In this Let People Prosper episode, let's discuss how the best path to prosperity is capitalism and that starts with a job. The more ways that we can free up the labor market from government barriers to opportunity, such as the minimum wage and occupational licensing, the more prosperity we can all enjoy.
My recent op-ed in the Investor's Business Daily titled "Amazon's Minimum Wage Revelation: It's About Competition, Not Workers" notes the opportunity costs associated with a government-mandated minimum wage compared with a private market decision: "Just as the company's management had the freedom to consider the firm's profitability and outlook in deciding whether to offer the higher wage, other private employers should have the same freedom. Amazon apparently thinks they shouldn't, hence the lobbying for a national mandate. Those lobbying efforts could end up doing even more harm."
My recent paper with Dr. Edward Timmons titled "Occupational Licensing: Keeping People Poor" notes the huge cost that many licenses have on people whether they be workers, consumers, or employers. We highlighted this in a recent op-ed: "Between 1993 and 2012, Texas added licensing requirements for 22 low-income occupations. Data from the Texas Department of Licensing and Regulation indicate a 460 percent increase in the number of licenses issued by the department, far surpassing the state’s population growth of 37.5 percent in that period. By making it harder for aspiring workers in Texas to enter the job market, licenses artificially inflate wages — and this means higher prices for the services provided. National estimates suggest that licensing inflates wages of professionals by about 15 percent. And this means consumers pay higher prices. In addition, individuals looking to enter a new field may be prevented from achieving their dreams."
For the sake of human flourishing, we should be doing all we can to reduce government barriers to prosperity that are socialist programs like the minimum wage (price of labor control) and occupational licensing (quantity of labor control).
As many across the country argue for an increased federal minimum wage, such as the Fight for $15, Amazon announced on October 2 that they were raising their base pay to $15 per hour. While altering their own business costs is one thing, Amazon also plans to join others in lobbying Congress to mandate a higher minimum wage for Americans.
Amazon’s move to raise its base pay isn’t surprising; the company recently passed the trillion dollar value threshold, second to only Apple. While Amazon may be applauded for raising workers’ pay, its lobbying efforts aren’t as worthy.
Just as the company’s management had the freedom to consider the firm’s profitability and outlook in deciding whether to offer the higher wage, other private employers should have the same freedom. Amazon apparently thinks they shouldn’t, hence the lobbying for a national mandate.
Those lobbying efforts could end up doing even more harm.
Despite the commonly held perception that minimum wage laws reduce income inequality and provide the poor with a better life, the real effects are the opposite.
FEWER JOBS, FEWER HOURS
Minimum wage laws have proven detrimental by reducing job creation and the total hours worked for low-skilled workers, who are primarily paid the minimum wage and have less than a high school diploma or little work experience. And the laws raise prices for everyone — thus widening income inequality.
A labor market without government impediments functions like any other market. Employers and workers negotiate a wage, benefits, hours worked, and other measures of compensation until there’s mutual benefit. If they don’t agree, the worker isn’t hired. This is the same kind of mutually beneficial exchange that occurs when you go to the farmer’s market or department store, and it shouldn’t be any different in the labor market.
When this unhampered negotiation is restricted by government barriers such as an arbitrary minimum wage law, there is a misallocation of resources that hurts employers and workers.
For example, no matter what the minimum wage is, $15 or $150, the market will correct itself through higher prices and fewer jobs. In other words, the poor will stay poor, as they see their hard-earned dollars able to buy less and find fewer job opportunities.
VULNERABLE LOW-SKILL WORKERS
Lower-skilled workers are especially vulnerable to the proven job losses caused by federal minimum wage increases because employers who can’t afford the increases in the cost of production simply close up shop, reduce employee hours, or even switch to automation.
A recent study on the effects of minimum wage raises in California using data from 1990 to 2016 showed that a 10% increase in the minimum wage could contribute to a 3.4% reduction in employment. Key industries hit hardest are restaurants and retail stores that typically operate on razor-thin profit margins and often hire low-skilled workers and those new to the workforce.
And minimum wage laws actually make income inequality worse.
As noted from research by the American Action Forum, a large share of the added wage value from minimum wage hikes goes to workers already paid well.
For example, McDonald’s has been replacing cashiers with kiosks in many of their locations nationwide. The kiosks are designed, built, and maintained by high-skilled, high-wage workers while cashiers are typically low-skilled, low-wage workers.
