How to Keep More Kids on the Streets

from The Wall Street Journal, March 13, 2012

Donald J. Boudreaux and Walter E. Williams

Economists have analyzed the minimum wage and its effect on employment more often than almost any other topic. And the result of all this study is clear: Raising the minimum wage hurts the very people—low-skilled workers—that champions of the raise intend to help, because it prices many such workers out of jobs. That's just what a bill now under consideration by New Jersey's legislature will do. By raising the state minimum wage to $8.50 from $7.25 an hour, politicians will guarantee that fewer people get work.

The reasoning here isn't rocket science. Put yourself in the place of an employer and ask: If I must pay $8.50 an hour to whomever I hire, does it pay me to hire a person who is so unfortunate as to possess skills that would only allow him to contribute $5 an hour to my bottom line? Most employers would view hiring such a person as a losing economic proposition. Therefore the effect of minimum-wage legislation is to discriminate against the employment of low-skilled persons, who are for the most part young, and mostly minority young, people.

Proponents of raising the minimum wage assert in effect that the laws of economics don't apply to human labor. Yet wishful thinking aside, no employer can afford to pay a worker more than that worker's services are worth to the firm. Importantly, though, no employer who wants productive employees can afford to pay less than that worker's services are worth to the firm, either. Wages in market economies reflect each worker's productivity.

Evidence for this is overwhelming. Consider that in 2010 25% of workers in America age 16-19 earned no more than the federal minimum wage of $7.25. But in that same year only 11% of workers 20-24 earned so little. The figure for workers 25-29 earning this meager hourly rate was lower still, at 6%. This falling trend continues as workers age, so that among people 60-64, only 2% were earning at or below the minimum wage.

In short, as people age they gain more skills and experience. The resulting higher productivity pushes their wages up.

Responding to this argument, minimum-wage proponents note that some studies—especially one done in 1994 by economists David Card and Alan Krueger—show that raising the minimum wage has little or no effect on employment. While such studies do exist, they have been devastatingly challenged by other professional economists, who pointed out significant flaws in methodology and data interpretation.

The evidence is overwhelming that minimum-wage legislation has a negative effect on the employment of low-skilled workers. As a careful empirical study done in 2000 by Cornell University economist Richard Burkhauser and some co-authors concluded: "Minimum wage increases significantly reduce the employment of the most vulnerable groups in the working-age population—young adults without a high-school diploma (aged 20-24), young black adults and teenagers (aged 16-24), and teenagers (aged 16-19)."

Even the loudly and proudly progressive economist Paul Krugman—who called the Card-Krueger result "iffy"—has admitted that raising the minimum wage likely reduces employment prospects for low-skilled workers.

If minimum-wage legislation only destroyed jobs for teenagers, it would be bad enough. But its long-term consequences are more dire. Precisely because the climb to higher wages begins for most workers during their teenage years with entry-level jobs, the minimum wage—by knocking off the bottom rungs of the economic ladder—effectively tells young workers: Unless you can jump immediately to higher rungs on the ladder, you must remain unskilled and unemployed for the indefinite future.

Moreover, the little bit of money a teen can earn after school or in the summer is nowhere near as important as what he learns from these early work experiences, such as showing up on time, respect for supervisors, and pride from being financially semi-independent. Such experiences are even more vital to minority youths who attend rotten schools or live in broken homes. If they are to learn to become valuable workers, it will be through jobs they hold and not the schools they attend.

All the good intentions of the champions of minimum-wage raises do nothing to cure these evil consequences. In New Jersey, and everywhere else, compassionate policy requires that we think with our brains and not with our untutored hearts.

Messrs. Boudreaux and Williams are professors of economics at George Mason University.

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