Must Reads for Serious Thinkers: The Minimum Wage Affects the Teen Employment Rate Negatively

July 18th, 2011 by 

Those who argue that the minimum wage and living wage laws have unacceptably deleterious effects like to concentrate on groups which would be affected most by any increases in the mandated rate of pay.  We've covered the matter multiple times, with articles by both yours truly and our on-site serious thinker Cameron Daniels. Today we're going to explore how the minimum wage affects teen employment rates... and other low income jobs right along with it.

How the Minimum Wage Affects Teen Employment Rates

Groups which earn rates close to the minimum wage have the most to lose when minimum wages increase.  One of the groups often singled out is teenagers - who often seek work in areas which pay rates which match or closely parallel the minimum wage.  A great series comes from Ironman at Political Calculations, and you can explore his thoughts here: Part 1, Part 2, Part 3.  (Like any good trilogy, it has a cliffhanger in part 2, so make sure you read all three!)

Why write about it again? 

The federal minimum wage increased 3 times soon after 2007, and the teen unemployment rate increased right along with itMany people have tried to point out the futility of living wage laws, yet even a group of commentators with IQs as high as readers of the New York Times refuse to analyze the substance of the argument and defer to attacks on an author's credibility.  On that note, I'd like to do my part to refute a few of the repeated arguments I see in the comments section of articles like the one I just linked:

1) If the minimum wage is eliminated, is it acceptable for companies to pay a $2/hr (pick your number) wage to those they hire?  Is that preferable to our current situation with high employment simply because more jobs would be created?

Well, yes.

First of all, the premise of the argument implied in the question is wrong.  Employment is a contract which requires both sides to consent, so a $2/hr would still require consent from the employee.  Consent from the employee implies they are okay with the $2/hr wage.

Additionally, having no wage floor doesn't mean that other market mechanisms are eliminated... if there is a dearth of people seeking employment at the $2/hr wage rate, companies will have to increase their offer.  The same mechanism ("supply and demand") which leads to increased wages for skilled workers like Economists and Opinion Journalists also benefits those who draw less wages.

At some level, it is unfair to disqualify people from employment because the job they would do doesn't justify paying them the current minimum wage rate.

Take the automatic soda dispenser at McDonald's as a silly argument.  Let's say it costs $7.50 an hour to run, and the minimum wage is $8.00 an hour (ignoring payroll tax, medical insurance, and other requirements which make the actual employment cost higher than the minimum wage).  If the minimum wage is eliminated, McDonald's would happily pay up to $7.49 an hour for a human to dispense your favorite sugary beverage.

However, the law as currently written disallows this, so a machine does the work.  An argument against automation?  No... this is an argument against restrictive wage laws.  The next time you see a sign saying "Will Work for Food!", go explain that Living Wage laws make it impossible for you to fulfill your end of that bargain.

Will we see signs popping up which state, "Will Work for Minimum wage plus Payroll Taxes!"?  Doubtful.

The minimum wage affects teen employment rate - you cant work only for food.

... only if I can pay you under the table. (eddiedangerous)

Additionally, the retort that "the amount companies will pay isn't enough to live on!" is an argument for a well designed supplemental wage program (ahem, a negative tax rate), better than the Earned Income Tax Credit.  If that functioned as the program was originally designed, the supplemental income provided would boost the income provided by companies - so instead of unemployment insurance and welfare covering 100% of the gap, companies would cover it instead.  Nice!

2) The case of raising the minimum wage to a certain number (say, $15/hr) is a moral one.  Giving people a higher wage allows people to have enough to live on while recirculating that money in the economy.  Win, win (win)!

The case of eliminating the minimum wage is an economic one - and a moral one too, if you follow it through to the end.  I harbor no illusions that living wage laws are the result of a real moral problem - but the solution is almost exactly the opposite of what we have in place now.  Increasing the minimum wage to $15 an hour or any other arbitrary number is a tremendous idea on paper - but in a dynamic economy would quickly prove to be disastrous.  Hear me out.

Taking the minimum wage now as $8.00 an hour, the delta of the change is $7.00, an instant 87.5% raise on paper.

