Sunday, July 25, 2010

98,000 more teenagers are now earning the true minimum wage

One of the most frustrating things about economic experiments is the difficulty in establishing control groups within a large population.  You might think that economic policy "A" is helpful, while I think it's a disaster.  But we can't try out economic policy "A" on one group of citizens while giving an identical group a free pass.  (Think death taxes, Obamacare, stimulus spending, etc.  We're all influenced by these actions.)

If only we could do that with, say, the new minimum wage laws.  

Well, some economists got lucky this time, but in an upside down sort of way.  Before the new federal minimum wage laws went into effect, there were already some states with minimums set at the higher level.  So here was a great opportunity to compare the unemployment rates between the two groups of states.  Both groups would be living in the same economy, with the same fears of an economic downturn, fears of Obamacare, interest rates, etc etc etc.  

But one large group of states would suddenly go through a minimum wage hike, all at the same time.  Another group would already be dealing with the higher minimum.
This is from The Wall Street Journal, via Newsalert:

Today marks the first anniversary of Congress's decision to raise the federal minimum wage by 41% to $7.25 an hour. But hold the confetti. According to a new study, more than 100,000 fewer teens are employed today due to the wage hikes.
Economic slowdowns are tough on many job-seekers, but they're especially hard on the young and inexperienced, whose job prospects have suffered tremendously from Washington's ill-advised attempts to put a floor under wages. In a new paper published by the Employment Policies Institute, labor economists William Even of Miami University in Ohio and David Macpherson of Trinity University in Texas find a significant drop in teen employment as a direct result of the minimum wage hikes.
The wage hikes were implemented in three stages between 2007 and 2009, and not all states were affected because some already mandated a minimum wage above the federal requirement. But for the 19 states affected by all three stages of the federal wage increase, "there was a 6.9% decline in employment for teens aged 16 to 19," write the authors. And for those who had not completed high school, "we estimated that the hikes reduced employment by 12.4%," which translates to about 98,000 fewer teens in the work force.
The true minimum wage is zero.  You can't raise it.  
When politicians raise the "minimum wage", all they're doing is raising the "productivity threshold", making it illegal to hire people whose productivity doesn't reach the new minimum level.  
The higher they set their new minimums, the more people they condemn to earning the true minimum, which is zero.  Nothing.  Zilch.  Nada.  


Nick Rowe said...

That's a great way to put it.

Card and Krueger did this sort of "natural experiment" when New Jersey raised their minimum wage but neighboring Pennsylvania did not. They surveyed businesses and found that NJ would not experience higher unemployment. Bill Clinton put this result in his State of the Union Address.

But thr C&K study was flawed on so many levels. Subsequent research based on ACTUAL labor hours showed a decline resulting from the min wage hike. Hundreds of papers before C&K and hundreds after have thoroughly established that min wage decreases employment, just as theory predicts.

You'd think that people who have the best interests of the poor at heart would realize the folly, but many union contracts for labor WELL ABOVE min wage are indexed to it, so that's the political motivation for it. Union wage premiums reduce the quantity of labor too but not necessarily with the productivity gains because of seniority rules.

TarrantLibertyGuy said...

Nick, it's hard to have the little people's best interest at heart when you've got a yacht payment due and boatload of union lobbyists breathing down your neck.

The Whited Sepulchre said...

The infamous Krueger and Card experiment was a phone interview of the businesses that were still around after the minimum wage increase.
Using the same methodology (interviewing the survivors) you can prove that no one died in World War II.