Bad Consequences of Public Policies Aren’t Really “Unintended,” Just “Unacknowledged”

By Steve Buckstein

Decades of research and experience tell us that raising the government-imposed minimum wage results in fewer younger and lower-skilled individuals being hired, and in some of them losing jobs they previously held at lower wages.*

Decades of research and experience also tell us that requiring landlords to charge lower rent than market conditions dictate results in fewer housing units being built, making housing shortages worse and raising housing costs in areas not subject to rent controls.**

During last year’s minimum wage debate in Oregon, pointing out the negative consequences was not enough to stop the legislature from imposing significant wage increases. Likewise, this year the legislature may allow local jurisdictions to impose rent controls even though opponents will surely point out the negative consequences of this policy also.

It now seems obvious what is happening. Supporters of minimum wage increases and rent control aren’t blind to their negative consequences; they simply refuse to acknowledge them because the political benefits outweigh the real costs imposed on those forced to endure them.

The harm done by minimum wage increases and rent control is so obvious that we should probably stop saying that their negative consequences are “unintended.”  Rather, we should say that their negative consequences are “unacknowledged” because their supporters refuse to admit that they exist.

* Making Youth Unemployment Worse, Randall Pozdena and Steve Buckstein, Cascade Policy Institute, December 2016

** The Rent Is Too Damn High! — Why Rent Control Won’t Help, Steve Buckstein, Cascade Policy Institute, September 2016


Steve Buckstein is Founder and Senior Policy Analyst at Cascade Policy Institute, Oregon’s free market public policy research organization.

Making Youth Unemployment Worse

The unintended negative effects of raising minimum wage rates

By Randall Pozdena and Steve Buckstein

President-elect Donald Trump has nominated the CEO of one of the nation’s largest fast food chains to serve as U.S. Secretary of Labor. The food preparation and serving industry employs almost half of all minimum wage workers. It is thus widely assumed that the nominee would be unfriendly to minimum wage regulation. Efforts such as the union-financed Fight for 15 are seeking to raise the federal minimum wage in the food service industry to $15 per hour—a 52 percent increase over the $9.87 average pay rate in the industry today.

The spotlight has thus returned to the issue of minimum wage regulation, including the impact of recent Oregon legislation. SB 1532, passed in 2016, phases in a $14.75 minimum wage in the Portland metro area, and $13.50 and $12.50 respectively in other metro areas and rural areas, by 2022. The average annual increase over the prior (statewide) minimum wage would be 8.5, 6.6, and 5.0 percent respectively for these three tiers over the 2016-2022 phase-in period. As with the last major reform in 2002, the legislated minimum wages would be adjusted after that time by any increases in the CPI.

To put these events in perspective, Cascade Policy Institute has released a major, new analysis of the history, theory, and empirical impacts of minimum wage regulation. The report focuses on the labor market impacts on youth, aged 16 to 24—the age cohort most likely to be affected as new entrants into the labor force. The study uses data and statistical techniques that, for the first time, allow measurement of how the impact of an increase in the minimum wage evolves over time, not just in the period immediately after the increase. In addition, it allows prediction of the interaction of the minimum wage shock with employment, wages, and labor force participation over time.

The findings have ominous implications for youth labor markets. First, as many studies over the past fifty years have shown, the new study finds that increases in the minimum wage significantly depress youth employment and labor force participation. The share of youth employed falls by 3 percent in just the first six months after a 10 percent increase in the minimum wage, and it falls by 6 percent after a year. Similarly, the share of youth participating in the labor force declines by 4 percent at 6 months and 6 percent at 18 months.

Second, contrary to the claims of minimum wage advocates that higher minimum wages create a cascade of even greater increases, youth wages only rise by the amount of the mandated increase—and then only for those lucky enough to find a minimum wage job. Collectively for all youth, what wage increases occur are more than offset by condemnation of a large share of youth to a zero wage; namely, to unemployment.

Third, the study finds that even a one-time increase in the minimum wage persistently continues to depress the share of youth who are employed. Specifically, statistically significant employment impacts can be expected to cumulate over time for at least five years into the future. Even seemingly innocuous increases in the minimum wage—such as Oregon’s prior 2002 policy of adjusting for the CPI—can significantly depress youth employment. Since the implementation of that adjustment policy fourteen years ago, the previous 56 percent share of youth employed has fallen to just 46 percent, an 18 percent decline. Thus, it appears that inflexible, automatic CPI indexing is inferior to letting markets set youth wage rates.

Oregon’s newest policy of legislating different minimum wage levels among metro and designated rural markets is, ironically, a concession to the reality that unregulated private market forces better balance the supply and demand for youth labor. Since the state imposed higher-than-market levels of wages nonetheless, the new study uses its findings to estimate the impact on the three tiers’ respective youth labor markets.

