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Destroying the Young with the Minimum Wage, Part 1

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The minimum wage, a price control as futile as all other government price controls, continues to damage the U.S. economy and much of the world.

But the obscene irony of the minimum-wage law is that it hurts some of the very people it is supposedly designed to help — young people seeking employment. The government’s setting a higher price for their employment means it is more difficult for them to find a first job. That first job can be so important in any person’s life. That first job can provide valuable experience — even if it pays little — because it can put someone on the road to bigger and better things.

In April, economists said that not nearly enough jobs were created. The U.S. unemployment rate dropped from 8.2 percent to 8.1 percent, according to government figures. But look behind the numbers. They went down because approximately 342,000 people quit looking for work.

Who is hurt the most by minimum-wage laws that produce sluggish job growth?

They hurt people at the low end of scale, those with few skills trying to find a job that will give them some, as well as young people just beginning their work lives. They are the most frequent victims of minimum-wage laws. Indeed, for teenagers and young adults 25 and under, those who often earn the minimum wage, these are hard times.

The teenage jobless rate, for example, was about 250 percent higher than it was for adult men and women. Teenagers, said the U.S. Labor Department, had a 24.7 percent rate compared to 7.5 percent and 7.4 percent for adult men and women, respectively. Those younger than 25 aren’t doing much better. The U.S. Labor Department reported they had a 16.4 percent jobless rate.

What is the effect on businesses and individuals of setting wages artificially high for a class of workers, young and old, who are just trying to get started, many of whom desperately want work?

The minimum wage’s economic effects are obviously egregious. But the damage caused by government wage controls goes beyond the economic.

That first job

Think of our own lives. What would have happened if we didn’t get that first job as teenagers or in our early 20s? What would have been the effect of spending the first five or ten years of young adulthood unemployed, as now happens routinely to tens of millions of young people?

Flawed minimum-wage policies are being put into effect at a time of “staggeringly high” youth unemployment in the advanced welfare-state democracies across the globe, according to Nemat Shafik, deputy managing director of the International Monetary Fund (IMF).

The current problems of youth unemployment, he writes, threaten to create “a lost generation.” Observing that youth unemployment for persons 15–24 is high even in the United States, he notes the cultural as well as the economic results of these numbers. They have had “long term consequences for economic growth because of the loss or degradation of human capital,” he writes at his blog.

Charles Murray, in his latest book, Coming Apart, documents the problem. He warns that millions of young Americans, especially white men, are giving up on the idea of work. The minimum wage certainly is part of the problem.

Shafik says that the problem of youth unemployment is worldwide, with some countries such as Greece, where they abide by the myths of minimum-wage laws, registering a 50 percent youth-unemployment rate. That is a frightening number. Is America headed down the same road?

Shafik’s comments are logical. How many of us, as we progress through life, started out in high school or college with a low-paying or minimum-wage job. It didn’t pay much. But it was a building block to a better job. We learned a lot from that first job. And even if all we learned was how to get to work on time and how to interact responsibly with bosses and fellow workers, we were on the road to better things.

In some ways, that first job was as critical to a career as a good education. In fact, one can say that it supplemented formal education. For many people that first job made it possible to pay for higher education or for other things — or just made it possible to stay out of poverty.

As a young person I remember that my best friend, Eugene, had a minimum-wage job in high school that helped support his fatherless family. After school, Eugene went on to have a good full-time job and raise a family. His “minimum wage” or low-paying jobs in high school had been a key part of his personal development.

What happens to the millions of Eugenes today because the cost of employing them has been set too high? In the case of people working their way through school, it would have been a terrible loss not to have a job to help defray the costs of an education.

Tinkering

More important, to paraphrase Shafik, without those first jobs to begin our work lives the ability to develop “human capital” would have been hurt.

Yet remarkably, at a time of high unemployment, numerous state legislatures and the federal government will inevitably talk about raising the minimum wage as a compassionate way to help the poor and young people. It reminds one of a comment of the Victorian prime minister who complained of government attempts to tinker with the economy in bad times: “Why can’t they leave it alone?”

Still, lawmakers in many places just can’t stop tinkering. So raising the minimum wage, governments playing with prices — a form of central planning with all its faults — is an idea that is supported in many places. In state legislatures, including that in New York, more minimum-wage laws are under discussion. At the same time, New York City is also discussing imposing a “living wage” on contractors who conduct business with the city.

The New York State legislature has pending minimum-wage increases that would raise the wage by $1.25 to $8.50 and also index the minimum wage to inflation. State Assembly Speaker Sheldon Silver has said raising the minimum wage is “a top priority” of this session of the state legislature. A spokeswoman for the speaker said he is “optimistic” that the minimum-wage measure will pass this year.

So what’s wrong with raising the minimum wage by $1.25? After all, most of us aren’t employers. Supposedly, we won’t be paying for it and some of our poor neighbors will benefit from it. What’s wrong with a cost imposed on someone else?

The problem is that the long-term effect of such a policy is rarely appreciated until the damage has been done. It is the classic case of what one brilliant economist called “what is seen and what is not seen.”

A higher minimum wage would have a devastating effort on them, according to several small-business owners in the New York/New Jersey/Connecticut region.

“You’re talking about a 17 percent to 18 percent increase in the wage of your minimum-wage worker who isn’t even trained,” says Pat Orzano, who owns a 7-Eleven store in Massapequa, New York. Orzano emphasizes that she is speaking for herself, not for the 7-Eleven corporation.

She adds that raising pay for the newest worker, one who is often in his first job, would have a ripple effect. Other workers, who have more experience, would demand a higher rate of pay.

She explains that the government is imposing higher wage costs at a time when her store sales have been sluggish. Unfortunately, Orzano and millions of other small-business people can’t lobby and pass a law that gives them higher sales. They must compete with other store owners and earn higher sales in part by offering low prices.

These New York minimum-wage changes, if approved, would take effect in January 2014, according to the Assembly bill. Similar bills are under consideration in New Jersey and Connecticut.

This article was originally posted in the October 2012 edition of Future of Freedom.

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  • This post was written by:

    Gregory Bresiger, an independent business journalist who works for the Sunday New York Post business section and Financial Advisor Magazine, is the author of the book Personal Finance for People Who Hate Personal Finance.