In other words, jobs are created for computer programmers and robotics experts, while jobs are destroyed for those with fewer skills and less workplace experience. The result is an increase in income inequality.
MINIMUM WAGE MISTAKE
So why would Amazon lobby for a policy that has such broad negative effects on the economy?
Maybe because Amazon is a mammoth corporation that has seen tremendous success in recent years. A higher federal minimum wage would probably not hurt its bottom line much.
But Amazon’s competitors might not be so lucky, particularly if they are small businesses just starting out. A higher federal minimum wage could create artificial barriers of entry that would make it easier for Amazon to stay at the top while making it harder for its competitors to succeed.
When it comes to wages, what works for one employer doesn’t necessarily work for another.
We can applaud Amazon for giving its own workers raises; that doesn’t mean Amazon should be lobbying to demand raises for everyone else’s workers, too.
By strengthening the employee-employer relationship through economic freedom — not minimum wage laws — to let people freely negotiate, employees and employers can prosper.
In this episode, I discuss today's decision by the San Antonio City Council with a 9-2 vote to pass a city ordinance mandating private businesses provide paid sick leave of 64 hours for those with more than 15 employees and of 48 hours for those with 15 or fewer employees.
As I noted in a previous blog post, this sort of forced activity by government is bad for employers (raises costs), bad for employees (reduces negotiating power), bad for consumers (increases prices), and bad for the Texas economy (less economic activity).
Instead, San Antonio and Austin, which passed this ordinance earlier this year, should find ways to provide a pro-growth economic framework to let people prosper instead of making people poor while likely violating state law (Texas Minimum Wage Act).
Service industry workers — wait staff, bartenders and the like — are experts in free-market economics. They enjoy immediate and tangible reward for their hard work in the form of tips, and the best servers can make hundreds of dollars per shift through hard work, positivity and attentiveness.
When they aren’t feeling it, the effects are equally tangible — in the form of less pay at the end of a shift. There are other variables, of course, but tipped service workers enjoy something that’s increasingly rare in our salary and set-wage world: They have a real degree of control over how much they earn daily.
So it’s no surprise that many oppose the District’s minimum wage hike for tipped workers. When Initiative 77 was presented to D.C. voters in June, it was sold as a progressive reform for an industry with struggling workers. The measure, approved 55 percent to 45 percent , will raise the minimum wage for tipped staff from the current $3.33 per hour to $4.50 in July and eventually to D.C.’s standard $15 per hour by 2025.
Yet the workers themselves opposed it. They formed “Save Our Tips” groups on social media, and they lobbied hard against it. Why? Because they knew its effect wouldn’t be to set a lower limit on how much they could earn; instead, it would set an upper limit.
It’s simple economics. Restaurant owners will probably compensate for mandated higher server wages by raising food prices. The predictable effect is fewer customers. And the remaining customers will be less inclined to tip. Proponents of Initiative 77 said customers would be free to tip, but the legislation itself makes no mention of that. Tipping culture could die, leaving the ambitious wait staff or bartenders scraping by on what government — not their customers — says they’re worth.
And it’s not just the workers at risk. The bustling D.C. food scene will drastically change.
Food writer Todd Kliman (formerly of the Washingtonian ) knows what will happen if the D.C. Council doesn’t repeal the measure.
“Get ready for it, DC,” he tweeted. “Those cocktails that’re overpriced [right now] at $14? Soon enough they’ll be going for $18. And you’ll be lucky to find apps below $16 at anywhere decent. Entrees? $36-$40, easy. Initiative 77 is gonna make [restaurants] even more a place for those with $$$.”
And the small, family-owned restaurants and neighborhood bars will be hit the hardest. Their margins are typically small, and with rising rents, additional costs will force more of them to close or relocate outside the District.
But really, this is a battle over minimum wages.
Supporters of Initiative 77, “Fight for $15 ” and similar measures call for a “living wage,” but the truth is that despite their good intentions, minimum-wage hikes hurt the very people they’re attempting to help.
There’s a rare near-consensus among economists that price controls lead to poor outcomes in the marketplace. The classic example is the price controls on gasoline the federal government put in place in the 1970s. The outcome: long lines and significant shortages.
This is also true of restaurants. When government demands that employers pay more for labor, then employers can afford less of it.
