July 1, 1981

July 1, 1981 | Backgrounder on Jobs, Jobs and Labor Policy

The Minimum Wage: Restricting Jobs for Youth

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147 July 1, 1981 I THE MNIMUM WGE RESTMCTING JOBS FOR -YOWH INTRODUCTION In January 1980, Ronald Reagan declared The minimum wage has caused more misery and unemployment than anything since the Great Depression.'Il ing teenagers and minorities.

Congress would limit the harmful effects of the minimum wage on youth unemployment by establishing a llsubminimumlt wage rate for teenagers, and would thereby create financial incentives for firms to hire young, unskilled workers. A similar proposal was narrowly defeated (by one vote) in the House of Representatives in 1977 This observation is particularly true regard Several bills currently before To review the social, political, and economic consequences of the minimum wage, Congress created the Minimum Wage Study Commission in 19

77. In its recently issued report, the Commission recommended against enacting a youth differential. This is sur prising in light of the vast evidence presented before the Commission as to the damage done by the minimum wage sioner S. Warne Robinson points out in his minority report As Commis The Commission majority's near-total disregard for facts became apparent a s the results of our economic research began taking shape bulk of the evidence from these studies showing that the minimum wage hurts far more poor families than it helps, the majority proclaimed the view that Congress did not really expect the Commission t o base its recom mendations on the facts anyway. When the evidence became inescapable that a rising minimum wage wipes out With the overwhelming 1 "A Balky Assault on Minimum Wages Newsweek, March 30, 1981, p. 75. 2 millions of job opportunities for young people, women, the elderly, and the disadvantaged, the Commission's majority did not even bother to refute the facts were simply declared immaterial.2 They Continuing high unemployment rates, however, mandate an objective re-evaluation.of this timely and necessary proposal.

BACKGROUND The federal minimum wage was first established as part of the Fair Labor Standards Act in 1938 at 25 cents an hour. Many workers were not covered by the initial Act, most notably those in the retail trade and service industri es. The original Act has been amended six times to expand coverage and provide adjustments terms) and the percentage of workers in covered employment have roughly doubled since 19

38. Table 1 provides minimum wage values in nominal and real terms) for eac h of the years the minimum was raised and the estimated coverage for the private non-agricultural sector. These figures, however, probably understate the true magnitude of the legislated changes. First, the value of the minimum wage is raised by costs to t he employer, such as social security and unemployment insurance contributions, which have increased substantially over the years. Second, the workers originally covered were disproportionately in high wage industries mitigating the initial adverse impact o f coverage. Subsequent amendments extended coverage to workers in disproportionately low wage employment, thus magnifying the' effects of coverage. These points are important because they help explain the correlation between minimum wage legislation and h i gh unemployment rates among certain demographic groups such as teenagers and minorities. to compensate for inflation. Both the minimum wage (in real YOUTH DIFFERENTIAL Senator Orrin Hatch (R-Utah), Chairman of the Senate Labor and Human Resources Committe e , has introduced the Youth Opportuni ty Wage Act of 1981 (S. 348 which would encourage youth employment by providing a lower minimum wage for teenage workers. Under this bill, employers would be allowed to pay 75 percent of the minimum wage to any youth u n der 20 years of age for a period of six months, at which time the employer would be required to pay at least the full minimum wage any one of the following violations under the Act 1) employing a youth at less than 75 percent of the minimum wage; 2) payin g a reduced wage for more than six months; 3) substituting youth labor at less than the minimum wage for adult labor; and 4 Employers would be penalized for 2 "Minority Report of Commissioner S. Warne Robinson in Report of the Minimum Wage Study Commission , Vol. 1, May 1981, pp. 184-85. 3 TABLE 1 The Basic Minimum Wage and Aggregate Coverage, 1938-1981 Percentage of All Nonsupervisory Minimum Wage Employees in Month/Year Private of Change Current Constant Nonagricultural in Minimum Dollars 1938 Dollars Work covered 10/38 10139 10/45 1/50 3/56 9/61 9/63 2/67 2/68 5/74 1/75 1/76 1/78 1/79 1/80 1/81 0.25 0.30 0.40 0.75 1.00 1.15 1.25 1.40 1.60 2.00 2.10 2.30 2.65 2.90 3.10 3.35 0.25 0.30 0.31 0.45 0.52 0.54 0.57 0.60 0.66 0.58 0.57 0.58 0.59 0.59 0.56 0.57 43.4 47.1 55.4 53.4 53.1 62.1. 62.1 75.3 72.6 83.7 83.3 83.0 83.8 83.8 83.8 83.8 Sources: Finis Welch, Minimum Wages: Issues and Evidence (Washington, D.C American Enterprise Institute, 1978 p. 3; and James W. Singer A Subminimum Wage--Jobs for Youths or a Bre ak for Their Employers?"