Although detailed, localized youth employment data for Oregon does not exist, application of the nationally estimated behavior measures can be used to estimate regional tier impacts. This analysis suggests that Portland metro area youth will suffer the most, with the share of employed youth falling by 30 percent by 2022. Youth in the state’s other metro areas will see a 20 percent decline, and youth in designated rural areas of Oregon will see a 15 percent decline.

Even though a three-tiered minimum wage is an attempt to accommodate real economic differences between urban and rural areas, Oregon has made a public policy mistake that predictably will be paid for by many of the state’s youngest current and soon-to-be potential members of the youth labor force.


Randall Pozdena is President of QuantEcon, Inc., an Oregon-based consultancy. He received his BA in Economics from Dartmouth College and his Ph.D. in economics from the University of California, Berkeley. He is the author of Cascade Policy Institute’s new analysis, Minimum Wage: Its Role in the Youth Employment Crisis. Steve Buckstein is Senior Policy Analyst and founder of Cascade Policy Institute, Oregon’s free market public policy research organization.

Cascade Report Finds Long-Term Negative Impacts on Youth from Oregon’s New Minimum Wage Policy

FOR IMMEDIATE RELEASE

Media Contact:

Steve Buckstein

Senior Policy Analyst

Cascade Policy Institute

(503) 242-0900

steven@cascadepolicy.org

PORTLAND, Ore. – Cascade Policy Institute released a report today that has foreboding implications for young people in our state. The report was commissioned after passage of SB 1532 earlier this year, which phases in large increases in Oregon’s minimum wage. The law mandates minimum wages by 2022 of $14.75 in the Portland metro area, and $13.50 and $12.50 respectively in other metro areas and rural areas. These rates must be adjusted after 2022 by any increases in the Consumer Price Index.

Authored by Oregon economist Randall Pozdena, Ph.D., Minimum Wage: Its Role in the Youth Employment Crisis analyzes the history, theory, and empirical impacts of minimum wage regulation. It focuses on youth aged 16 to 24 because they are most likely to be affected by minimum wage increases as new entrants into the labor force. The report uses data and statistical techniques that, for the first time, allow measurement of how the impact of an increase in the minimum wage evolves over time, not just in the period immediately after the increase. In addition, it allows prediction of the interaction of the minimum wage shock with employment, wages, and labor force participation over time.

“This report confirms ominous long-term negative consequences of minimum wage increases, not just for those currently 16 to 24 years old, but for future potential workers coming into this age group,” said Steve Buckstein, Cascade’s founder and Senior Policy Analyst. 

Key findings of the report: 

  • Increases in the minimum wage significantly depress youth employment and labor force participation. The share of youth employed falls by 3 percent in just the first six months after a 10 percent increase in the minimum wage, and it falls by 6 percent after a year. Similarly, the share of youth participating in the labor force declines by 4 percent at 6 months and 6 percent at 18 months.
  • Contrary to the claims of minimum wage advocates that higher minimum wages create a cascade of even greater increases, youth wages only rise by the amount of the mandated increase—and then only for those lucky enough to find a minimum wage job. Collectively for all youth, what wage increases occur are more than offset by condemnation of a large share of youth to a zero wage; namely, to unemployment.
  • Even a one-time increase in the minimum wage persistently continues to depress the share of youth who are employed. Specifically, statistically significant employment impacts can be expected to cumulate over time for at least five years into the future. Even seemingly innocuous increases in the minimum wage—such as Oregon’s prior 2002 policy of adjusting for the CPI—can significantly depress youth employment. Since the implementation of that adjustment policy fourteen years ago, the previous 56 percent share of youth employed has fallen to just 46 percent, an 18 percent decline. Thus, it appears that inflexible, automatic CPI indexing is inferior to letting markets set youth wage rates.
  • Portland metro area youth likely will suffer the most, with the share of employed youth falling by 30 percent by 2022. Youth in the state’s other metro areas will see a 20 percent decline, and youth in designated rural areas of Oregon will see a 15 percent decline.

Buckstein and Pozdena conclude that “even while bowing to the reality of economic differences between urban and rural areas of the state in its latest minimum wage law, Oregon has made a public policy mistake that predictably will be paid for by many of the state’s youngest current and soon-to-be potential members of the youth labor force.”

The report, Minimum Wage: Its Role in the Youth Employment Crisis, is available here.

Founded in 1991, Cascade Policy Institute is a nonprofit, nonpartisan public policy research and educational organization that focuses on state and local issues in Oregon. Cascade’s mission is to develop and promote public policy alternatives that foster individual liberty, personal responsibility, and economic opportunity. For more information, visit cascadepolicy.org.

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Oregon’s Minimum Wage Law Perverts Compassion into Coercion

Picture two Oregon workers. One, a highly skilled and educated woman named Kate, earns well over $40 per hour based on a 40-hour work week. The other—a younger, less skilled, and less educated woman also named Kate—has a job that pays her Oregon’s minimum wage rate of $9.25 per hour.