Fast Food Employment and the Minimum Wage

In reality, business itself is a race to eliminate and minimize cost - witness soda machines and the next big wave of automation (I know, I'm using fast food examples... find your own more appropriate examples!) - the dreaded computer assisted ordering.

Yes, I can skip the line at Jack in the Box, but I'm also eliminating the need for a human to take my order.  Overnight, companies paying people in the $8.00 to $15.00 range would have to consider whether they can afford to pay their workers that much.  If automated systems can replace a worker for less than that $15 an hour, you could expect to see more of those systems crop up.  If a company can get away with less service, they will eliminate positions (and increase the number of complaints of lack of service at Big Box Stores!).

Not everything can be automated today, and not every position of service can be eliminated, so a fair number of people would see a pay raise as well.

Great, right?  Not really.  Since all companies in a space now have to contend with these costs, prices would rise.  In order to pay their workers $15 an hour, companies would increase the prices of their goods and services.  Dollar menus (that don't really exist anymore...) would become $2 menus, and all sorts of other weird distortions would happen - and we call that inflation.  So, at some point after the change, inflation would again "move the goalposts" and make $15/hr an unacceptable living wage!  Unfortunately, the policy has now increased unemployment while at the same time making it harder to afford basic things.

(Of course, this policy failure will lead to more cries for an increased living wage and the cycle will repeat.)

Politically, it's a win.

People argue morally for a living wage, politicians deliver, and even the people who are most affected by the inflation and unemployment have little idea why it happened - the very policies they championed.  Rinse and repeat.

My question to you: Where do you stop?  If $15, why not $1000?  The reason I ask is because minimum wage laws and employment are counterbalancing forces.  If you make less than $1000 an hour (most of us do), your job would be at risk.  Luckily, inflation would take care of those of us who truly have indispensable positions, so if you enjoy brinkmanship, go ahead and increase the amount you demand.

Hit Us With Your Last Questions!

3) Ivory tower professors a) don't understand what it's like to stretch to pay bills on a minimum wage, b) employers are trying to get around paying employees a fair wage and c) jobs which the minimum wage doesn't apply to, like tip supported jobs, are increasing in popularity in the current environment.

There is no question in ad hominem attacks like this, but let a non-professor address it anyway:

a) Some of the stretching to pay bills is related to inflation caused by the very laws in question.  It's also an argument for a negative income tax - the pure form of the EITC.  We created a negative income tax and guaranteed basic income calculator, check it out.

b) This is not inconsistent with the data.  Jobs which can't be justified will be eliminated.  Computers, robots, and increased automation, which have no wage requirements, will continue to replace jobs which no longer pay off under new wage laws.

c) Yes, this makes sense, and why wouldn't it?  Inflation makes it easier to pay current minimum wages, so as new jobs are justified, employers will hire into those jobs... and people are accepting them, so that's just the market at work.

4) If you were a benevolent dictator, what would you set the minimum wage to?

First off, if I was dictator, I would set it to $0/hr with a healthy negative income tax.  (Now Democrats and Republicans are both mad, but I don't need to please anyone - I'm a dictator.)

In a democracy it's not that simple... the best course of action is to do absolutely nothing *completely* rendering the usefulness of this article zero - in fact, this article is worse than worthless since it serves to increase attention on the minimum wage a non-negligible amount (spurring more arguments against this piece and increasing the odds of new laws)!

As long as inflation is positive, the minimum wage will take care of itself.  In 2050, our money will be worth less, so $8 today might mean more like $4.00 or less... meaning more jobs can be justified again.  Instead of increasing the minimum wage, work on the Earned Income Tax Credit - and turn it into a true negative income tax as imagined.

Also, most definitely do not index the minimum wage to inflation: there is no easier way to guarantee that the lower paying jobs we have seen eliminated will never come back.

Do you see how minimum wage affects teen employment?  What would you do about it?



PK started DQYDJ in 2009 to research and discuss finance and investing and help answer financial questions. He's expanded DQYDJ to build visualizations, calculators, and interactive tools.

PK is in his mid-30s and works and lives in the Bay Area with his wife, two kids, and dog.

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