On a not-unrelated note, the first hamburger-making robot has gone online in a San Francisco restaurant. Such technology shows that when government steps in and forces up wages, employers have ways to work around them.
To put it simply, no matter what the minimum wage is in law, the actual minimum wage is always zero. An unemployed person who lost his job or can’t find one because of high labor costs earns nothing.
Servers and tipped staff understand this simple economic concept, and that’s why they’re so vehemently against Initiative 77. The D.C. Council has already taken steps to repeal the measure, and Congress is stepping in.
That’s good — it’s good for the economy, it’s good for the industry, and it’s good for the workers who will again have control over their own prosperity.
The Military Order of the World Wars approached the Texas Public Policy Foundation in 2014 about having someone present on the benefits of a free enterprise system at their Southwest Youth Leadership Conference aboard the U.S.S. Lexington in Corpus Christi. I have presented to many top-notch, high school students from across Texas each summer since then to discuss the importance of the free enterprise system, especially how it relates to the labor market with the use of a minimum wage game (spreadsheet for the game here).
Watch the video above of the presentation in 2016, which provides further explanation of the game and shows the wage negotiations between students.
The game has been expanded upon over time since first created with Dr. Mark Frank while we both taught at Sam Houston State University. The game is composed of multiple sessions where some of the students are employers and others are workers.
Students learn how a labor market works through negotiations between employers and workers in a free enterprise system and in a system with a government-mandated minimum wage. The game shows that although there’s a higher average wage in a system with a minimum wage, there is also higher unemployment, especially for low-skilled workers that the government is trying to help. Students learn how workers are best able to demand a higher wage with less unemployment by increasing their productivity through education, technical skills, and on-the-job training, which access can be limited when there is a minimum wage.
Ultimately, the game helps students to start thinking like an economist when considering how the free enterprise system works and how government intervention will distort those outcomes. It’s fantastic to see the light bulbs start turning on throughout the game as students realize the costs of a minimum wage.
For the last three years, I've worked with SMU's O’Neil Center for Global Markets and Freedom to present my unit in their series “Teaching Free Enterprise in Texas” that teaches high school teachers in Texas about key economic principles. This series of publications are compliant with Texas' TEKS (state standards) and include the benefits of the free enterprise system with regards to international trade, fiscal policy, and other important areas. My unit on “Labor Market Economics” includes the minimum wage game that I've presented to hundreds of public school teachers statewide.
The best path to prosperity is through free enterprise, individual liberty, and personal responsibility—the pillars of improving everyone’s well-being that we promote at the Texas Public Policy Foundation. Unfortunately, these are concepts that many students never learn. With the Foundation’s outreach to high school students on these important principles, there’s a better chance that many will think like an economist and help provide a brighter future for all.
I talk about the increased trade uncertainty by the Trump administration influencing the stock market today, TPPF's daily newsletter called The Cannon (sign up here), and the vastly different costs of living in each state leading to different state poverty rates and the question of whether there should be a federal minimum wage (Answer: NO).
Stay tuned for the next episode!
In this episode, I talk about the concept of opportunity costs and how we must sacrifice things to satisfy our desires. We work to consume, but an artificial minimum wage set by government distorts the labor market and hurts low-skilled workers the most.
Find the article on DC here and the average tipped wages from BLS here.
I had the opportunity today to testify before the Texas House Business & Industry Committee against raising the state's minimum wage. There were 9 bills filed to raise the government-mandated minimum wage and I testified against them all. As outlined in the following resources and research links in many of them, it is clear that the minimum wage hurts most those its intended to help. The Texas Legislature would be wise to not raise the minimum wage but rather focus on strengthening the Texas model of limited government and free markets.
Here is my oral testimony at time 01:26:30.
Here is my written testimony and KVUE interview
Here are recent interviews: KXAN, EverythingLubbock
Here is a video of my minimum wage game for students.
Here are previous op-eds in the Statesman, Houston Chronicle, Tyler Morning Telegraph, Morning Consult, Fort Worth Star-Telegram, The Daily Signal
Here is a blog post: Just Say No to a Higher Minimum Wage
Here is a list of more than 500 economists who signed to not raise federal minimum wage.
This commentary originally appeared in the Fort Worth Star-Telegram on December 2, 2016.
