By Randall Pozdena, Ph.D.
Introduction and Executive Summary
This paper examines the history of the imposition of a minimum wage, studies of its effects on youth, and the implications for current policy. A novel analytical technique produces important new findings regarding the adverse effects of the minimum wage on youth.
This topic is timely. Even as the International Labour Organization has declared that there is a worldwide “youth employment crisis,” a record number of U.S. states recently authorized minimum wage rate increases, either through legislation or ballot initiative. According to the National Council of State Legislators (2016), in 2014 and 2015, 11 enacted increases through legislation and four through ballot initiative. Thus far in 2016, two states, California and Oregon, have enacted new minimum wage policies that sharply increase their minimum wage levels, even after adjustments for inflation. Approximately three-fifths of the states’ minimum wage levels exceed the federal minimum wage rate.
This has important bearing on the employment status of youth, because many economists believe that sharp increases in the minimum wage affect youth employment particularly negatively. Despite these regressive effects on this vulnerable class of workers, their plight is largely ignored in policy discussions. This paper reviews the theory of minimum wage impacts and more than four decades of others’ research on the impacts of raising the minimum wage. I then use a statistical technique that has not been widely applied in the literature to develop my own estimates of impacts on the youth age cohort. I conclude from these efforts the following:
- Basic economic theory argues that wage levels are a consequence of the interactions of demand and supply conditions in labor markets. Wages are not a parameter of the economy that can be manipulated without consequence. Artificially raising the wage in a market economy will result in the use of less of the affected labor. The resulting reduction in employment will occur among workers already at a productivity disadvantage relative to others.
- Thus, youth wages are low because many are unskilled, lack work experience, and do not contribute sufficient value in the workplace to justify high wages. Since skill and productivity are acquired through accretion of experience and training, imposing a minimum wage that reduces youth employment has the potential to cause collateral damage. Specifically, doing so retards the future prospects of those who suffer the reduction in employment.
- Most of the very large literature on the impact of minimum wages supports the notion that increases in minimum wages impairs the employment prospects of youth and discourages them from participating in the labor force.
- Some of the key studies on which pro-minimum wage advocates rely have been criticized for poor design or implementation.
My approach confirms the view that the negative effects of minimum wage policy on youth are, in fact, material economically. I argue and demonstrate statistically that the adverse effects on youth employment and labor force participation are not only significant, but also causally related to minimum wage increases, and persistent. That is, the impacts of a one-time increase in the real (inflation-adjusted) minimum wage do not dissipate over time.
I then apply my findings to Oregon and find:
- Oregon’s policy of indexing Oregon’s minimum wage to the Consumer Price Index (CPI)–introduced in 2002–resulted in a progressively more damaging minimum wage. This caused, by my calculation, a loss of 32,000 and 31,000 youth labor force participants and workers, respectively, over the 2002-2014 period.
- Under Oregon’s new law passed in 2016, the youth age cohort in Oregon will lose another 52,000 jobs by 2022. This is over 22 percent of the 2015 youth labor force. Also, 63,000 more Oregon youth will withdraw from the labor force. This is over 26 percent of the 2015 youth labor force.
- Even beyond 2023, when the graduated increases under the new law have ceased, Oregon youth will continue to lose access to employment. This is both because of the persistent (albeit weakening) echoes of the 2016 law changes and Oregon’s planned return to the 2002 indexing practice.
It is believed that labor organizations are advancing the current frenzy of large minimum wage hikes. It is argued that they see benefits to themselves––partly because their own contracts link their compensation to the minimum wage. Policy makers have joined the movement, having focused on the notion that minimum wages result in an improved distribution of income. The reality is that today’s policies will impose on many youth the cruelest minimum wage of all––a wage of zero. From this author’s perspective, regulatory intrusions into market wage-setting processes should not be undertaken lightly, both on first principles and my own and others’ analyses. If they do, as done by the International Labour Organization, then they also have to be open about their potential culpability for creating the “youth employment crisis” that they themselves now decry.
 ILO (2014).
 Connecticut, Delaware, Hawaii, Maryland, Massachusetts, Michigan, Minnesota, Rhode Island, Vermont, West Virginia, and D.C.
 Alaska, Arkansas, Nebraska, and South Dakota.
 Youth is conventionally defined as the cohort of individuals between the ages of 16 and 24.
 In a 1995 survey conducted the University of New Hampshire survey center, 83 percent of economists held the view that a proposed increase would have negative effects on youth employment. https://www.minimumwage.com/2015/11/survey-of-us-economists-on-a-15-federal-minimum-wage/, retrieved April 6, 2016. In a more recent survey by IGM, an expert panel was asked specifically if, under a $15 dollar minimum wage in 2020, whether “the employment rate for low-wage US workers will be substantially lower than it would be under the status quo.” Only 24 percent disagreed or strongly disagreed. Thirty-eight percent were uncertain. Note that the question was not selectively posed for the youth age group. See, www.igmchicago.org/igm-economic-experts-panel, retrieved May 5, 2016.
By John A. Charles, Jr.
The news from Portland is that despite record levels of revenue, the City Council needs to cut $4 million in spending next year in order to balance the budget.
