved upwards enough that skill level becomes less relevant. What is more relevant is how politically active the other end of offshoring gets with our country (read: lobbying efforts, etc.).

It's one thing to diversify. It's another to throw everything into one basket called "offshore". If there was a specific undesirable group in the US that you wanted to marginalize with offshoring, you've won. Stop undermining the US markets with nations that only want to economically undermine ours.

 
At 3/06/2010 4:07 AM, Blogger PeakTrader said...

Acquiring needed skills raise living standards. Otherwise, most Americans would still be farmers, similar to China.

 
At 3/06/2010 6:16 AM, Blogger rjs said...

http://www.brendan-nyhan.com/blog/2010/03/simplistic-wsj-minimum-wage-editorial.html

 
At 3/06/2010 6:57 AM, Anonymous Rand said...

Two son of friends of mine who studied engineering at U of Illinois and at Purdue are both working. The U of I grad is a petroleum engineer in Ohio and the Purdue grad (this year) will be working in biomedical engineering in Indiana. Perhaps your friend's son's problem is that he is looking only in California.

 
At 3/06/2010 10:28 AM, Anonymous Jefferson Davis said...

You know what the real problem is here? The Thirteenth Amendment. Before the Thirteenth Amendment was passed, black unemployment was near zero. Some people would be more than willing to work in exchange for food and a place to stay. How dare the government demand that we capitalists pay "wages" for work done, when some workers would agree to be paid in food and shelter (in perpetuity). How can we really 'have' rights if we can't sell them to the highest bidder? Plus, I bet the poor would be helped greatly if they were allowed to sell their votes to wealthier and therefore more responsible citizens or joint-stock companies.

 
At 3/06/2010 11:05 AM, Blogger It's Always Something said...

The core argument in this article is correct: if a product or service is unsold, then the price must come down to clear the market. Unemployment is unsold labor, so trying to keep labor rates up is only guaranteeing that some portion of it (the least desireable portion, meaning least productive) will remain unemployed.
Are you better off with a poor paying job, or with no job at all? In a free market, we can all make that decision for ourselves, but in our current economy, governments have decided that we will not work unless they approve the terms of employment.

The difficulty in using statistics as the main support for an economic theory is clearly demonstrated by this article. While statistics can be a helpful illustration, they are often compromised by the complexitiy of causation.

As for eliminating "offshoring," ...please, you must be kidding. There is NO effective means of doing that, short of totalitarianism. What are you going to do? Lock the borders so people and capital can't get out, or so they can't get in? Or both? Nothing will destroy our wealth faster than to destroy international trade. Adam Smith demonstrated that 250 years ago.

That said, the real culprit in off-shoring is our monetary policy. It is cheaper to print a bunch of money (figuratively speaking), trade that new counterfeit money for real goods and services overseas, than to roll up our sleeves and make stuff here. Other countries have eagerly accepted dollars at a premium because they were used as a world currency. We got the benefit of their products for the price of some paper and electrons. That will end if the world decides the dollar is too plentiful and no longer worth their products and services. Additionally, our wage rates, tax rates,numerous mandates and regulations, and high cost of living makes it less profitable for companies to do production here. Focus on removing impediments to business, and stop all this easy money by the Fed (as well as deficit spending by the U.S. government) and jobs will return.

 
At 3/06/2010 2:06 PM, Anonymous Anonymous said...

When you learn what 'money' really is you will awaken to the weapon of mass deception. ALL economic value starts with labor. It is an asset to have a human work for your business. But in an age of great taxation used mostly for war, what is left for the people actually working in a small percentage. When you add all the taxes, hidden and otherwise you find less than 5% of your earnings in your pocket. Spending your time is a tax too, so filling out government forms, adhering to odious regulations all cost. German and Greek city states lived fine with out central governments. Did you know that each and every person on the planet is under thousands of laws that bind them? First and foremost end central banks and outlaw international bankers would be a start to a healthier world where we all could earn a living without killing ourselves to do so.

 
At 3/06/2010 2:12 PM, Blogger OA said...