As the start of the 2017 Texas Legislature on Jan. 10 quickly approaches, legislators have already pre-filed bills intended to improve your livelihood.
While some bills may accomplish this goal, others shouldn’t see the light of day. One of those is raising the minimum wage.
For example, House Bill 285 aims to alter Texas’ Labor Code section 62.051, which states, “an employer shall pay to each employee the federal minimum wage.”
Currently, Texas is one of 21 states that have a minimum wage at or below the federal minimum wage of $7.25 per hour.
This bill would raise the state’s minimum wage to $15 per hour or subvert Texans’ wage control to Congress if the federal mandate exceeds that level.
The bill may aim to help people in poorer districts, like District 104 in and around Dallas, where more people live in poverty than the state’s average. However, basic economics explains that a $15 minimum wage would hurt those it most intends to help.
There’s a common misconception that the labor market is different from other markets where individuals negotiate prices.
A minimum wage is a government-mandated wage control that centralizes power out of the hands of workers and employers.
There’s a rare consensus among economists that binding price controls lead to bad outcomes, such as long gas lines in the 1970s, but politics gets in the way of seeing the fallacy of a minimum wage control.
As with other markets, the labor demand curve is downward sloping — employers hire fewer workers as wages go up.
Setting a minimum wage floor above the market wage results in a bad outcome called unemployment.
It also pushes currently unemployed workers who would take a job less than the minimum wage into long bouts of unemployment and dependency on family or taxpayers.
In addition, the minimum wage puts more power in the hands of more highly skilled workers who will build and maintain labor-saving products, leading to an upward redistribution of income.
Research shows that Texas could lose nearly 1 million full-time jobs if the minimum wage was raised to $15 — more than any other state.
The state cannot afford this massive unemployment — nor can the country, as Texas has been the job creation engine for the last decade.
If employers aren’t able to quickly fire low-skilled workers, another option to avoid profit losses or shutting down is to raise prices.
As prices rise, the prevailing higher cost of living would leave the less than 5 percent of Texans who earn at or below the minimum wage no better off, highlighting the arbitrary nature of a government-mandated wage.
Instead of resorting to the misdirected policy of a minimum wage that doesn’t raise standards of living in Texas, the Legislature should focus on solving the underlying causes of poverty.
A good place to start would be with education savings accounts.
These would allow parents the opportunity to determine the type of schooling that best meets their child’s needs, whether that’s public, private, home school or some combination.
By increasing human capital, future workers can demand a higher pay.
For those already in the labor market, holding government spending increases below population growth plus inflation and putting the business franchise tax on a path to elimination would go a long way to increasing well-paying job opportunities statewide.
Raising the minimum wage may seem helpful on its surface, but a deeper look reveals that government control of wages hurts those it most intends to help.
Instead, legislators this session should support more prosperity achieved in Texas by further freeing markets from government intervention so limited taxpayer dollars fund core government provisions.
Vance Ginn is an economist and Elliott Raia is a research associate in the Center for Fiscal Policy at the Texas Public Policy Foundation in Austin.
With the elections finally over, increased scrutiny will be sure to follow Texas as Arizona, Colorado, Maine, and Washington all approved ballot provisions to raise their minimum wage. In all four cases, the minimum wage will be increased to at least $12 per hour by 2020.
While these states already had minimum wages slightly above the federal requirement of $7.25 per hour, their resurgence increases pressure on the twenty states that still operate at the federally mandated minimum wage. However, this should not be an alarm to Texans that we lag behind as increases in the minimum wage in the Lone Star State are aimed to stint growth, lower employment, and upend economic freedom.
Currently, Texas has it in statute Labor Code Section 62.051 that “an employer shall pay to each employee the federal minimum wage.” Should the federal government choose to follow the path of these most recent four states, Texas looks to lose more than any other state in the country primarily due to its low cost of living. With a wage floor moving in the direction of the often referenced $15 “living wage,” research indicates that Texas could lose nearly one million full time jobs—more than any other state.
Perhaps even more damaging, any raise in the minimum wage would be detrimental to Texas’ “economic freedom” rating as an increase would be viewed as increasing government regulation. Texas currently ranks third best in economic freedom nationwide. This is worth noting due to the strong correlation between high economic freedom and higher wages due to increased free market activity.
