New research shows that minimum wage laws have reduced teenage employment and left them less skilled
In 1994, the Labor Force Participation Rate among those aged 16 to 19 was 52.7%. By 2004, that was down to 34.0%. It is true that the Labor Force Participation Rate has fallen for all workers in recent years. But, as Figure 1 shows, the fall in 16-19 employment predates this. This is unsurprising, as the fall in the broader Participation Rate has been driven primarily by retirees as the Baby Boomers start to leave the workforce.
Figure 1 – Labor Force Participation Rates
Minimum wage laws are pushing teenagers out of the labor force
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 skilled 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 add 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, $Xph. So, if someone lacks the skills to be productive enough to generate $Xph in revenue for the employer, 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 $Xph for an employer. Likewise and older worker with a couple of decades of experience. Minimum wages will likely not affect the employment of skilled or older workers too much.
But the story is very different for unskilled workers. If, because of a lack of training and/or experience they aren’t able to add $Xph 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.
What they gain in extra schooling, they more lose from not working
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.” In other words, the human capital formation of on the job training that is lost more than offsets that which is gained from extra schooling.
One more way minimum wages hurt those they are meant to help
Minimum wages are bad public policy. In 2008, Neumark and economist William L. Wascher surveyed two decades of research into the effects of minimum-wage laws. They found that “minimum wages reduce employment opportunities for less-skilled workers … (that) a higher minimum wage tends to reduce rather than to increase the earnings of the lowest-skilled individuals … (that) minimum wages do not, on net, reduce poverty … (and that) minimum wages appear to have adverse longer-run effects on wages and earnings.”
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 Center of the American Experiment.