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,”[1] 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[2] and four through ballot initiative.[3] 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,[4] because many economists believe that sharp increases in the minimum wage affect youth employment particularly negatively.[5] 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.
[1] ILO (2014).
[2] Connecticut, Delaware, Hawaii, Maryland, Massachusetts, Michigan, Minnesota, Rhode Island, Vermont, West Virginia, and D.C.
[3] Alaska, Arkansas, Nebraska, and South Dakota.
[4] Youth is conventionally defined as the cohort of individuals between the ages of 16 and 24.
[5] 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.
This report was authored by Randall Pozdena, President, QuantEcon, Inc., an Oregon-based consultancy. He received his BA in Economics, with Honors, from Dartmouth College and his PhD in economics from the University of California, Berkeley. Former positions held by the author include professor of economics and finance, senior economist at the Stanford Research Institute (SRI International) and research vice president of the Federal Reserve Bank of San Francisco. He also served on numerous public, non-profit, and private boards and investment committees. He is a member of the CFA Institute and the Portland Society of Financial Analysts.
