Teen Unemployment And the Minimum Wage A Pelican Institute Study By James Plummer
Executive Summary As the Great Recession drags on, unemployment remains a major concern throughout the state of Louisiana and the nation as a whole. While the jobs situation in Louisiana is somewhat better than the national average, the unemployment rate for working-age teens (16-19) is astronomical and bodes ill for the future of Louisiana's youth. Figures provided by the U.S. Census Bureau 1 reveal shocking changes for the worse in regards to teenage 2 employment in Louisiana: Between 2006 and 2011, the teenage unemployment rate in Louisiana more than doubled from 13.2% to 26.5% Louisiana teens with less than a high school education have seen their unemployment rate rocket from 13.6% in 2006 to 34.4% in 2011. This is an increase of 153%. The average hours worked per week for Louisiana teens fell from 9.7 to 5.7 hours a decrease of 41.2% The percentage of Louisiana teenagers who have a job declined from 35.4% in 2006 to 22.8% in 2011. That is a decline of 35.6%. A new analysis 3 finds that recent increases in the federal minimum wage have accelerated this trend. According to this analysis, increases in the minimum wage from $5.15 to $7.25 have cost Louisiana teenagers over 6,600 jobs. It is not surprising that a 41 percent increase in the cost of unskilled labor would result in an excess supply of that labor. Policymakers should keep these basic economic facts in mind when contemplating minimum wage increases. Louisiana employment Louisiana has undergone a number of economic changes in recent years, most notably the exodus from and slow repopulation of the New Orleans area following the storms and floods of 2005. The growth of film and television production in Louisiana, thanks to generous tax credits and fewer regulations relative to California, has been another major change. Another change that must be taken into account, however, is the 41% increase in the federal minimum wage. (Louisiana has no state minimum wage, so the national minimum wage law prevails.) 1 Current Population Survey (CPS) data via http://www.bls.gov/cps/ 2 This and subsequent references to teenagers will refer only to 16-19 year-olds. 3 Update of analysis by William E. Even and David A. Macpherson, The Teen Employment Crisis. 2010. Employment Policies Institute.
While unemployment as of May 2012 remains a full point lower in Louisiana (7.2%) than nationwide (8.2%) 4 ; the 2011 unemployment rate for teenagers in Louisiana reached 26.5% 5. That represents a doubling of unemployment in just five years among the sector of the population most effected by the minimum wage law. 6 Minimum wage and teenage unemployment Louisiana 16-19 year-olds While the 2008 economic crisis' unfolding 30 8 concurrently with the new wage law obviously did not 7 help matters, the new 25 6 analysis of Louisiana labor 20 5 data indicates that 6,613 Louisiana teens were left 15 4 unemployed by the most 3 10 recent series of hikes to the 2 federal minimum wage. 7 5 1 0 2005 2006 2007 2008 2009 2010 0 2011 The situation appears worse when one looks beyond conventional La. unemployment (16-19) Minimum wage in dollars unemployment statistics, which measure only the active labor force. When you include those driven out of the labor force and those so discouraged they never bother to enter into the active labor force, the percentage of Louisiana teenagers who have a job declined from 35.4% in 2006 to 22.8% in 2011. 8 Unemployment rate % The decreased demand for unskilled labor at higher wages extends beyond the number of employed teens to the amount of work those employed actually do. The hours per week worked by employed teens has dropped in the state of Louisiana from 9.7 to 5.7 hours, a decrease of 41.2% Supply and demand The most basic and immutable laws of economics are those of supply and demand. Simply stated, the higher the price of a commodity, the less of the demand. The commodity of labor is not exempt from this fundamental reality. In a free market, supply and demand meet at an equilibrium price point where the quantity demanded equals the quantity supplied. However, when a government interferes with this equilibrium by setting artificial price ceilings or price floors this equilibrium cannot be reached. When a price ceiling is set, as with gasoline during the 1970s, there results a shortage of supply. When a price floor such as a minimum wage is set, the result is an excess of supply. When the commodity in question is labor, the excess supply of labor is, in fact, unemployed workers. Minimum wage in dollars 4 http://www.bls.gov/lau/home.htm 5 CPS data 6 Ibid. 7 Update of Even and Macpherson, 2010 8 Ibid.
