Teens will lose if minimum wage pegged to inflation

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Diana Furchtgott Roth
With sky-high unemployment rates for teens (23 percent) and unskilled workers (14 percent), why does Gov. Mitt Romney support raising the minimum wage with the inflation rate? New jobs numbers come out Friday, and we can be sure that these two groups will still remain behind.

Between 2007 and 2009, the federal hourly minimum wage rose to $7.25 in three steps from the $5.15 rate that had prevailed for a decade. If the rate is indexed for inflation, it will rise every year.

Romney and others assume that if the minimum wage were gradually raised through indexing or other means, all workers would retain their jobs. But this is not the case.

It sounds compassionate to alleviate poverty by mandating that employers raise wages, but employers often replace low-skill workers with machines. Think self-checkout machines in supermarkets, or computerized call centers.

Or, do a thought experiment: Would you have your job if the minimum wage were $75 an hour? Probably not.

At its current level, the minimum wage disproportionately affects teens and low-skill workers, many of whom qualify only for entry-level slots.

Minimum wage workers are overwhelmingly young, part-time, and work in the food service industries. Workers under the age of 25 make up about half of the 4.4 million workers who earn at or below the minimum wage.

Employed teenagers are seven times more likely to be among the minimum wage earners than workers older than 25.

The minimum wage of $7.25 an hour, plus the mandatory employer's share of Social Security, unemployment insurance, and workers' compensation taxes, brings the hourly employer cost to $8, even without benefits.

And in 2014 employers with more than 49 workers who do not offer the right kind of health insurance will have to pay a penalty of $2,000 per worker per year, further increasing costs.

Unemployment rates for teens and low-skill workers rose faster than others in the recession. The adult unemployment rate stood at 7.2 percent in December 2011 (data for January 2012 due today). That's over 3 percentage points higher than the 3.8 percent rate in December 2007, four years earlier.

But the December 2011 unemployment rates for teens and unskilled workers were about 6 percentage points higher than December 2007, at 23 percent and 14 percent respectively.

Employers now only employ workers who can produce $8 an hour or more of goods or services. As minimum wages rise, employers change technologies or hire more skilled workers.

Forbidding employment of those whose skills aren't worth $8 an hour prevents workers getting their foot on the bottom of the career ladder. The federal government is essentially taking away the right to work for low-skill workers.

Most American employers have to pay more than minimum wage just to attract and hold the workers they need. More than 128 million workers now earn above minimum wage, not because of federal or state law, but because that is the only way that firms can attract and keep employees with skills.

Under federal law, employers are allowed to pay teens $4.25 an hour for 90 consecutive calendar days, or until their 20th birthday, at which point the wage has to revert to $7.25 an hour. There is no similar exception for low-skill workers.

But the minimum wage exception is complex. Employers must show that teen workers don't displace others. Moreover, if the state minimum laws don't specifically include a teen exception, teens have to be paid the regular minimum.

Romney obviously cares about getting Americans back to work. He could start by advocating getting rid of the minimum wage entirely, rather than expanding it.

Examiner Columnist Diana Furchtgott-Roth (dfr@manhattan-institute.org), former chief economist at the U.S. Department of Labor, is a senior fellow at the Manhattan Institute for Policy Research.

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