Saturday, October 31, 2009

Minimum Wage Laws and Entry Level Jobs

It is interesting to compare Bob Herbert's article in the NY Times yesterday about unemployment among recent college graduates with a Wall Street Journal op-ed from earlier this month about the effect of the recent minimum wage hike.

Here's Herbert from October 30, 2009:

As jobs become increasingly scarce, more and more college graduates are working for free, at internships, which is great for employers but something of a handicap for a young man or woman who has to pay for food or a place to live.

"The whole idea of apprenticeships is coming back into vogue, as it was 100 years ago," said John Noble, director of the Office of Career Counseling at Williams College. "Certain industries, such as the media, TV, radio and so on, have always exploited recent graduates, giving them a chance to get into a very competitive field in exchange for making them work for no — or low — pay. But now this is spreading to many other industries."

Lonnie Dunlap, who heads the career services program at Northwestern University and has been advising young people on careers since the mid-70s, said today’s graduates are experiencing the worst employment market she’s ever seen.


Like Mr. Noble, she mentioned the growing use of interns versus paid employees and said she can see the value of such unpaid work for some recent graduates, "though, of course, not everyone can afford to do that."

Herbert concludes:

If we’re having trouble finding employment for even these kids, then we’re doing something profoundly wrong.

Ahh, but what could we be doing wrong?

From the WSJ article on October 3, 2009, aptly subtitled “The minimum wage hike has driven the wages of teen employees down to $0.00”:

Yesterday's September labor market report was lousy by any measure, with 263,000 lost jobs and the jobless rate climbing to 9.8%. But for one group of Americans it was especially awful: the least skilled, especially young workers. Washington will deny the reality, and the media won't make the connection, but one reason for these job losses is the rising minimum wage.

Earlier this year, economist David Neumark of the University of California, Irvine, wrote on these pages that the 70-cent-an-hour increase in the minimum wage would cost some 300,000 jobs. Sure enough, the mandated increase to $7.25 took effect in July, and right on cue the August and September jobless numbers confirm the rapid disappearance of jobs for teenagers.

The September teen unemployment rate hit 25.9%, the highest rate since World War II and up from 23.8% in July. Some 330,000 teen jobs have vanished in two months. Hardest hit of all: black male teens, whose unemployment rate shot up to a catastrophic 50.4%. It was merely a terrible 39.2% in July.


As the minimum wage has risen, the gap between the overall unemployment rate and the teen rate has widened, as it did again last month. (See nearby chart.) The current Congress has spent billions of dollars—including $1.5 billion in the stimulus bill—on summer youth employment programs and job training. Yet the jobless numbers suggest that the minimum wage destroyed far more jobs than the government programs helped to create.

Now, I don’t want to mislead you; Herbert is writing specifically about college graduates, and the numbers from the WSJ article are for teenagers. However, there is obviously a strong correlation. Recent college graduates are usually unskilled and trying to land their first real jobs, just like teenagers. And employers are not currently willing to pay $7.25/hour (plus the 7.65% employer portion of FICA taxes) for an on-the-job trainee of limited productivity.

The fact that zero wage internships are widely available means that the need for young, unskilled workers is there (after all, taking on interns is not exactly free – interns do require some supervision from paid employees), but that given the choice between paying zero (which is legal) and minimum wage, employers choose zero because the minimum wage does not make economic sense.

It is highly likely that there is some hourly wage between zero and $7.25/hour that could better clear the market for entry level labor and could match hundreds of thousands of additional entry level workers with entry level jobs. But the federal government, in its unbounded wisdom, has made that wage illegal.

I recently remarked to an economist friend of mine that economics must be a depressing field in which to be a researcher. In the hard sciences, new research is often translated into practical applications which benefit society. In economics, however, ideas that were worked out and widely accepted by practitioners centuries ago are not only not implemented, but are contradicted and disparaged by those who wield the most power over our society.

I suppose that we should feel fortunate that lawmakers don't try to repeal the law of gravity, even as they try again and again to repeal the law of supply and demand.

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