The first Kate happens to be the Governor of Oregon. She, along with some of her colleagues in the legislature and activists on the campaign trail, believe that the second Kate should be paid as much as $15.00 per hour by law, depending on where she lives.

Wanting our second Kate to earn more is commendable; but forcing Kate’s employer to pay her more than he or she can afford, or more than Kate may be worth to their business, is not commendable.

Some politicians may feel good by “giving” more money to the Kates of Oregon, but how should they feel for “taking” that money from someone else?

I join many policy analysts, economists, and business owners in pointing out the negative effects of raising Oregon’s minimum wage. Younger, less educated and lower-skilled workers may lose their jobs, or not gain jobs in the first place, if the law prices them out of the labor market. Some employers will be forced to hire fewer workers, let some workers go, and/or raise their prices to all the Kates of Oregon who will blame them, not the politicians, for their suddenly higher cost of living.

But, the practical effects of raising the minimum wage, good or bad, should not cause us to forget the moral aspects of a state policy that dictates what one adult is required to pay another. Voluntary transactions between workers and employers are moral; imposing wage floors from Salem or any other layer of government is not.

I have no illusions that Oregon’s Governor, legislature, and activists will now see the light and abandon their plans to impose yet another burden on employers while helping some workers at the expense of others. I simply want it on the record that I agree with the author who wrote:

“The minimum wage is the modern perversion of compassion into coercion: I believe there is a moral imperative for you to earn more, so I force someone else to pay more. I feel moral while sticking someone else with the bill.”*

So, rather than raise Oregon’s minimum wage rate, the legislature should do the moral thing and end the policy altogether. Then we can all work together with Oregon Governor Kate Brown to find better, moral ways to help all the other Kates of Oregon earn more money without perverting our compassion into coercion.

* Doug Bandow, Cato Institute, January 14, 2014, The Minimum Wage: Immoral and Inefficient.


Steve Buckstein is Founder and Senior Policy Analyst at Cascade Policy Institute, Oregon’s free market public policy research organization.

 

Will Oregon Price the Least-Skilled out of the Workforce…Too Slowly?

As Oregon’s February legislative session approaches, Governor Kate Brown wants to head off a contentious minimum wage ballot measure that would raise Oregon’s rate up to $15 per hour over three years. But, her plan seems to upset all sides.

She has determined that the Portland area minimum wage should be exactly $15.52 by 2022. She has also figured out that the rest of the state should impose a $13.50 minimum by 2022. “That is entirely too long” to wait, according to activists behind the ballot measure.

Solid research concludes raising the minimum wage at all is not an effective way to alleviate poverty. It is, however, an effective way to pander to voters who either don’t read the economic literature, don’t believe it, or don’t care.

Oregon already has one of the highest minimum wage rates in the country at $9.25 per hour. But, with some cities and states determined to raise their rates to $15 soon, our Governor’s $15.52 Portland area proposal over six years may not be enough to keep us at the forefront of pricing the least-skilled people out of the workforce altogether.

Perhaps she should go for a $30 minimum wage rate by 2030. Or a $40 rate by 2040. Or…well, you get the idea.

Steve Buckstein is Founder and Senior Policy Analyst at Cascade Policy Institute, Oregon’s free market public policy research organization.

Oregon’s Minimum Wage Debate: Disadvantaged Youth Are Crucial Issue

The Oregon legislature is considering raising the minimum wage over the next few years from $9.25 per hour to as much as $15. What the minimum wage means for disadvantaged youth should be the central question of this controversial topic. Plenty of middle- and upper-class teenagers take their first jobs at the minimum wage, working part-time or summers. I don’t much care whether they make five dollars an hour or ten or fifteen. They’ll be fine.

There are also some older people working at low-skilled jobs. A higher minimum wage doesn’t really solve their problem, which is low skills. However, many people parlay on-the-job learning into higher-paying jobs. Combine that with some more education and these folks should be all right.

Disadvantaged teenagers and youth in their early 20’s concern me, however. For them, the minimum wage is a big issue.

When my own kids were going out to their first job interviews, their mother and I prepped them well. We both had experience in job interviews and we helped our kids succeed at theirs. Many disadvantaged youth lack parents with good work experience themselves, so they go into their first job interview with no coaching. Which kid do you figure gets the job? It’s usually not the teenager who stares at his shoes instead of the manager’s eyes, who stammers and is unsure of himself and is surprised by simple questions.

Put this into a business context. Suppose you are trying to sell a product that looks inferior on the outside. You are sure that your product’s functionality is as good as the better-looking competitors, but yours doesn’t present itself as well. What would you do?

A business manager’s first thought might be to cut the price. Other approaches are to offer free samples, introductory discounts, special coupons, and so forth. These marketing techniques could get buyers to try your product.

