Now that teenage unemployment has reached 25 percent among those still actively seeking work (source), it seems like a good time to look at regulations that might discourage companies from hiring teenagers. Economists have traditionally said that the minimum wage law is the primary weapon wielded by older workers against the young. With a high minimum wage, companies won’t want to hire the inexperienced so the next generation will be hobbled in their attempts to build a sufficiently strong resume to unseat the current generation of workers.
At a party here in Massachusetts, I asked a group of comfortable middle-aged folks how they felt about the minimum wage. All were strongly in favor of a minimum wage law and thought that it benefited entry-level workers. I asked “Wouldn’t a minimum wage, of whatever amount, cause companies to refrain from hiring any worker that wasn’t worth the mandated wage?” Absolutely not, the group agreed. A restaurant would need burger flippers and they would pay whatever the government told them to pay. I observed that it would be pretty tough to live on the current $8 per hour minimum wage here in Massachusetts. Wouldn’t it be better to set it at $50 per hour? If $8 is good, surely $50 would be better. “Maybe that is too high,” one person said. They accepted that a $50 per hour minimum wage would discourage hiring, but believed that an $8 one would not.
What about in their own households? Nearly all of these folks employed cleaners, landscapers, babysitters and nannies. Suppose that the government mandated that they pay their helpers more than they were currently paying. “We’d clean the house ourselves,” one couple said. “I’d let the weeds grow,” said another. “We would stay home and watch TV instead of hiring a sitter and going out,” said a parent. Would a business faced with a minimum wage law behave similarly? “Absolutely not, companies are completely different from consumers,” was the response.
Why was it more common in California for households to employ helpers than here in Massachusetts? Was it because immigrant labor is available at much lower prices than here in Massachusetts? That a gardener at $10 per hour is appealing to a homeowner than a $30 per hour gardener? “No, it is mostly because there are more people available and it is easier to find someone.”
“We need the minimum wage for social stability,” one guest asserted. I asked if they considered Norway, Singapore, Switzerland, and Sweden to be unstable, as those countries had no minimum wage law. Then I asked if they thought it made our society more stable to have 25 percent of the young workforce out on the street instead of working at a job.
Not a single person changed his or her mind as a result of my questioning. Support for the minimum wage remained solid at 100 percent.
Minimum wage laws are a pretty large liberal totem pole. I have only my personal experience, and try to keep my mind open. I’m an assistant manager at a huge retail chain. From what I have personally seen minimum wage laws absolutely discourage hiring. If it were up to me (as the hiring person) I could hire someone still in high school for five dollars an hour and change that payrate two weeks or a month from now when I see them working out. Or see their experience and hire them straightaway at ten or twelve dollars an hour. Because of minimum wage laws everyone has to be paid the same when they start, and because of discrimination laws I can’t pay an 18 year old less than a 35 year old even though they have obvious differences in experience, work history, etc.
It’s never a good idea to try to apply Economics 101 to the real world — there is, after all, a reason why students who’ve already taken Economics 101 have to spend several more years studying economics before they can get a degree in the subject. And in the real world, the most recent experiment of which I’m aware was the introduction of a minimum wage in the UK ten years ago — and the effect on employment levels was indistinguishable from zero: http://ideas.repec.org/p/ecj/ac2002/169.html
As the first complicating factor to think about, people who get a pay rise because of a minimum wage have more money, and because they’re still too poor to save much they tend to spend it, which increases employment.
Norway, Singapore, Switzerland, and Sweden all have some kind of government subsidized or taxpayer funded healthcare. I would say that the reason we have minimum wage laws is not to for teenagers, but for people who are trying to survive on that salary. Of course, since nobody could survive on $16k in the Boston area, we end up with a multitude of government programs anyway.
I see that none of your compatriots have studied microeconomics and looked at how price controls causes disequilibrium in a market. I think those are the correct terms, last time I studied economics, it was in HS. What did your friends think of the 25% unemployment rate?