The news from Salem is that despite record levels of revenue, the Governor needs to close a $1.7 billion dollar budget gap for the next two-year state spending cycle.
It’s not just a coincidence that these messages are the same. Elected officials are almost always poor stewards of public money. No matter how much they receive from property taxes, income taxes, payroll taxes, liquor taxes, garbage taxes, and dozens of other fees and licenses, it’s never enough.
The primary reason is that politicians tend to adopt new programs where the costs are back-loaded. Policies are approved that sound good and don’t seem to cost much in the short-term; but decades out, the costs explode. Public employee pensions are the most painful example of this.
By the time it becomes obvious that we can’t afford the programs, the politicians who approved them are long gone, and the expenses are locked in.
We don’t have a revenue problem in government; we have a spending problem. The top priority at both the Portland City Council and the state legislature should be to reduce or completely eliminate programs before any new taxes are even considered.
John A. Charles, Jr. is President and CEO of Cascade Policy Institute, Oregon’s free market public policy research organization.
By Kathryn Hickok
Derrell Bradford has spent his adult life passionately advocating for education reform through parental choice. Derrell grew up in southwest Baltimore and received a scholarship to a private high school. Better than anyone, he knows the power of choice to unleash a child’s potential.
“A scholarship is not a five-year plan or a power point…,” Derrell explained recently. “It’s a ticket to the future, granted today, for a child trying to shape his or her own destiny in the here and now….”
Choices in education are widespread in America, unless you are poor. Affluent families can move to different neighborhoods, send their children to private schools, and supplement schooling with enrichment opportunities. Lower- and middle-income families, however, are too often trapped with one option: a school in need of improvement assigned to them based on their home addresses. Families deserve better.
It’s time Oregon took a serious look at the diversity of options parents now have in 61 school choice programs across the country, including privately or publicly funded scholarship programs, charter schools, education tax credits, vouchers, and Education Savings Accounts. Oregon has a history of bold experimentation in other policy areas. It’s time to expand the role of parents choosing―and the market delivering―better education for Oregon’s children through educational choice, because every child deserves a ticket to a better future today.
Kathryn Hickok is Publications Director and Director of the Children’s Scholarship Fund-Portland program at Cascade Policy Institute, Oregon’s free market public policy research organization.
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.
Please join us for our monthly Policy Picnic led by
special guest Bobbie Jager
From 2012 “Oregon Mother of the Year” to School Choice Activist
January 22-28, 2017 is National School Choice Week. Started in 2011, NSCW has grown into the world’s largest celebration of opportunity in education. The Week is a nonpartisan, nonpolitical public awareness effort.
Held every January, National School Choice Week shines a positive spotlight on effective education options for every child.
The goal of National School Choice Week is to raise public awareness of all types of education options for children. These options include traditional public schools, public charter schools, magnet schools, online learning, private schools, and homeschooling.
In honor of National School Choice Week, Cascade Policy Institute is delighted to host guest speaker Bobbie Jager, Oregon’s 2012 “Mother of the Year” and energetic advocate for educational choice for all Oregon children. She will talk about how she got involved in education advocacy and what’s ahead for parents and students in Oregon in 2017.
Last year Bobbie wrote a Cascade Commentary in support of extending Oregon’s public school open enrollment law.
Admission is free, but reservations are required due to space limitations. You are welcome to bring your own lunch; light refreshments will be served.
Cascade’s Policy Picnics are generously sponsored
by Dumas Law Group, LLC
FOR IMMEDIATE RELEASE
Senior Policy Analyst
Cascade Policy Institute
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.
By Lydia White
Amazon has introduced its new line of physical stores: Amazon Go. Using a smartphone, consumers can swipe into the store, pick up their desired items, and exit—receiving an electronic receipt for their purchases and avoiding dreaded checkout lines. Many hail this new technology as promising and exciting, while others are concerned about the potential for job losses.
Such concerns overlook a fundamental aspect of free market economies: freedom of choice. While many will choose Amazon’s technology for convenience or cost, others may prefer not to out of regard for traditional retail job opportunities or other business or personal reasons. But regardless of these differences, freedom of choice serves everyone.
This holds true across industries. You can buy a BlackBerry or upgrade to an iPhone. You can hail a taxi or download Uber. The economy is not a zero-sum game.
Consumer decisions aren’t made in an ivory tower or executive board meetings, but by each of us in our daily lives. Businesses must cater to our needs to maintain mutually beneficial, voluntary transactions. No one is forced to shop in an Amazon Go store, and traditional shopping experiences will continue to exist as long as consumer demand for them exists.
So, whether or not you are enthusiastic about capitalism’s creative destruction, the choice remains yours.
Lydia White is a Research Associate at Cascade Policy Institute, Oregon’s free market public policy research organization.
Cascade Policy Institute President and CEO John A. Charles, Jr. presented a version of this testimony before the Oregon State Land Board on December 13, 2016.
Re: December 13 SLB hearing on the possible sale of the Elliott State Forest
Dear Land Board members:
I am writing in advance of the December 13 Land Board hearing to summarize my testimony.