National Journal, January 24, 1981, p. 146 hiring.new young employees to replace existing youths to gain continual advantage of the youth differential.

Senator Charles Percy (R-Ill.) has proposed a similar bill S. 430), but has ra ised the youth subminimum somewhat, to 85 percent of the full minimum wage, while Senator Don Nickles R-Okla.) bill (S. 658) would exempt employees under the age of 18 from the minimum wage provisions (Section 6) of the Fair Labor Standards Act THE MINIMU M WAGE AND EMPLOYMENT THEORY A basic law of economics is that the quantity of labor demanded is inversely related to the wage rate. When a minimum wage is established at a level above one that would be determined by market forces, employment opportunities a re restricted for the least productive workers by pricing their services out of the market. The resulting higher labor costs may exceed,the value of some workers' services, causing disemployment among these workers. 4 The minimu? wage alters the relative p rices of labor and other inputs by,saking low-skilled labor relatively more expensive and inducing a substitution towards other inputs such as capital and higher wage labor, thereby resulting in an inefficient allocation of resources. Moreover, increased p roduction costs would reduce output and lower the demand for all inputs Government interven- tion in the labor market via minimum wage legislation may have some far-reaching effects, such as forcing some firms to close and others to shift into new industr i es. Again, this is suboptimal from an efficiency standpoint jobs at the higher wage, butthose who lose their jobs or are not hired at all clearly are made worse off. Some unemployed workers no barriers to employment, but in so doing, increase 'the supply o f labor, exerting downward pressure on wage rates in those areas. In addition, as coverage'has expanded, fewer jobs have become available in uncovered sectors for displaced workers to turn to The minimum wage may benefit those workers who retain their may seek jobs in uncovered sectors, where minimum wage laws pose ON-THE-JOB TRAINING The minimum wage discriminates against the most disadvantaged workers by denying them an opportunity to develop skills and gain experience through on-the-job training because it makes it unpro fitable for employers to hire unskilled and young workers To illustrate, a distinction must be drawn between a workerls Ilob served" wage and his Irfull1l wage. In addition to a money wage the IIfulllf wage includes non-monetary rewards f rom works such as fringe benefits and on-the-job training. Employers are willing to supply these non-pecuniary benefits because the workers are willing to pay for them with reduced wages. Many workers accept a low wage initially, in return for training, b e cause they view it as an investment in human capital that will enable them to command greater earnings in the future ally important for young workers because it provides them with a chance to learn skills and develop productive work habits. A higher minim u m wage mandating employers to raise their monetary wage may result in reduced fringe benefits and training opportun ities. Hence, even those workers who keep their jobs may be worse off than before. This would be especially true if employee training were d rastically curtailed because of its potentially powerful effect on future compensation. Martin Feldstein asserts that the minimum wage may actually lower the lifetime earnings for many workers Such training is especi the minimum wage law has an unambiguou s ly harmful effect on some young workers were willing to lfbuyIv on-the-job training by taking a very low wage for six months or a year, the minimum wage law would not permit him to do so For the disadvantaged, the minimum wage law may have the ironic Even if an individual 5 effect of lowering lifetime incomes by a very large amount.

Consequently, the minimum wage often hurts the very group it was designed to help. Milton Friedman has a similar view: "The real tragedy of minimum wage laws is that they are s upported by well- meaning groups who want to reduce poverty. But the people who are hurt most by higher minimums are the most poverty stricken.It4 A special youth subminimum would ameliorate the pernicious effects of the minimum wage on youth unemployment a visiting professor of economics at George Mason University and an Adjunct Scholar at The Heritage Foundation, makes the following point: workers are generally less productive than adults and would eliminate discrimination against low-skilled teenagers.I l 5 would have an incentive to hire and train unemployed youth because the reduced labor costs would make it more profitable for firms to hire labor and expand output also help deter many teenagers from falling victim to a life of crime or indolence Walter W illiams A youth subminimum would take into account that young Employers The employment effects would DISCRIMINATION The minimum wage has had an especially devastating impact on black teenage employment In 1948, the overall unemployment rate was 3.8 percen t and about 10 percent for teenagers, both black and white. This difference is not unusual given the inexperience of a group entering the labor market for the first time. At that time, the minimum wage (in real terms) and the percentage of the workforce co vered were relatively low. Periodic adjustments raising the minimum and expanding coverage have been accompanied by concomitant increases 'in the youth unemployment rate, especially among blacks. This can be seen from the results in Table 2.

During April o f 1981, youth unemployment among white male teenagers aged 16 to 19 was 16.5 percent, while the corresponding figure for blacks was 37.3 percent. This gap has arisen because the minimum wage makes it costless for an employer to discriminate,.

