The minimum wage tends to hurt those it is intended to help.
Raising the federal minimum wage will be a hot topic in the 2016 presidential race. President Barack Obama has called for increasing it to $10.10 per hour and others, including liberal presidential candidates, have promoted a “living wage” of $15.
Like other well-intentioned proposals, research shows this will be most harmful to those it’s intended to help, making it poor public policy and even worse economics. Instead, given the negative effects that raising the minimum wage will have on the least skilled, particularly teenagers, lowering or even eliminating the federal minimum wage should be discussed.
The late, great free market economist Milton Friedman said, “The rise in the legal minimum-wage rate is a monument to the power of superficial thinking.”
This is because it defies the law of demand teaching us that as the price of labor increases there will be fewer people employed. It also incentivizes employers to mechanize low-skilled jobs, such as ATMs replacing bank tellers, self-checkout registers replacing cashiers, and burger robots soon replacing fast food workers.
While workers who keep their job at the higher wage win, others fired will lose. Public policy should avoid picking winners and losers, especially when there is so much at stake for millions of workers.
Research that considers teenagers and low-skilled workers consistently finds negative employment effects, such as those by Neumark, Salas, and Wascher and another by Meer and West. As teenagers suffer from fewer jobs available, they lose the opportunity to get their foot in the door and learn from on-the-job training that improves their skills and boosts their lifetime earnings potential. This oftentimes forces them on welfare programs leading to long-term government dependence that’s costly to workers and society.
Three million people, or only 3.9 percent of the 77.2 million hourly paid workers, earned at or below the minimum wage nationwide in 2014. More than one out of every five of them were 16- to 19-year-olds and almost half were 16- to 24-year-olds.
Most in these age groups earning the minimum wage provide supplemental household income, are in college, or are starting their career; they aren’t the sole breadwinners and don’t earn this wage long. If these individuals are forced out of their job by a higher wage, then it makes it harder for them to improve their well-being.
Despite this evidence, Congress has increased the federal wage 22 times since its inception in 1938 during the depths of the Great Depression.
A liberal Congress approved the last increase from $5.15 in July 2007 to $7.25 in July 2009. This period provides a relevant case study for the potential effects of a 41 percent minimum wage increase on 16- to 19-year-olds by looking at their labor market data in 2006 and 2010.
Teenagers in this wage category increased by about 575,000 though their share of the 4.4 million total minimum wage earners nationwide declined from 25 percent to 22.8 percent in 2010. Their labor force participation rate fell from 43.6 percent to 35 percent, unemployment rate increased from 15.3 percent to 25.9 percent, and employment-population ratio declined from 37 percent to 25.9 percent.
These data after the minimum wage increase was in full effect were near the worst for teenagers since record keeping began in the late 1940s.
Black teenagers fared even worse during this period. Their participation rate dropped 8.4 percentage points to 25.6 percent, unemployment rate increased 49 percent to 43.1 percent, and employment-population ratio fell by 5.9 percentage points to 14.6 percent. Again, all near the worst levels.
Critics may argue that these hardships were from the severity of the Great Recession. Clemens and Wither study this and find that the increase in the minimum wage accounts for at least 14 percent of the drop in the national employment-population ratio, disproportionately effecting teenagers.
It’s not only bad economics, but it’s also terrible policy as a one-size-fits-all wage bears no connection with reality as there are substantially different costs-of-living among states.
Take conservative Texas and liberal California that are the largest two economies and populations in the U.S.
Texas matches the federal minimum wage while California keeps theirs above federal level currently at $9 per hour, and increasing to $10 per hour in January 2016. But Californians earning $9 per hour can’t purchase as large of a basket of goods and services as Texans earning $7.25 per hour because their cost-of-living is 50 percent higher than in Texas, according to the private firm C2ER. This means a comparable wage in California would need to be $10.88.
Comparing 2006 and 2010 data around the last federal minimum wage increase, California’s teenage unemployment rate increased from 17.5 percent to 34.4 percent. Texas’ rose from 16.7 percent to 22.3 percent.
Of course, the Great Recession and subsequent recovery were worse in California driven much by liberal policies that include the highest income tax rate of 13.3 percent nationwide and a regulatory environment that is not conducive to job growth. However, the Texas model of low taxes, no personal income tax, and less regulation were successful.
For example, job creation has been much more robust in Texas driving the unemployment rate for the total labor force down to 4.2 percent compared with California’s 6.3 percent unemployment rate, which has been higher than Texas’ rate since July 2006. This doesn’t even account for the large number of people leaving California for greater opportunity to prosper in Texas.
Moreover, the conservative policies in Texas have contributed to the teenage unemployment rate of 16 percent compared with the 25.9 percent rate in California from the latest available 2014 data, which like the nation, can likely be partially explained by a higher minimum wage in the Golden State.
Though the minimum wage was created with good intentions to provide a minimum standard of living, instead it has banned workers and employers from choosing to negotiate wages that best meet their needs, which may be below $7.25 per hour. Unfortunately, this leads to underground economic activity to earn a living, more jobs moving overseas for cheaper labor, and employment of cheaper undocumented workers.
Despite good intentions, it’s clear that the minimum wage should not be increased. In fact, for the well-being of teenagers, the least skilled, and all Americans, presidential candidates, liberal and conservative, should advocate for lowering it. Or, better yet, they should push for eliminating it so that they can negate the substantial costs to these workers for almost 80 years.
A freer labor market will generate a more productive economy and workforce, increasing the ability of workers to demand a higher wage without government intervention. Advocating for improving the education system through school choice, supporting private worker training, creating a more efficient tax system, reducing unnecessary regulations, and other market-driven alternatives will improve the well-being of all Americans.
Vance Ginn, Ph.D., is an Economist in the Center for Fiscal Policy at the Texas Public Policy Foundation, a non-profit, free-market research institute based in Austin.
Mary Katherine McNabb is a Research Associate in the Center for Fiscal Policy.