First, you were correct in deciding last year that a sale of the trust lands was necessary to fulfill your fiduciary responsibilities to the Common School Fund (CSF) beneficiaries. The continued requests from public land advocates to retain ownership should be ignored.
Unfortunately, your sale protocol is fatally flawed, for two reasons: (1) the four unnecessary “public benefits” requirements inherently devalue the asset; and (2) you are prohibiting competitive bids. Both of these elements ensure that you will not be able to get the best possible offer for the transfer, which you are required to do as fiduciaries.
Any sale should be made through a straight up, no-string-attached auction of the property. That is the only way you can determine fair market value.
To illustrate how much money you are leaving on the table, we’ve done two sets of calculations. In one scenario, we took the difference between the “official” price tag of $220.8 million and the high appraisal of $262 million ($41.2 million), and calculated the value of that over 50 and 100 year periods.
In another scenario, we assumed that the Land Board took the “maximum revenue” approach by dispensing with appraisals and simply selling the Elliott via competitive bid with no public benefit requirements. For this scenario we picked $350 million as a conservative value for what the winning bid might be, then subtracted the official price of $220.8 and used the difference ($129.2 million) as the starting point.
We used two different assumptions about future return rates – the first being the 7.5% used by Oregon PERS, and the second a more conservative rate of 6.0%. The projections are below.
Elliott State Forest sale
Investment projections of net proceeds under various assumptions
|Difference between high appraisal and sale price: $41.2 M|
|Time period||100 years||50 years||100 years||50 years|
|Difference between market price and sale price: $129.2M||7.5%||7.5%||6.0%||6.0%|
|Time period||100 years||50 years||100 years||50 years|
Notice the stunning difference in earnings between the first 50 years and the second 50 years. This is, of course, the miracle of compounding. The refusal of the Land Board to sell off this land in a traditional auction will likely cost public school students somewhere between $44 billion and $179 billion in lost earnings by 2117, and much more in the centuries beyond that.
You have a fiduciary responsibility to the CSF beneficiaries to get the best possible price for the timberland. That can only come through a traditional auction. I urge you to set aside the one offer in front of you and direct the DSL staff to design a new, competitive bid sale protocol to be implemented during 2017.
John A. Charles, Jr.
President & CEO
Cascade Policy Institute
By Allison Coleman
In 2009 the regional transit agency, TriMet, opened a commuter rail line running from Wilsonville to Beaverton. The line is known as the Westside Express Service, or WES.
According to transit advocates, commuter rail would help reduce energy consumption in the Portland region because it was assumed that trains moved people more efficiently than private automobiles.
However, the energy efficiency claims about WES turned out to be wrong. WES uses 6,753 BTUs of energy per passenger mile, which is 4,000 more than the national average of all commuter rail lines. WES also uses more than twice the amount of energy as a car to move the same number of passengers. On average, automobiles consume only 3,122 BTUs per passenger mile, and that number has been dropping steadily since 1970.*
Many transit advocates have been so enthused about commuter rail that they have urged lawmakers to fund an expansion of WES to Salem. Not only would this be costly, it would be a step backwards for energy efficiency. Surprising as it may seem, the average automobile is now far more efficient than commuter rail.
*See http://cta.ornl.gov/data/tedb35/Edition35_Chapter02.pdf, page 2-20, table 2.15.
Allison Coleman is a Research Associate at Cascade Policy Institute, Oregon’s free market public policy research organization.
By John A. Charles, Jr.
The Portland Auditor released the 2016 Annual Community Survey on November 30. The responses show that the share of all commute trips taken by public transit fell 17% during the past year.
This was part of a longer-term decline in transit use. The transit share of all Portland commute trips peaked in 2008 at 15%. Since then it has hovered near 12%, and now rests at 10%.
Taxpayers should be especially concerned about the negative correlation between passenger rail construction and market share. In 1997, when the region had only one light rail line—the Blue line to Gresham—transit market share was 12%.
After extending the Blue line to Hillsboro and adding four new lines plus the WES commuter rail and the Portland Streetcar, transit market share is only 10%.
Travel Mode Share for Weekday Commuting
Portland citywide, 1997-2016
Source: Portland Auditor, Annual Community Survey
The numbers cited above are for citywide travel patterns. When broken out by sector, the Auditor found that just 5% of all commuters in Southwest Portland took transit to work in 2016. Despite this lack of interest by commuters, TriMet and Metro are working to gain approval for another light rail line extension from Portland State University through SW Portland to Bridgeport Village. The likely construction cost will be around $2.4 billion.
Unfortunately, there is no empirical basis for thinking that cannibalizing current bus service with costly new trains would have any measurable effect on transit use.
Transit advocates like to claim that we simply need to spend more money to boost ridership, but we’ve already tried that. TriMet’s annual operating budget went up from $212.2 million in 1998 to $542.2 million in 2016. After adjusting for inflation, that’s an increase of 72%. Those increases were on top of construction costs for rail, which cumulatively exceeded $3.6 billion during that era.
It’s time to stop the myth-making and start holding public officials accountable for a plan that isn’t working.
John A. Charles, Jr. is President and CEO of Cascade Policy Institute, Oregon’s free market public policy research organization.