As these four states raise their minimum wage, they jeopardize hundreds of thousands of jobs and the incomes of all of their citizens. Most notably, Maine and Washington place themselves in even more precarious situations as they are already in the bottom 20 percent of the economic freedom ranking.
Even though this election would appear to continue a trend of minimum wage increases, Texas shouldn’t take part in these job-killing measures. For those who view the minimum wage as a manner of assisting low-skilled, hard-working Americans, the best solution is simple: create more jobs, don’t eliminate them. This entails the Texas Legislature limiting the size and scope of government by passing conservative budgets and putting the business franchise tax on a path to elimination.
This commentary originally appeared in San Antonio Express-News on April 26, 2016.
San Antonio Independent School District recently approved a big pay increase for many of its full-time workers, and the decision has a lot of people scratching their heads.
The district’s decision to arbitrarily raise its minimum hourly wage from $10 to $12 — a 20 percent pay raise not based on merit — comes at a difficult time for SAISD, which is not only struggling with soaring debt but is also seeing its student population slowly disappear.
While school district debt is not uncommon, the pervasiveness of public debt in SAISD is alarming. According to the Bond Review Board, SAISD’s debt totaled almost $1.1 billion in fiscal year 2015. That’s up from $723 million in 2010, which means the debt has jumped by roughly $375 million in five years. SAISD’s $1.1 billion in total debt works out to a whopping $20,330 per student.
Keep in mind all this debt is being put on the taxpayer credit card at a time when student enrollment is shrinking.According to the Texas comptroller’s Debt at a Glance transparency tool, the number of students enrolled in SAISD declined by 4.9 percent from the 2004-05 to the 2013-14 school year. Statewide student enrollment grew by almost 15 percent over the same period.
With debt up and student enrollment down, it’s easy to see that raising the minimum wage is a bad idea. But the economics behind the district’s decision doesn’t make sense either.
According to the law of demand, an increase in the price of something results in a decrease in the quantity consumed. In the private labor market, labor demand is based on multiple factors, but the most prevalent is a worker’s productivity. As productivity increases, the employer finds that there’s more output per worker, rewarding workers with a higher market-driven wage.
A minimum wage distorts this efficient outcome by artificially pricing labor based on politics instead of merit. Unfortunately, some economists and most politicians get this basic economics concept wrong. But not all.
Economist David Neumark recently noted, “The overall body of recent evidence suggests that the most credible conclusion is a higher minimum wage results in some job loss for the least-skilled workers.”
In other research, economists find the minimum wage redistributes income from low- to high-wage workers — the opposite of an intended goal. This happens because a higher minimum wage not based on market activity eliminates low-wage workers, substituting them with new technologies built and serviced by high-wage workers.
Based on these destructive results, more than 500 economists recently signed a statement to not raise the federal minimum wage, a logic that applies to local governing institutions.
SAISD’s artificial increase in the minimum wage defies basic economics and its dire fiscal situation. Merit-based pay increases instead of arbitrarily increasing pay for workers with different levels of productivity and experience at or below $12 per hour would best serve taxpayers, workers and students.
Watch the video here: http://bit.ly/1Sxpz38.
Last week, the governors of California and New York signed bills that would eventually create a minimum wage of $15 per hour in those states, almost double Texas' minimum wage, which hasn't moved in seven years.
According to Texas law, the state will always maintain the same minimum wage set by the federal government. Right now that number has been fixed at $7.25 since 2009.
Garrett Groves, Director of the Economic Opportunity Program at the Center for Public Policy Priorities said $7.25 is not enough for the average worker in Texas to get by.
“If you work full time on a minimum wage job, you'll bring home around $15,000 a year, which is not much certainly,” Groves said, “and you need almost twice that just to pay for housing, for food, for health care and transportation costs. And you'll need more than that if you are trying to support a family on that amount.”
Groves led the charge during the last legislative session to bump the minimum wage in Texas to $10.10. According to his report, “It's Time to Raise the Minimum Wage in Texas.” This is the amount needed to support a family in Texas on a minimum wage salary.
“Many of us were surprised that it is a quarter of the workforce that would be affected by minimum wage increase to $10,” Groves said. “So that's one out of every four workers or two and a half million people make less than that amount of money.”
The proposal didn't make it past a discussion on the house floor, but Groves said he plans to bring it up again in the upcoming legislative session.
