fbpx

Latest Posts

Home

Facebook

Twitter

Search
About

Minimum wages are bad public policy

This op-ed appeared February 19, 2018 in the Rochester Post Bulletin

Between 2004 and 2014, America’s Labor Force Participation Rate for people over age 16 fell from 66 percent to 62.9 percent as Baby Boomers started to retire. But, over the same period, the Participation Rate of those aged 16 to 19 also fell, from 43.9 percent to 34 percent.

What is causing this? New research from economists David Neumark and Cortnie Shupe suggests that the answer is minimum wage laws.

Neumark and Shupe consider three potential causes. First, that a rising minimum wage that could reduce employment opportunities for teens; second, that the returns from going to school rose relative to those of going to work; and third, increased competition from immigrants for low-skill jobs.

After crunching the numbers, they find that “in terms of explaining changes in the behavior of teens age 16–17 since 2000, the role of the minimum wage is predominant. Increases in the returns to schooling appear to have played almost no role, and immigrant competition a minor role”

This makes theoretical sense. An employer will not hire someone if doing so adds more to their costs (the wage) than to their income (their revenue). If they did so, they would be losing money on the hire and no business that did that would be around too long. All minimum wage laws do is make it illegal to contract at a wage below some legally specified level. So, if someone lacks the skills to be productive enough to generate enough revenue, that employer will not hire them.

This will impact different sections of the workforce in different ways. A graduate in biomechanics, for example, might have no problems generating at least X amount for an employer. Likewise an older worker with a few decades of experience. Minimum wages will likely not affect the employment of skilled or older workers too much.

But the story is different for unskilled workers. If, because of a lack of training and/or experience they aren’t able to add to an employer’s revenue, all that the minimum wage laws have done is make it illegal to hire them. Younger workers in that 16-19 category are likely to be disproportionately affected and this is exactly what the evidence shows.

Is this a bad thing if they’re in school increasing their human capital instead of working? After all, the decline in employment consisted of fewer teens in school and employed, and more teens in school exclusively.

In fact, Neumark and Shupe find “no evidence that higher minimum wages…led to greater human capital investment. If anything, the evidence is in the other direction. Thus, it is more likely that the principal effect of higher minimum wages in the 2000s, in terms of human capital, was to reduce employment opportunities that could enhance labor market experience.”

This new research illustrates one more avenue in which this works. Minimum wages push teenagers out of the workforce and the extra human capital they get from any extra education is more than offset by that lost from not working.

John Phelan is an economist at the Center of the American Experiment, a Twin Cities-based public policy institute. A version of this column was first posted on their website and is used with permission.

Comments

Subscribe

Categories

Upcoming Events

  • Morning in Minnesota Breakfast Series: Winona

    Location: Signatures Restaurant, 22852 County Road 17, Winona, MN 55987

    Please join Center of the American Experiment Friday, March 6 at Signatures for a FREE breakfast with economist John Phelan.

    Register Now
  • Lunch Forum with Amity Shlaes

    Location: Hyatt Regency Minneapolis 1300 Nicollet Mall Minneapolis, MN 55403

    Buy tickets for March 2nd HERE. About This Event: Enjoy our Early Bird Ticket Special through February 23rd! After this date, ticket price will increase to $30. Doors open at 11:30 AM, program and lunch begin at Noon. In Great Society, the New York Times bestselling author of The Forgotten Man and Coolidgeoffers a stunning revision of our last great period of idealism, the 1960s, with burning relevance for our contemporary challenges. Today, a battle rages in our country. Many Americans are attracted to socialism and economic redistribution while opponents of those ideas argue for purer capitalism. In the 1960s, Americans…

    Register Now
  • 2020 Annual Dinner Featuring Sarah Huckabee Sanders

    Location: Minneapolis Convention Center Ballroom 1301 2nd Ave S Minneapolis, MN 55403

    American President: The Unorthodox Approach to Politics that Changed the World. Sarah Huckabee Sanders served as White House Press Secretary for President Donald J. Trump from 2017 to 2019. A trusted confidant of the President, Sanders advised him on everything from press and communications strategy to personnel and policy. For two and a half years, Sanders was at the President’s side, battling with the media, working with lawmakers and CEOs, and staffing the President on every foreign trip, including dozens of meetings with foreign leaders. Sanders is only the third woman and the first mother to hold the job of…

    Register Now