Research shows that DFL bill to hike youth minimum wage will reduce youth employment

Last month, my colleague Martha Njolomole wrote about a bill — HF 4050 / SF 3947 — which would eliminate the lower minimum wage rate for small businesses.

But that isn’t all these bills would do. HF 4050 — authored by Reps. Kozlowski (DFL), Michael Nelson (DFL), Greenman (DFL), Hill (DFL), Berg (DFL), and Jordan (DFL) — and SF 3947 — authored by Sens. Mohamed (DFL) and McEwen (DFL) — would also eliminate the lower minimum wage rate for employees under 18 years old. This would be bad policy.

I’ve written before about what I called the “the real iron law of wages:”

This says that no hire will take place at a wage level above the employer’s estimate of what the employee will add to revenue. If the employer thinks the employee will add $10ph to revenue, they will pay up to that. If they pay $9.98, they are adding $10 to income and $9.98 to costs. And profit is just revenue (-) costs. The employer is making a profit of 2 cents ph.

It follows, by extension, that if this employer is forced, by law, to pay this worker $10.02ph, they will be adding more to their costs than their revenues and losing money on the hire. They simply won’t do that.

The next point to note is that different workers will generate different amounts of revenue. A worker with lots of experience, for example, will generally be more productive than a worker with little experience. In our example, the experienced worker might generate $10.05ph in revenue in which case it will make sense for the employer to pay them at least the legal minimum of $10.02ph. But the less experienced worker might only generate revenue of $9.98ph in revenue, in which case it will not make sense for the employer to pay them the legal minimum. They just won’t hire them at all.

This is the theory behind the empirical finding that:

Minimum wages reduce employment opportunities for youths and create unemployment. Workers miss out on on-the-job training opportunities that would have been paid for by reduced wages upfront but would have resulted in higher wages later. Youths who cannot find jobs must be supported by their families or by the social welfare system. Delayed entry into the labor market reduces the lifetime income stream of young unskilled workers.

Differing minimum wage rates by age are an acknowledgement that workers of different levels of experience have differing levels of skill. Refusing to acknowledge this reality, which is what these bills do, would negatively impact the very people it is allegedly intended to help. For these reasons, we hope that HF 4050 and SF 3947 are not passed.