Minimum Wage Indexing will Push More Teens to the Unemployment Line

Original Article:

  • Author: Michael Saltsman

  • Publication Date: July 2010

  • Newspaper: Atlanta Journal Constitution

  • Topics: Minimum Wage

In an effort to help economically poor families make ends meet, some Georgia legislators proposed indexing increases in the minimum wage to inflation. The idea is that low-income Americans should see their wages go up when basic necessities like gas and food become more expensive.

But there are a few problems with their plan: Economists have shown that indexing the minimum wage to inflation does little to help raise the wages of poor families or alleviate poverty and will cost many teens currently earning the minimum wage their jobs.

Let’s understand one thing: According to Census Bureau data, 85 percent of Americans earning the minimum wage are young adults living at home (42 percent), childless adults (25 percent) or married adults that were secondary earners (18 percent). And low wage does not mean poor. The vast majority of families who see the benefits of minimum wage increases make two to three times more than the poverty level.

So when the Legislature proposes raising the minimum wage, it’s important to know the measure by and large won’t boost the paychecks of the low-income families it’s intended to help. What indexing the minimum wage to inflation does do, however, is raise the teen unemployment rate by decimating entry-level job opportunities.

Washington and Oregon indexed their state minimum
wages to inflation in 2001 and 2003, respectively. Research by Eric Fruits of Portland State University found that, between 2003 and 2008, both states had young adult unemployment rates 5 percent higher than without an indexed wage.

This is Econ 101. Raising the price of something — in this case, the cost of an hour of work — decreases demand. Since indexing causes the price of entry-level labor to rise almost every year, the consequences for younger, less experienced workers are devastating. Teen unemployment rates are through the roof in states indexing the minimum wage to inflation. Washington’s teen unemployment is averaging 34.5 percent; Oregon’s is 33 percent; Nevada’s is 35.4 percent.

It’s not hard to understand why. Minimum wage employees tend to work in labor-intensive industries with razor-thin profit margins like grocery stores and restaurants. You can raise the minimum wage with inflation year after year, but it still takes just as long for teens to bus tables or sweep floors. These businesses have to find other ways to absorb new costs, and that often means introducing self-service — like asking customers to clean their own trays, bag their own groceries or simply wait longer to be served — to cut down on employee hours. Either way, it means more teens are missing out on valuable career skills learned in a first job.

The most insulting aspect of this plan is Georgia’s legislators thinking employees working at the minimum can’t earn a raise on their own. Research shows that is just not the case: William Even (Miami University) and David Macpherson (Trinity University) found that almost two-thirds of minimum-wage employees earn a greater than 10 percent pay increase within a year of beginning employment.

There are better ways to lift people out of poverty. As former President Bill Clinton put it: “We can increase the earned income tax credit by a couple of billion dollars a year, and far more efficiently than raising the minimum wage, lift the working poor out of poverty.”

If you don’t trust President Clinton, ask an economist. Fully 70 percent surveyed point to the Earned Income Tax Credit as the best anti-poverty policy; only 9 percent said the same about the minimum wage.

If Bubba and the vast majority of economists can’t convince you, maybe that unemployed teenager sitting on your couch all summer will.

Michael Saltsman is the research fellow at the Employment Policies Institute in Washington.