Maybe you should’ve inserted the apocryphal story about George Bernard Shaw haggling over price: “He was at a party once and he told this woman that everyone would agree to do anything for money, if the price was high enough. `Surely not, she said.’ `Oh yes,’ he said. `Well, I wouldn’t,’ she said. `Oh yes you would,’ he said. `For instance,’ he said, `would you sleep with me for… for a million pounds?’ `Well,’ she said, `maybe for a million I would, yes.’ `Would you do it for ten shillings?’ said Bernard Shaw. `Certainly not!’ said the woman `What do you take me for? A prostitute?’ `We’ve established that already,’ said Bernard Shaw. `We’re just trying to fix your price now!'”
Minimum Wage law.
Pretty big Deal here in Germany. We have none. And around half of the people urgently want it to be implemented. One of the reasons for the socialist party to come back from nearly 0 to 20 percent of the voters.
In our current economic situation there are no more jobs for highscholl kids in supermarkets as there is trained personel fully available for around 5 € the hour, which is exactly the fee, that I earned 20 years ago as a kid.
So the system isn’t working that much better without a minimum wage barrier.
You wouldn’t see working highschool kids either, as there is substantial underemployment in western societies at the foreseeable future.
Thanks to the cutthrought competition I can now get my hair cut for 8€ which is 50% less than 20 years ago.(when I grew my hair hippie style…)
We pay about $25 a week for gardeners. It’s a contract price. The mow-and-blow guy seems to show up with three other guys for an hour. That’s far below the minimum wage. I haven’t asked any of the workers for documentation, because that’s my gardener’s business. Minimum wage might be unenforced in California, and that’s why we hire more people.
On the other hand, the housekeeper has gotten really good at getting out of here in almost four hours and she gets $120 for the week’s worth of cleaning she does in a single day. So she makes more than I made my first few years as a computer consultant.
Mike: Thanks for that research link. It supports my argument for raising minimum wage to $50 per hour! If wages can be increased with the stroke of a government pen and there is no reduction in hiring, why limit ourselves to $8 per hour?
Craig: An $8/hour worker in Massachusetts, at least in most cities, would be eligible for free health care at his or her city-run hospital. So that is not significantly different than the countries cited with no minimum wage. As for your argument that a person could not survive on $16,000 per year in the Boston area, that supports my plan for raising minimum wage to $50 per hour!
Martin: Doesn’t Germany have a lot of other costs and barriers to hiring workers, besides whatever wages have to be paid? Here in the U.S., hiring a new worker entails significant administration and benefits costs, the latest of which is the obligation to buy health insurance in the world’s most expensive health care system. Even if the wage were 1 cent per hour, the cost of employing a worker in the U.S. would still be high enough to be unaffordable to many potential employers.
It has intrigued me that proponents of federal minimum wage do not seek to tie/index it to inflation (though 10 states do.) Is this a recognition of its consequences (Mike’s evidence to the contrary notwithstanding) or a measure of its perpetual political value to demonize the opposition every so often?
I predict the present Democratic lock will not enact it.
None of the other guests had considered these Ec-10-type questions before?
At a party attended by such vapid post-bimbo boomer ciphers, I would require mind-numbing doses of a variety of currently-proscribed substances, to consider staying. These people are a lost cause. You should get cooler friends.
Mike Scott writes “… people who get a pay rise (SIC) because of a minimum wage have more money, and because they’re still too poor to save much they tend to spend it, which increases employment.” Question: If employers were not required to pay for the pay raise, how would that associated money be used? Would it be used to hire additional workers at the lower wage? Would it be spent by the employer on additional goods and services that would require additional labor to produce? would it be invested (or alternatively saved and then borrowed by someone else), leading to increased activity requiring additional workerts? Or, in Keynesian-like fashion, would it be stuffed under a mattress (hoarded)? The notion that employers can cause a net increase the aggregate level of employment by increasing the amount they pay workers seems bizarre.
Bill, shades of Frederic Bastiat – “What is seen, what is unseen”, Broken windows, etc.
