Proposed Minimum Wage Hike Would Stall Recovery
Author: Michael Saltsman
Publication Date: July 2013
Newspaper: Detroit News
Topics: Minimum Wage
Within hours of Thomas Perez’s confirmation as Secretary of Labor this month, he announced his top goal would be job creation. Strangely, he’s also planning to push for a minimum wage hike — a strong sign that the new secretary doesn’t understand how to achieve his goal.
In reality, a higher minimum wage will have the opposite effect on job creation, disproportionately hurting the teens and young adults who need entry-level jobs to be successful later in life.
Nationally, the unemployment rate for all teens has been above 20 percent every summer since 2009; it’s 24.3 percent in Michigan. But for black teens, unemployment has been above 30 percent over the same period. That’s four straight summers — soon to be five — of record teen unemployment.
Tellingly, these disheartening numbers have occurred during or since the 40 percent hike in the federal minimum wage — which rose in three steps from $5.15 an hour to $7.25 — from 2007 to 2009.
Writing in 2010, economists at Miami and Trinity universities estimated that — even accounting for the effects of the recession — at least 114,000 young adults lost job opportunities as a direct result of federal wage hikes. (Other economists have put that figure above 300,000.) Among less-educated young black males specifically, the same team of economists found that the job losses associated with the federal wage hike in some states were actually worse than the consequences of the Great Recession.
One need only look at the businesses where young adults are employed to understand why.
Roughly 40 percent of employed teens work in the leisure and hospitality industry (think restaurants, movie theaters and hotels), while another 25 percent work in retail jobs at grocery stores, service stations and the like.
These types of businesses aren’t exactly rolling in the dough. Their profit margins are generally 2 or 3 cents on every sales dollar. Sudden spikes in labor costs — like a 40 percent jump in the minimum wage in two years — leave these businesses with two options: Raise prices, or reduce costs.
When raising prices isn’t an option — good luck with that in a rough economy, Mr. Perez — the only other option is to provide the same product with less service. This might mean having waiters or waitresses bus their own tables or opting for a self-service alternative to young grocery baggers. The data bear this trend out: Teens’ share of employment in the leisure and hospitality industry dropped by more than 20 percent from 2007 to 2011.
Teens start climbing the employment ladder through their first summer jobs. Further minimum wage hikes only postpone their ability to get these jobs. Research published in the Journal of Human Resources found that even a six-month spell of unemployment can have lasting effects for a young adult, the equivalent of forgoing a quarter-year of schooling.
On the flip side, part-time work in high school has been linked to better outcomes in the labor market following graduation.
Detroit parents want nothing more than a good future for their kids, and attaining that future means part-time work experience now is crucial.
Unfortunately, the minimum wage hike that Perez desperately wants will only put those opportunities further out of reach.
Michael Saltsman is the research director at the Employment Policies Institute.