“There will be legislation that will be proposed,” Groves said. “The dollar amount will probably go higher than $10.10.”
However, many republican lawmakers have expressed their concern for raising the minimum wage. U.S. Congressman Randy Neugebauer (R-Texas) said he doesn't think a wage hike would be good for the overall economy.
“I think it is a disincentive for businesses to bring in people who are you know, first time in the job market, give them training so they can be a more productive member of that firm,” Neugebauer said. “So I think the government setting prices for anything is not good policy.”
Dr. Vance Ginn with the Center for Fiscal Policy said raising the minimum wage in Texas would hurt the state's economy.
“Really what we are doing by raising the minimum wage and reduce the number of jobs available,” Ginn said. “We're reducing their opportunity to move up the income spectrum and to be more prosperous over time.”
Ginn said the biggest reason why a wage increase in Texas is not as necessary as it would be in California is simply the difference in cost of living.
“California is about 45 percent more expensive,” Ginn said. “Their cost of living is about 45 percent more expensive than in Texas. And so that means they can buy a lot less, even whenever they are still earning a higher amount.”
The discussion surrounding minimum wage has also hit the presidential campaign trails. Hillary Clinton said on Sunday that if elected she plans on raising the federal minimum wage to $12.
“It's important to point out that there are people who don't believe that the minimum wage should be raised,” Clinton said. “In fact, Donald Trump has said that wages are too high. And a lot of members of his party agree.”
AUSTIN – Texas Public Policy Foundation Director of the Center for Local Governance James Quintero and Economist Dr. Vance Ginn issued the following statements on the San Antonio Independent School District Board’s approval of a minimum wage increase for all non-exempt, permanent, full-time employees for the 2016-17 school year. The increase in the hourly rate from $10 to $12 is tantamount to a 20 percent pay raise and comes at a difficult time for the district’s finances.
“San Antonio ISD’s decision to hike the minimum wage by 20 percent is mindboggling. The district is deeply in debt and it’s losing student enrollment,” said James Quintero, director of the Center for Local Governance. “According to the latest debt data, SAISD owes more than $1 billion right now. If the district has extra money in its budget, then it ought to be going to pay down this monstrous sum. In addition, the district is also seeing its student population in decline. From the school years 2004-05 to 2013-14, the district’s student enrollment declined by 4.9 percent, while at the same time the rest of the state’s enrollment grew by almost 15 percent.”
“Defying basic economics and their dire fiscal situation, San Antonio ISD unfortunately raises workers’ pay based on politics instead of merit,” said Dr. Vance Ginn, economist with the Center for Fiscal Policy. “Given the limited taxpayer dollars the district has available, providing merit-based pay increases per worker instead of increasing pay for workers with different levels of productivity and experience that are at or below $12 per hour would best serve taxpayers, workers, and students.”
By Dr. Vance Ginn and Mary Katherine McNabb
This commentary originally appeared in the Morning Consult on August 14, 2015.
The minimum wage tends to hurt those it is intended to help.
Raising the federal minimum wage will be a hot topic in the 2016 presidential race. President Barack Obama has called for increasing it to $10.10 per hour and others, including liberal presidential candidates, have promoted a “living wage” of $15.
Like other well-intentioned proposals, research shows this will be most harmful to those it’s intended to help, making it poor public policy and even worse economics. Instead, given the negative effects that raising the minimum wage will have on the least skilled, particularly teenagers, lowering or even eliminating the federal minimum wage should be discussed.
The late, great free market economist Milton Friedman said, “The rise in the legal minimum-wage rate is a monument to the power of superficial thinking.”
This is because it defies the law of demand teaching us that as the price of labor increases there will be fewer people employed. It also incentivizes employers to mechanize low-skilled jobs, such as ATMs replacing bank tellers, self-checkout registers replacing cashiers, and burger robots soon replacing fast food workers.
While workers who keep their job at the higher wage win, others fired will lose. Public policy should avoid picking winners and losers, especially when there is so much at stake for millions of workers.
Research that considers teenagers and low-skilled workers consistently finds negative employment effects, such as those by Neumark, Salas, and Wascher and another by Meer and West. As teenagers suffer from fewer jobs available, they lose the opportunity to get their foot in the door and learn from on-the-job training that improves their skills and boosts their lifetime earnings potential. This oftentimes forces them on welfare programs leading to long-term government dependence that’s costly to workers and society.