The disadvantaged youth is not allowed to do any of these things. The wage cannot be lower than the legal minimum, no unpaid work is tolerated by our laws, no discounting or trial offers are allowed. The kid who interviews poorly is in trouble.

This is the worst kind of trouble for both society and the young person. We need disadvantaged youth to get jobs and learn the soft skills every employer wants: following instructions, getting along with others, serving customers. The first job is vital for learning those skills. (I recall learning a lot in my first job: to get along with people I didn’t much like, to take direction from a boss I didn’t respect, and to accept that I had to do the worst tasks because I was the newest employee. These were all valuable lessons.)

To help disadvantaged youth, we need to let them compete. That means a low or zero minimum wage. Employers will provide more coaching and help for workers just starting out if that’s what it takes to get workers at a low wage. And that is exactly what will help disadvantaged youth in the long run.

Government-Imposed Minimum Wage Increases Don’t Work for Oregon Small Businesses

The concept that everyone should earn at least some government-mandated minimum wage is politically very appealing. It’s almost the classic example of taking from the few and giving to the many. “The few” in this case are portrayed as rich businessmen who could never spend all the money they have, so what’s wrong with making them pay their workers a little more? Now, proponents of raising Oregon’s minimum wage are trying to convince us that somehow such policy is actually good for small business owners.

A recent report from the Oregon Center for Public Policy claims that a higher minimum wage works for small businesses by giving them “more of what they need most: customers with money.”

In reality, raising the minimum wage would only benefit small businesses if owners didn’t mind depleting their own savings or investment funds in order to support higher labor costs. Otherwise, they would have little choice but to raise prices, which would harm all their customers, especially those on the lower rungs of the economic ladder.

And, because minimum wage laws actually cut off those lower rungs on the economic ladder, younger, less educated, and less experienced workers will be even less likely to get or keep the very jobs they need to be customers in the first place. They may spend their unemployment checks, but those checks won’t go as far once prices are raised to cover the higher labor costs that a boost in the minimum wage imposes.

The argument that a higher minimum wage pumps more money into the economy assumes that the resulting pay increases are somehow “new money.” In reality, much if not all of that “new money” will be offset by a corresponding loss of savings or investment funds that otherwise would contribute to more economic growth and hiring more workers.

Just because low-wage workers are likely to quickly spend any wage increases doesn’t mean that on balance that’s good for small business. Taken to its logical conclusion, that would mean small business owners, and everyone else, should never save and invest for the future, but immediately spend every dollar they earn also. If this behavior really benefitted the economy, why are we seemingly so concerned about the dismal rate of saving and investing for retirement among Oregonians? Couldn’t small businesses benefit even more by encouraging everyone to spend all their income right now?

Another set of arguments for raising the minimum wage include the assumptions that higher wages “motivate employees to work harder;” “attract more capable and productive workers;” “lead to lower turnover, reducing the cost of hiring and training new workers;” and “enhance quality and customer service.”

While higher wages may lead to the benefits stated above, if business owners believe that is the case then they should be willing and eager to raise wages whenever possible. The fact that minimum wage proponents want to force business owners to reap these benefits weakens their case.

Finally, there is a real irony in the campaign to boost Oregon’s minimum wage. Minimum wage laws conspicuously leave out a class of individuals who don’t get a paycheck from someone else, but hopefully get one from themselves. Self-employed people, small business owners, and entrepreneurs trade a steady paycheck for the opportunity to be their own boss. They often risk everything―their homes, their savings, all their assets―to build a business that might someday earn them a much higher paycheck than they could ever earn working for someone else.

But, while building a business, many entrepreneurs actually earn less than the minimum wage. They may actually have negative earnings, dipping into savings or borrowing money to keep their doors open and pay their employees. And yet, if these risk-takers hire anyone to help them make their dreams come true, government says they must pay those workers at least $9.25 per hour in Oregon today, and perhaps as much as $15 per hour in the near future.

So, while business owners are free to do a lot of things, and take a lot of risks, one thing they cannot do is hire anybody for less than the minimum wage, even if they are earning less than that themselves. Of course, this may not be a winning argument politically.

It’s easier to demonize supposedly “rich” business owners than to tell workers and job seekers the uncomfortable truth that to be employed in a successful business they must produce as much or more value than they wish to be paid.

Proponents of raising the government-mandated minimum wage know that they have little to lose and much to gain politically by telling young, less educated, and less skilled workers that they deserve to be paid more, and it’s only greedy business owners standing between them and the higher wages they desire.

Let’s just hope that if another bump in Oregon’s minimum wage results in some workers losing their jobs and others not getting hired in the first place that they place the blame for their troubles where it belongs―not on employers, but on those who promised them higher wages but couldn’t deliver because economic reality stood in the way.