Will Work for Human Capital

Summary: The teenage unemployment and underutilization rates are staggeringly high. This has a negative impact on teenagers’ ability to build human capital such as job skills and education. Policies like minimum wage laws should be amended or reversed to allow teens to better develop their human capital.

A blank resume is not worth much. Although this is obvious, Oregon state legislators have opted for ostensibly feel-good legislation that has raised the cost of work through taxes (e.g., payroll) and mandates (e.g., minimum wage), which keeps many resumes empty by inflating unemployment. Teens, in particular, have been priced out of the market because their productive contribution is frequently lower than what employers are required to pay them. Inflicting high unemployment on young people has serious consequences for their future and for society’s.

With a 29% national teen employment rate in June (lower than any seen since the Great Depression), we have reason to be concerned, especially here in Oregon where it is even lower (24%).[1] The teen employment rate has been tumbling since 2000, when it was healthier (but still lower than it should be), at 45%. Worse still, those who are working are frequently getting far fewer hours than they want, and many people have withdrawn from the workforce. Adding these groups to the official teen unemployment rate (which only includes those individuals who have looked for work in the last four weeks) gives a teen underutilization rate of 49% in Oregon (the worst in the nation), as of May, according to Andrew Sum, Director of the Center for Labor Market Studies at Northeastern University.

So, not only are teens earning less money to spend and save for valuable investments later (like college), young and inexperienced workers are not getting the experience that will allow them to earn more down the road by developing their human capital.

“Human capital” describes a person’s attributes that increase her earning potential and ability to grow wealth. It includes a person’s “intelligence, educational background, work experience, knowledge, skill and health.”[2] It is also important to our nation. According to Gary Becker, a prominent theorist, human capital accounts for around 75% of the United States’ wealth, with the rest consisting of capital in businesses, homes, goods, and government capital and cash. It is the proverbial knowledge of how to fish, versus the fish itself.

Teenagers must learn how to fish, and the earlier, the better. Teenagers are easily influenced. According to Andrew Sum, especially among low-income and minority youth, “[t]he more teens work this year, the more they work next year.”[3] If they do not work now, they are less likely to work later. But with increased experience, teens will earn better wages and be more likely to hold a steady job later. They are also more likely to graduate from high school (developing another form of human capital).

Yet, numerous policies throw obstacles in the way of teen employment. Minimum wage, for example, prices many teenagers out of the market. As Hans F. Sennholz wrote, “In simple language, a minimum wage law is nothing more than a government order that workers must not work unless they find jobs paying at least the stated minimum. It is an order to employers that they must pay workers the minimum, or not employ them at all.”[4] Those who have the least human capital are the ones who suffer most unless they are fortunate enough to be well connected.

In Oregon, a minimum wage employee is expensive at $8.40 per hour (the nation’s second highest), with additional higher costs like payroll tax. With such burdensome costs it should be no wonder that our underutilization rate (which counts those employees who want more work hours, and true unemployment) in Oregon is so low. It’s a shame that the federal government is following our poor example with the latest round of increases.

Statistically, teenagers (especially minorities) and low-income women take the worst blow from minimum wage laws, according to numerous studies. Yet, special interest groups, labor unions, and politicians woo public support for such foolhardy mandates with promises of helping the poor and needy. It may help a few families, but likely at the expense of pushing more families into poverty, according to most experts.[5] The truth is that most individuals living in poverty do not have a full-time job, according to the U.S. Census Bureau. Unlike minimum wage, more work actually could lift a significant portion of Americans out of poverty. While some employees’ pay increases, minimum wage does more harm than good for those whom it is intended to help, fails to alleviate poverty, and deprives particularly the young and inexperienced of the opportunity to develop and grow the most valuable asset of all, human capital.

[1] Andrew Sum, et al, The Collapse of the Nation’s Male Teen and Young Adult Labor Market, 2000-2009: The Lost Generation of Young Male Workers, Center for Labor Market Studies Northeastern Univ., (July 2009), available at http://www.nyec.org/content/documents/ThecollapseoftheNation’sMaleTeenandYoungAdult.pdf.

[2]Michael Sherraden, Assets and the Poor, 102-03 (1991).

[3] Andrew Sum, et al., The Continued Collapse of the Nation’s Teen Job Market and the Dismal Outlook for the 2008 Summer Labor Market for Teens: Does Anybody Care? (2008), available at http://www.clms.neu.edu/publication/documents/The_Continued_Collapse_of_the_Nations_Teen_Job_Market.pdf.

[4] The Politics of Unemployment, 49 (1987).

[5] See, e.g., David Neumark, The Effects of Minimum Wages on Distribution of Family Incomes: A Non-Parametric Analysis, working paper, Federal Reserve Bank of Cleveland (December 2004).

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