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.