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Topics: CBO

Minimum wage supporters mischaracterize its effects

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Opinion,Diana Furchtgott Roth,Columnists,Economy,CBO,Minimum Wage,Unemployment

As President Obama pushes to increase the minimum wage to $10.10 an hour, supporters continue to mischaracterize its effects.

Despite a Congressional Budget Office report showing that 500,000 low-skilled people could lose their jobs by 2016 due to a higher minimum wage, some insist that raising the minimum wage will not affect employment.

The latest salvo comes from University of Massachusetts Amherst economics professor Nancy Folbre, writing in the New York Times earlier this week. She writes that the effects of raising the minimum wage can be measured by comparing employment growth in local jurisdictions that increase the minimum wage with employment growth in neighboring counties that leave the wage unchanged.

“The results showed no negative employment impacts,” she states. “Analysis of the same variations reveals significant reductions in employee turnover in the first nine months after a minimum-wage increase, a factor that increases efficiency and helps compensate for increased costs.”

Folbre is referring to published studies by her colleague, the economist Arindrajit Dube, together with University of North Carolina economist T. William Lester and University of California at Berkeley economist Michael Reich.

However, these studies are not universally accepted. Other economists, including University of California-Irvine professor David Neumark, have shown that matters are not so simple.

Although minimum-wage workers get front-page news, as well as the attention of politicians who think they are doing workers a favor without increasing the federal budget deficit, fewer than 3 percent of workers make minimum wage. Half of minimum-wage workers are under 25, many of them teens.

An increase in the minimum wage causes employers to substitute more-skilled labor for less-skilled labor, leaving employment approximately the same.

Just think — if you were running a business, and the minimum wage rose from $7.25 to $10.10, your first step would be to lay off your least-skilled workers. Future workers would have to produce more. You might do less on-the-job training and hire workers who already have experience.

That is why many studies find that overall employment is not affected by minimum wage increases. The people who are affected are teens and low-skilled workers, who can no longer find work.

Over the past 10 years, teen unemployment has risen from 17.0 percent to 20.7 percent, more than 3 percentage points, while the unemployment rate has risen from 5.7 percent to 6.6 percent, less than 1 percentage point. Over the same period, unemployment for 20- to 24-year-olds has grown from 9.7 percent to 11.9 percent, 2 percentage points.

Labor-force participation has declined, too. In 2013, 55 percent of workers aged 16 to 24 were participating in the labor force, compared to 62 percent in 2003, a 10-year decline of 7 percentage points.

Some say that young people are spending more time in school. But the percentage of 16- to 24-year-olds enrolled in high school, college, or university has barely changed over the past decade, rising from 56 percent to 56.3 percent.

As Neumark writes in a paper forthcoming in the Industrial and Labor Relations Review, the strongest evidence linking unemployment to increases in the minimum wage comes from teenagers and other low-skill groups, without regard to industry. That is because most other employees are in the 97 percent of the workforce that is paid more than minimum wage.

Just because minimum-wage workers are not a large fraction of the workforce does not mean they don't matter. If teens cannot get their first jobs, then they cannot get their second, or third. The effects of this change might not be quantifiable in prestigious economic studies, but they are real, and harmful.

Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is a Washington Examiner columnist. She directs www.Economics21.org at the Manhattan Institute. Follow her on Twitter here.
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