Three million people, or only 3.9 percent of the 77.2 million hourly paid workers, earned at or below the minimum wage nationwide in 2014. More than one out of every five of them were 16- to 19-year-olds and almost half were 16- to 24-year-olds.
Most in these age groups earning the minimum wage provide supplemental household income, are in college, or are starting their career; they aren’t the sole breadwinners and don’t earn this wage long. If these individuals are forced out of their job by a higher wage, then it makes it harder for them to improve their well-being.
Despite this evidence, Congress has increased the federal wage 22 times since its inception in 1938 during the depths of the Great Depression.
A liberal Congress approved the last increase from $5.15 in July 2007 to $7.25 in July 2009. This period provides a relevant case study for the potential effects of a 41 percent minimum wage increase on 16- to 19-year-olds by looking at their labor market data in 2006 and 2010.
Teenagers in this wage category increased by about 575,000 though their share of the 4.4 million total minimum wage earners nationwide declined from 25 percent to 22.8 percent in 2010. Their labor force participation rate fell from 43.6 percent to 35 percent, unemployment rate increased from 15.3 percent to 25.9 percent, and employment-population ratio declined from 37 percent to 25.9 percent.
These data after the minimum wage increase was in full effect were near the worst for teenagers since record keeping began in the late 1940s.
Black teenagers fared even worse during this period. Their participation rate dropped 8.4 percentage points to 25.6 percent, unemployment rate increased 49 percent to 43.1 percent, and employment-population ratio fell by 5.9 percentage points to 14.6 percent. Again, all near the worst levels.
Critics may argue that these hardships were from the severity of the Great Recession. Clemens and Wither study this and find that the increase in the minimum wage accounts for at least 14 percent of the drop in the national employment-population ratio, disproportionately effecting teenagers.
It’s not only bad economics, but it’s also terrible policy as a one-size-fits-all wage bears no connection with reality as there are substantially different costs-of-living among states.
Take conservative Texas and liberal California that are the largest two economies and populations in the U.S.
Texas matches the federal minimum wage while California keeps theirs above federal level currently at $9 per hour, and increasing to $10 per hour in January 2016. But Californians earning $9 per hour can’t purchase as large of a basket of goods and services as Texans earning $7.25 per hour because their cost-of-living is 50 percent higher than in Texas, according to the private firm C2ER. This means a comparable wage in California would need to be $10.88.
Comparing 2006 and 2010 data around the last federal minimum wage increase, California’s teenage unemployment rate increased from 17.5 percent to 34.4 percent. Texas’ rose from 16.7 percent to 22.3 percent.
Of course, the Great Recession and subsequent recovery were worse in California driven much by liberal policies that include the highest income tax rate of 13.3 percent nationwide and a regulatory environment that is not conducive to job growth. However, the Texas model of low taxes, no personal income tax, and less regulation were successful.
For example, job creation has been much more robust in Texas driving the unemployment rate for the total labor force down to 4.2 percent compared with California’s 6.3 percent unemployment rate, which has been higher than Texas’ rate since July 2006. This doesn’t even account for the large number of people leaving California for greater opportunity to prosper in Texas.
Moreover, the conservative policies in Texas have contributed to the teenage unemployment rate of 16 percent compared with the 25.9 percent rate in California from the latest available 2014 data, which like the nation, can likely be partially explained by a higher minimum wage in the Golden State.
Though the minimum wage was created with good intentions to provide a minimum standard of living, instead it has banned workers and employers from choosing to negotiate wages that best meet their needs, which may be below $7.25 per hour. Unfortunately, this leads to underground economic activity to earn a living, more jobs moving overseas for cheaper labor, and employment of cheaper undocumented workers.
Despite good intentions, it’s clear that the minimum wage should not be increased. In fact, for the well-being of teenagers, the least skilled, and all Americans, presidential candidates, liberal and conservative, should advocate for lowering it. Or, better yet, they should push for eliminating it so that they can negate the substantial costs to these workers for almost 80 years.
A freer labor market will generate a more productive economy and workforce, increasing the ability of workers to demand a higher wage without government intervention. Advocating for improving the education system through school choice, supporting private worker training, creating a more efficient tax system, reducing unnecessary regulations, and other market-driven alternatives will improve the well-being of all Americans.
Vance Ginn, Ph.D.