The minimum wage gives firms effective economic incentive to seek to hire only the most productive employees which means that firms are less willing to hire and/or train the least productive employee which includes Martin Feldstein The Economics of the New Unemployme nt Public Interest Vol. 33 (Fall 1973 p. 15.

Milton Friedman The-Minimum Wage Rate, Who Really Pays?" An Interview with Milton Friedman and Yale Brozen (Free Society Association ed 1966), pp. 26-7.

James W. Singer A Subminimum Wage Jobs for Youths or a Br eak for Their Employers National Journal, January 24 1981, p. 147 6 Year 1948 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 teenagers and par t icularly minority teenagers. By holding all else constant, such as worker productivity, the minimum wage law gives firms incentive to indulge whatever racial preferences that they may hold.6 TABLE 2 Comparison of Youth and General Unemployment by Race (Ma l es General 3.8 5.9 5.3 3.3 3.0 2.9 5.5 4.4 4.1 4.3 6.8 5.5 5.5 6.7 5.5 5.7 5.2 4.5 3.8 3.8 3.6 3.5 4.9 5.9 5.6 4.9 5.6 8.5 7.7 7.0 6.0 5.8 7:1 White 16-17 10.2 13.4 13.4 9.5 10.9 8.9 14.0 12.2 11.2 11.9 14.9 15.0 14.6 16.5 15.1 17.8 16.1 14.7 12.5 12.7 12 . 3 12.5 15.7 17.1 16.4 15.1 16.2 19.7 19.7 17.6 16.9 16.1 18.5 Black 16-17 9.4 15.8 12.1 8.7 8.0 8.3 13.4 14.8 15.7 16.3 27.1 22.3 22.7 31.0 21.9 27.0 25.9 27.1 22.5 28.9 26.6 24.7 27.8 33.4 35.1 34.4 39.0 39.4 37.7 38.7 40.0 34.4 37.7 B/W Ratio 92 1.18 90 .92 .73 .93 96 1.21 1.40 1.37 1.81 1.48 1.55 1.89 1.45 1.52 1.61 1.84 1.80 2.26 2.16 1.98 1.77 1.95 2.14 2.28 2.41 2.00 1.91 2.20 2.37 2.14 2.04 White 18-19 9.6 14.2 11.7 6.7 7.0 7.1 13.0 10.4 9.7 11.2 16.5 13.0 13.5 l5.i 12.7 14.2 13.4 11.4 8.9 9.0 8.2 7 . 9 12.0 13.5 12.4 10.0 11.5 17.2 15.5 Black 18-19 10.5 17.1 17.7 9.6 10.0 8.1 14.7 12.9 14.9 20.0 26.7 27.2 25.1 23.9 21.8 27.4 23.1 20.2 20.5 20.1 19.0 19.0 23.1 26.0 36.3 22.1 26.6 32.9 34.0 13.0 36.1 10.8 30.8 12.3 29.6 14.6 33.0 B/W Ratio 1.11 1.20 1.5 1 1.43 1.43 1.14 1.13 1.24 1.54 1.70 1.62 2.09 1.86 1.58 1.72 1.83 1.72 1.77 2.30 2.23 2.31 2.40 1.93 1.93 3.11 2.21 2.31 1.91 2.19 2.78 2.85 2.41 2.26 Source: Walter Williams, "Government Sanctioned Restraints that Reduce Economic Opportunities for Minori t ies Policy Review, Vol. 2 Fall 1977) p. 14; Department of Labor, Bureau of Labor Statistics Handbook of Labor Statistics 1980 (Washington, D.C U.S. Govern ment Printing Office, 1980); Employment and Earning (Department of Labor, Bureau of Labor Statistics various issues.

Walter E. Williams, "Government Sanctioned Restraints that Reduce Economic Opportunities for Minorities," Policy Review, Vol. 2 (Fall 1977 p. 15 7 In the absence of a minimum wage law, blacks might be willing to work for a lower wage than whites would be penalized by incurring greater labor 'costs than non- discriminating employers that hire black workers discriminating firms would have lower production costs and could force discriminating firms out of business by charging a lower price. C ompetition in labor and product markets would therefore mitigate the effects of any such employment and wage discrimination Discriminating employers The non Moreover, a lower minimum wage is gaining more and more acceptance in the black community.

Public Opinion Polls, a national black polling and research organization, revealed that 37 percent of those questioned favored a lower minimum wage to reduce unemployment among teenagers while 36 percent thought that such a wage would adversely affect adu lt employment A recent survey by Data Black LABOR OPPOSITION The biggest supporters of the minimum wage are not represen tative of the poor, but organized labor from their desire to protect union members from competition.