This is relatively uncontroversial among economists who have studied the effects of a minimum wage on employment. In a recent analysis published by the Cato Institute, former deputy assistant secretary for the U.S. Labor Department Mark Wilson put it this way: 85 percent of the most credible studies point to negative employment effects, and in the studies that focused on the least-skilled groups most likely to be adversely affected by minimum wage, the evidence for disemployment effects are especially strong. In contrast, there are very few, if any, studies that provide convincing evidence of positive employment effects of minimum wages. 9 Yet, despite almost 75 years of evidence of the disemployment effects since the first federal minimum wage law was passed in 1938, calls to hike up the minimum wage continue. As this report goes to press, some such activists are engaging in a day of action protesting employers and members of Congress in order to raise the minimum wage. 10 And politicians are still introducing measures to increase the minimum wage. 11 Public-choice economists have suggested much of this political support comes from unions (and thus, their allied lawmakers) who wish to undermine their lower-priced 12 13 competition in labor markets. Skilled and unskilled As the debate over education reform continues in Louisiana, many commentators have pointed to low college-graduation rates in the state and suggested a greater emphasis on trade schools and high-school career training as an alternative to a four-year Bachelors' degree. These policies may make sense, but we should also remember the unique value of on-the-job training. For many college graduates and graduation-track students, unpaid internships in white-collar professions offer just such training. But lower-skilled workers searching for a bluer-collar career have no such option. And an artificially high minimum wage may preclude these workers from learning on the job at a lower training wage commensurate with their lack of experience. The Cato Institute study pointed out that, Research finds that some employers will replace their lowest-skilled workers with somewhat higher-skilled workers in response to increases in the minimum wage, 14 in order to get what they are paying for. 9 Wilson, Mark. The Negative Effects of Minimum Wage Laws. Cato Institute. June 21, 2012. 10 http://www.iwj.org/home-page/featured-campaigns/minimum-wage-campaign 11 See, e.g. http://thomas.loc.gov/cgi-bin/query/z?c112:h.r.5901: 12 Rustici, Thomas. A Public Choice View of the Minimum Wage. Cato Journal, 1985. www.cato.org/pubs/journal/cj5n1/cj5n1-6.pdf 13 Graphic courtesy Idaho Freedom Foundation 14 Wilson, Mark. The Negative Effects of Minimum Wage Laws. Cato Institute. June 21, 2012.
The vast majority of those 6,613 Louisiana teenagers unemployed by the federal wage law were, unsurprisingly, from the least skilled among the labor force -- those without a high school degree. By 2011, the unemployment rate for teenagers with less than a high school degree reached 34.4%. The data further indicate that 5,723 Louisiana teens were in that unfortunate number. 15 Although 65.1% of working-age teenagers statewide do not yet have a high school degree 16, those 5,723 represent 86.5% of the unemployed teenaged population in the state. Nobel laureate Milton Friedman summed it up well: "The minimum wage law is most properly described as a law saying that employers must discriminate against workers who have low skills." 17 Conclusion Unemployment rate 40.0% 30.0% 20.0% 10.0% Unemployment, less than high school Louisiana 16-19 year-olds 0.0% 2005 2006 2007 2008 2009 2010 2011 Louisiana's edge in the nation's dismal employment situation is due in part to the lack of a state minimum wage. States like California, which impose a minimum wage higher than mandated by federal law, are struggling with employment situations much more dire than Louisiana's. Moreover, the growing teenage unemployment problem in Louisiana could be ameliorated by repealing the federal minimum wage. Louisiana would be better served by a natural minimum wage where supply meets demand in a free market for unskilled labor. Thousands of teenagers not to mention other Louisianans would thus have the chance to enter the workforce and receive valuable real-world on-the-job training presently not available to them. This would also obviate the need for increased state expenditures on vocational training in a educational system that still struggles (despite recent improvement) to teach basics such as math and reading. Louisiana lawmakers have wisely resisted calls to impose a higher state minimum wage. While advocates for such laws claim they will help the poor, the evidence proves otherwise. Increases in the minimum wage serve primarily to increase the unemployment rate and exacerbate other employment problems such as the lack of skills among the labor force. Thus, lawmakers in Baton Rouge should remain steadfast in opposition to well-intended but economically futile schemes. 15 Update of Even and Macpherson, 2010 16 CPS data 17 Friedman, Milton. The Open Mind. WPIX, December 7, 1975