“And in the real world, the most recent experiment of which I’m aware was the introduction of a minimum wage in the UK ten years ago — and the effect on employment levels was indistinguishable from zero”
The UK has more than one minimum wage – it has a maximum minimum, and a minimum minimum, along with some exemptions: http://www.hmrc.gov.uk/nmw/
This because the aim is to try and set the wage at almost the same level as it would have on average if there was no minimum wage legislation, thus making a political “achievement” without actually making any difference. Why else would the government think that a 21 year old requires less protection from exploitation than a 22 year old?
Of course there is some risk that this crude pay scale would inadvertently discourage hiring in some cases. If this doesn’t manifest itself in unemployment, it must be manifesting itself in illegal forms of employment. e.g. http://news.bbc.co.uk/1/hi/business/4871760.stm
Jess: I should get cooler friends? I have as cool friends as any other… computer programmer!
Ouch, that hits pretty close to home. b^)
At least up until recently, the federal minimum wage wasn’t keeping up with inflation:
http://en.wikipedia.org/wiki/Minimum_wage_in_the_United_States
Back in the 30’s, Congress inadvertently included Haiti in a small minimum wage increase, doubling Haiti’s minimum wage. It destroyed their lace industry. Typical minimum wage increases are made when most people are already earning that wage, minimizing the narmful effects of the minimum wage law. The example of Haiti shows what a real “living wage” will do to people’s lives.
In The Netherlands (part of the People’s Republic of Europe) the minimum wage is 3,63 Euro an hour for an 18 year old. And yes, we have our problems too with teenage unemployment.
What’s more of a barrier to hire anybody, is that you can’t fire someone without going to court or another government institution to ask for permission to do so.
High unemployment among those who work for around minimum wage is a good thing. A lot of them are immigrants who shouldn’t be here at all, and some of them have been going back to their own countries during this recession. Since we live under a quasi-socialist state instead of libertarian fantasyland, a low-wage worker is a net drain on the economy – the value they add is less than the value they extract. So good riddance.
In the absence of serious immigration law enforcement, lower minimum wage -> more jobs -> bigger immigrant underclass -> bigger government budgets.
If Grover Norquist determined public policy, or alternatively when we start excluding unskilled, net tax-eating immigrants with the same determination that we exclude foreign PhDs, your simple-minded Econ 101 model would be more relevant to the real world. That’ll happen right after the Cubs win the World Series.
Mike Scott-UK study:
See UK Gov’t stats, http://www.statistics.gov.uk/elmr/02_09/downloads/ELMR_Feb09_Kent.pdf, page 32, top of page.
Clearly show a a drop off in employment rate of 16-17 and 18-24 year olds starting around time of UK minimum wage discussion and introduction. (late 1998 -1999).
Scott’s study looked at if employed would continue to be employed, a longitudinal study. Study did not look at new hires entering the workforce. Much more difficult in UK to terminate employment than in US. Must document and can take up to two years.
Study also did not look at whether work week increased without additional pay and effectively lowering the minimum wage, which appears to be what happened in the UK. Study says it did not include unpaid overtime, which appears to be allowed in the UK and explicitly is included in government statistics.
See as one example, BBC News article, “Overtime ‘costs workers £4,800’ .” http://news.bbc.co.uk/2/hi/uk_news/6228565.stm
And, “Downturn ‘fuels unpaid overtime’. ” http://news.bbc.co.uk/2/hi/business/7817022.stm. There appears to be a recognition of an increase in unpaid overtime in many news articles even before the financial crisis and recession.
Seems like minimum wage negatively affected youth employment and increased unpaid overtime.
As a former small-business owner and the son-in-law of a current small-business owner, I can assure you that minimum-wage laws do factor into decisions about hiring more people.
We ran a retail ceramic studio and one of our best customers was needing some extra money and asked about working there. We couldn’t afford to hire anyone at the minimum-wage and she asked if she could get some smaller amount with free ceramics making up the difference.
