Higher Minimum Wage Hurts Employment Chances

By MASON RAYNER

Perhaps you are currently searching for a potential summer job, or have been trying to find part-time work over the course of this semester. If so, you probably have had trouble finding openings.

Jobs are incredibly scarce at the moment. Although you may think this is the natural side effect of the sluggish economy, the truth is a little bit more complicated.

The national unemployment rate is currently 9.7 percent, a small decline from its recent peak of 10 percent, but still one of the highest levels since the early 1980s. Teenage unemployment, meanwhile, sits at an off-the-chart 26.4 percent. Why the huge gap? The answer might surprise you.

As you might know from experience, many temporary and part-time jobs filled by high school and college students don’t pay particularly well. In fact, quite a few pay the absolute minimum level required by law—the minimum wage.

In 2007, Democrats in Congress passed a bill with the support of then President George W. Bush that increased the minimum wage, in three steps, from $5.15 to $7.25.

Sounds great, right? Actually, this law, along with the lingering effects of the recession, is largely responsible for the horrendously high unemployment rate for teens.

The reason is actually quite intuitive. When the price of something rises, people tend to want less of it. This is called the elasticity of demand, which is just a fancy way of saying that people respond to prices. And just as you might buy fewer songs from iTunes if Apple raised prices across the board to $5 a song, businesses are less likely to hire workers when it becomes more expensive to do so.

The sad fact is that most of us under the age of, say, 22, are what economists call unskilled workers. We don’t have lots of experience, we’re eminently replaceable, and to be brutally frank, we don’t add a whole lot of value. Employers are willing to hire us if the cost isn’t too high. Minimum wage laws, by raising this cost, take away the one advantage we have: our cheapness.

Some have argued that the minimum wage hike has had little effect on employment, but the only way this could be true is if demand for labor was perfectly inelastic; or, in other words, changes in the price of labor (wages) had zero effect on firms’ willingness to hire. If you believe this is true, try starting off your next job interview by saying you’ll take the job for nothing less than $30 an hour and see how that works out.

The adverse results of minimum wage hikes are a classic example of a well-meaning action leading to unintended consequences. Signaling theory tells us that people often choose their political positions on the basis of advertising, or signaling, something about themselves. In this case, support for a higher minimum wage effectively sends the message to others that you are concerned about workers at the bottom of the ladder and want to improve their position.

However, what makes you feel good about yourself is not necessarily good policy. The fact that more than one out of every four teenagers currently looking for a job can’t find one should be a cautionary tale to all of those who arrive at their political viewpoints solely with their hearts, at the neglect of their heads.