WASHINGTON — The unemployment rate for 16 to 19 year olds was an astonishingly high 23.8 percent last month. The United States is facing a youth employment crisis.
Young workers are finding it increasingly difficult to enter the labor market, get their first job and work their way up the career ladder. Yet, during this time of persistently high youth unemployment, there have been calls to increase the minimum wage from $7.25 to as high as $10 per hour.
America’s youth are having a hard time reaching the first rung on their career ladders. Now is a bad time to increase minimum wages and make that important step more difficult.
Higher minimum wages generate a tradeoff between higher wages for the employed and higher rates of unemployment. When minimum wages increase, many workers who earn less than the new higher minimum wage lose their jobs. Firms often decide that they can get by with fewer workers instead of paying higher wages.
As one might expect, David Neumark of the University of California’s Irvine campus and William Wascher of the Federal Reserve Board survey recent research on minimum wages and find that the least-skilled workers are hurt the most by minimum wages.
Minimum wages are particularly damaging for the future prospects of young workers as they typically earn the low wages that are impacted by the change in the minimum wage law.
In 2010, 50 percent of workers aged 25 and below, and 78 percent of teenagers earned less than $10 per hour. With youth unemployment topping 20 percent, it has become clear that employers are not willing to hire young workers at the current minimum wage, much less at an even higher one.
It would damage the prospects of those willing but no longer able to work for wages below the minimum wage.
So in the short term, higher minimum wages make it difficult for young workers to find jobs. In the long term, higher minimum wages diminish the career prospects of young workers. Higher rates of unemployment mean that young workers do not have access to the resume-building activities associated with employment and do not gain the experience necessary to earn higher wages in the future.
Research shows that early career experience is crucial for future job prospects and wage growth. Even if young workers are lucky enough to find a job, higher levels of the minimum wage reduce the incentive for firms to invest in young workers by providing training.
Wages are only one part of workers’ total compensation — beyond regular salary payments, they receive training and job experience that generate higher wages in the future.
Minimum wages increase employers’ total labor costs and make them less likely to give young workers the training that they need. Low levels of experience and training have reduced job creation after the recent recession.
Forty-nine percent of employers report having trouble filling crucial jobs within their organizations. Employers who want to hire report that they are unable to find workers with the right skills or experience.
Despite the lack of qualified applicants, companies have also been unwilling to hire and train unskilled workers. Increasing the minimum wage will only make this problem worse.
Proponents of increasing minimum wages claim that minimum wages only have a small effect on unemployment rates.
Studies that support this idea have three common features. First, the wage increases considered are typically small. Second, the initial wage level before the increases has been low. Finally, the economy has been strong.
Right now these conditions are not satisfied. Minimum wages have already risen from $5.15 to $7.25 per hour in three equal increments between July 2007 and July 2009 and the economy remains weak. Another increase will further increase youth unemployment. Right now, the focus should be on creating jobs not increasing wages.
ABOUT THE WRITER
Aspen Gorry is a research fellow at the American Enterprise Institute for Public Policy Research and former economics professor at the University of California at Santa Cruz. Readers may write to him at AEI, 1150 17th Street NW, Washington, D.C. 20036.
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© 2012 American Enterprise Institute
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