We looked into it and we couldn’t legally hire her at that; we could have just paid her under the table, but then you’re constantly in fear that someone will find you out (or she might decide to turn you in) and then your business is completely hosed. The law was protecting this lady out of a part-time job at terms that she found perfectly acceptable. To me, that’s the real problem with minimum-wage laws: they treat consenting adults as wards of the state who must be protected from making their own decisions. I find it very demeaning (and I’ve worked minimum-wage jobs in my time).
(Arizona recently raised its minimum wage and my mother-in-law had to let two people go because of it. She would have preferred to have kept them and her business was growing, but she couldn’t afford the new rate at the time.)
rps: Do you figure that the economy would be better off if, instead of having presumably low wage workers cleaning bathrooms in office buildings, bathrooms in office buildings went uncleaned until the cleaning robot is perfected?
Phil,
Excellent column. You may not have gotten anyone at the party to admit to changing his or her mind, but you deserve an “A” for effort. And it’s possible you planted some seeds which may take some time to germinate.
One small suggestion I have for anyone talking or writing about this topic is to refer to “wage control laws” rather than “minimum wage laws.” The traditional term has a built-in bias in favor of wage control, since it naturally directs one’s attention toward those workers who will be getting paid the higher wage, rather than toward those who will lose their jobs or be unable to find work.
I suspect that more people would oppose “wage controls” than would oppose a “minimum wage”, and this terminology makes it easier to bring other types of wage and price controls into the argument, so that the case can be made against all of them collectively, rather than just appearing (from the perspective of someone with a good heart but a poor understanding of economics) to be opposing the interests of low income workers.
Also, the phrase “wage control” emphasizes the role of government control or coercion in the law, which brings us closer to addressing the root moral issue of aggression.
rps: should we start start ‘excluding unskilled, net tax-eating’ citizens? We have plenty of them, too. Where can we deport them to? Should we have means-test for citizenship?
Would be interesting to see what happened to food prices if we were to deport illegals (the majority of agricultural workers) and only hire citizens. There would be probably be two outcomes: 1) price of food would dramatically increase since the market price of such undesirable work would increase dramatically. This would undoubtedly cause some civil unrest. 2) The agricultural lobby would rise up, scream and lobby congress for more unskilled workers from south of the border.
For the record, I’m against minimum wage.
It is of course not fair to couple a minum wage to a state where living expenses are the highest. We have a minimum wage in the Netherlands. And indeed that amount of money is seen as a minimum to have a decent life. So people can move from Massachusetts to cheaper states and survive on the minimum wage.
If unemployed, workers end up on welfare which is seen as a minimum to survive. Lower of course than the minimum wage to create an incentive to work. This welfare is not available to teenagers (for people under 27). They are forced to get or extend their education. There is no need to be on the streets.
Like stated before, the tight regulations to fire (and thus hire) workers is more of a problem.
Without knowing all the details of Norway and Sweden, these countries are well known as “welfare states”. They might not have a minimum wage, but for certain will have a plethora of subsidies to support people.
Are we doing bad? http://hdr.undp.org/en/statistics/
Norway is first, The Netherlands is 6th.
Guido: For a teenager living with his or her parents, the size of the minimum wage relative to the cost of “a decent life” is not relevant. The teenager already has food, clothing, shelter, and health care. What he needs is job experience so that he can get a better job when he is an adult. A high minimum wage prevents employers from hiring him (which is why his chance of being unemployed right now is 25 percent) and delays the time at which he will have built enough skills to compete with existing adult workers.
Norway and Sweden have lavish welfare states? That doesn’t have much relation to minimum wage. We could give every American free food, clothing, shelter and health care. There would still be young people trying to get onto the first rung of the workforce and adults stepping on their fingers trying to dislodge them.
Norway is #1? Let’s emulate the 4.6 million people who live there. All we need to do is put enough oil underneath our land so that no American ever needs to do a day of work again. That’s what the Norwegians were wise enough to do. Alternatively we could deport 290 million people and our existing energy reserves would fund a comfortable welfare state for the remaining 10 million.