Minimum wage isn't the full story, but recession isn't either. While people are willing to move down job tiers in a recession and displace the least qualified, it is not a given that there would be less jobs at the low end.

It's when the market wage level hits the minimum wage that that the least qualified lose out. We could easily pick minimum wage points that are so low they don't really come into play even in a recession, or that are so high the fallout for teens would be clear even with economic growth. But they most certainly are at a point that comes into play. But the federal rate doesn't prevail in all states.

Many states like California had minimum wages higher than the federal level so there was zero immediate effect when the Federal rates moved up. The California minimum moved to $7.50 back in January 2007. So none of the federal rate changes impacted California. Took the recession to affect the California unemployment rate.

A better study would be to just look at states where the federal rate was the effective rate. Which would vary back through the decades.

 
At 3/06/2010 2:52 PM, Blogger sethstorm said...


As for eliminating "offshoring," ...please, you must be kidding. There is NO effective means of doing that, short of totalitarianism. What are you going to do? Lock the borders so people and capital can't get out, or so they can't get in? Or both? Nothing will destroy our wealth faster than to destroy international trade. Adam Smith demonstrated that 250 years ago.

No I am not kidding. It is not totalitarian to enforce the law. It still is not if you fly out and wonder why the US government's waiting at your destination.

Kill offshoring, and you will have the positions to fill at the various levels. Without an end-run to US jobs, they will have to respond to domestic concerns. Few people can afford to sit it out just for a politically expedient outcome. Those whom do not, will be able to fill the demand.

Are non-economic freedoms an impediment to business? You seem to think so.

 
At 3/06/2010 4:07 PM, Anonymous Anonymous said...

Whoever said above that labor is the root of economic value needs to give their head a shake. The Labor Theory Of Value has precisely zero legitimacy.

The article's thesis is solid. Simple supply & demand -- when people are forced to pay more for something (e.g. the lower-end wages that are earned mostly by inexperienced youth) they will naturally demand less of it (i.e. not as many inexperienced youth will be able to find jobs).

For those who like minimum wage coercion, stop being so stingy & inhumane. Have faith that the minimum wage does no damage to the economy and demand an immediate minimum wage increase of $10000/hour. Ben Bernanke promises that printing the money to cover such wages also will have no negative effect on the economy. You can trust Ben...

 
At 3/06/2010 4:13 PM, Blogger sethstorm said...

Anonymous said at 3/06/2010 4:07 PM...
For those who want to set it to some arbitrarily high number just to provide a point, you're missing the whole idea. The minimum wage is not supposed to be something to live on, but something that disincentivizes slave labor.

 
At 3/06/2010 8:32 PM, Blogger It's Always Something said...

sethstorm:
Adam Smith noted that each country should work with whatever is their comparative advantage, and use that to trade with other countries who have other comparative advantages. Everyone gets richer. Thus the principle of free trade between nations is born.

Right now, other countries have a comparative advantage in cheap labor and lower costs of regulation, taxes, mandates,licensing, etc. By removing some or all of those impediments, the scales tip back toward America and our people can go back to work without impoverishing the country. We may even find markets overseas for our products.

Nothing will cripple us faster than trying to force capital to stay in the country. The moment anyone with capital realizes that by keeping it here they are condemned to fund overpriced, over regulated industries, they will hide their wealth and find loopholes to get it out of the country. You'll end up with the opposite of what you intended.

 
At 3/11/2010 8:45 PM, Anonymous Anonymous said...

Peak trader: no amount of data proves causality (post hoc ergo...) However, teen U rates do support the proposition that wage floors result in dead weight losses, and there is more data behind this than indicated in this article.

 
At 3/10/2011 3:43 PM, Blogger SteveP said...

you'd look at those graphs and think they were telling some truth except didn't something happen at the end of 2007 going into 2008? Oh yeah...the crash.

Teenage unemployment is more responsive to economic downturns, this has nothing to do with minimum wages (even before we break it into states and include data on state minimum wages).

 

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