Unions lobby for minimum wage legi slation because these laws tend to increase the labor costs of nonunion competitors, which raises the demand, as well as wage rates, for union labor It is for this reason that union leaders so adamantly oppose the youth subminimum Their support stems CRIT I CISMS OF THE YOUTH SUBMINIMUM Opponents of the youth subminimum wage legislation maintain that the rise in youth unemployment was not caused by concurrent increases in the minimum wage, but by the impact of the "baby boomll and the resulting expansion of the teenage population.

Clara Schloss, a consultant for the AFL-CIO and a member of the Minimum Wage Study Commission argues very little effect on teen employment at the same time as the population bulge for teenagers went up.117 This proposition is based on the premise that there are not enough jobs in the economy to go around. This true only to the extent that the minimum wage has destroyed many possibilities for job creation. Given demand, an increase in the supply of labor in this case workers born dur i ng the baby boom, results in downward pressure on the wage. When the minimum wage prohibits the wage from adjusting to the forces of supply and demand, unemployment results The minimum wage has had The minimum wage went up Harrison Donnelly, "Youth Submin imum Pay'Fate Tied to Adult Wage Floor,"

Congressional Quarterly, March 7, 1981, p. 421. 8 A second objection to the youth subminimum wage arises from the .fear that a two-tiered minimum would result in unfair competi tion between youths and adults, i.e it would encourage employers to substitute teenage labor for adult labor. Walter Williams points out that this is an example of the Iflump of labor fallacy where one person's gain must be accompanied by another person's loss. On the contrary, the subminimum would generate new employ ment opportunities by making it more profitable for an employer to hire and train marginal workers and expand output. Moreover most of these jobs would be entry-level positions that would be more suited toward the youth labor mar ket than to older workers.

According to Williams For the most part, teenagers hired at the subminimum rate would fill new jobs or old jobs that would be reinstated. There might be ushers at movies again, for example and hotels might decide to keep-their co rridors and windows cleaner.If8 These jobs may replace some of the self-service aspects found in many of the goods and services we purchase today, such as the self-service pumps at gas stations and salad bars in restaurants In an empirical study on the ef f ects of the subminimum wage prepared for the Minimum Wage Study Commission, Michigan State University economist Daniel Hamermesh finds that a 75 percent subminimum would increase teenage employment by about three percent or 250,000 jobs. His findings also indicate that nearly nine out of every ten jobs created for teenagers as a result of a youth differential would not come at the expense of adults. The Commissionfs own staff economists view this estimate as overly conservative and believe that a youth sub minimum would create employment opportunities for as many as 450,000 young people.

The effect on adult workers is minimal because the low labor costs would reduce prices and increase business activity, which would benefit all labor.

Furthermore, the two bills proposed by Senators Hatch and Percy would prohibit employers from engaging in such substitution.

Even in the absence of legal penalties, however, employers would be unlikely to fire existing workers to hire new ones because of the high costs associa ted with employee turnover. Examples of such costs include replacing experienced and trained workers Others argue that the subminimum wage would yield windfall profits to firms employing large numbers of young workers by significantly reducing their labor costs. This argument, however ignores the fact that competition in the product market would lower prices to a new competitive equilibrium, thereby eliminating any windfall Singer, op. cit p. 148. 9 CONCLUSION The original purpose of the minimum wage was t o alleviate poverty by insuring an adequate standard of living for all workers.

George Stigler has contended that government interference in low-wage labor markets is "neither an efficient not an equitable device for changing the distribution of personal i ncome lr9 Advo cates of the minimum wage assume that the benefits accrue to the needy, yet the Commission's own report reveals that less than one-third of an increase in the minimum wage would go to families with pre-tax earnings of $10,000 or less. Furth e rmore, the most needy members of our society are likely to suffer even greater losses by being denied employment and/or an opportunity to build for the future through training and experience. In essence Ithe minimum wage serves only as a tax from the poor to the poor.'110 without a youth differential, teenagers will continue to bear the burden imposed by minimum wage legislation. Current debate regarding the youth subminimum wage should be based on the vast body of empirical evidence, not on the biased rep o rt of the Minimum Wage Study Commission. An objective evaluation of the facts would certainly mandate a lower minimum wage for today's youth market, but also young adults, the less educated, the elderly etc a far better proposal would be one eliminating t h e minimum wage altogether America's young people are anxious and willing to work, but Because the minimum wage not only affects the youth labor Peter G. Germanis Policy Analyst George J. Stigler, "The Economics of Minimum Wage Legislation American Economi c Review, Vol. 36 (June 1946 pp. 358-65.

American Enterprise Institute, 1978 p. 25. lo Finis Welch, Minimum Wages: Issues and Evidence (Washington, D.C.:

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