Tuesday, July 21, 2009

Minimum wage factoids

This chart comes from a recent paper by Art Laffer. The blue line represents the percent of salaried workers that are paid the minimum wage or less. According to the most recent data, only 3% of those working for an hourly wage earn the minimum wage or less. Ask anyone you know to guess what percent of the workforce earns minimum wage, and I'll bet anything that they will answer with a number that is much higher than 3%. Those who earn the minimum wage are a vanishing breed, believe it or not. And that should make us proud.

The black line represents the minimum wage in today's dollars (i.e., adjusted for inflation). Note that it has stayed roughly constant for more than 20 years, while the percentage of workers earning that wage has dropped by almost 75%. It's not a coincidence, Art argues, that the huge relative decline in those earning minimum wage occurred during a period in which the federal government by and large pursued growth-oriented policies (e.g., declining tax rates). Giving incentives (lower tax rates) to those that create the jobs results in a huge increase in the number of unskilled workers that end up getting jobs, and most of them ended up getting jobs that paid more than the minimum wage since the total number of jobs has vastly increased over this 20+ year period. Incentives work much better than mandated wage hikes when it comes to alleviating poverty.

Art also explains the unfortunate consequences of the minimum wage:

While increasing the minimum wage is a seductive populist agenda item, it is incredibly harmful to the economy. All an increase in the minimum wage succeeds in doing is pricing people out of the job market, and particularly those people who have no ability to defend themselves, such as the poor, the minorities and the disenfranchised. The people who need entry-level jobs in order to gain the requisite skills to earn above the minimum wage are precluded from ever getting jobs in the first place if the minimum wage is too high.

When times are good, the minimum wage is not a large concern. In economic parlance, the equilibrium price for unskilled labor is above the price floor set by the minimum wage. When the economy turns south, though, a high minimum wage is often above the market-clearing wage for unskilled labor, meaning there is a surplus of labor, which shows up as higher unemployment among the least qualified workers. And that certainly seems to be the case today. Teenage unemployment has surged from 15.1% in July of 2007 to 24.0% in June of 2009. Meanwhile, black teenage unemployment has risen from 26.4% in July of 2007 to 37.9% in June of 2009.
As Art further notes, it is a real shame that the minimum wage "will be 41% higher [on July 24th] than it was two years ago." This will only retard the recovery, since the economy will not be taking full advantage of the huge numbers of unemployed teens.

These are the unintended and very unfortunate consequences of misguided government policies such as are being pursued by the Obama administration.


ronrasch said...

Companies have been very proactive in hiring teens with disabilities for entry level job and patient in supporting a long learning curve. The jobs and time needed for growth are much less available. The most vulnerable are being hurt

__ said...

Scott, what is your take on the performance of Obama's economic "dream team"? I've been appalled by what they're doing, but I suppose that, as usual, politics trumps economics.

Scott Grannis said...

Obama's "dream team" has done a miserable job in my view. Cristina Romer abandoned her principles (e.g., her excellent paper which showed that fiscal stimulus is largely ineffective and tax cuts are very effective) and went with the party line to support the faux-stimulus bill. Larry Summers has been speaking out of both sides of his mouth of late.

But above all, how in the world could they think that the stimulus package designed by Pelosi and Reid could possibly be stimulative? How could any serious economist these days believe that? And how can they look themselves in the face every morning knowing their boss is pushing a healthcare reform that has zero chance of reducing costs? Zero chance, because the only way to fix healthcare is to turn it into a private market where consumers of healthcare are the ones who pay for it, and healthcare insurance can be purchased across state lines and without government mandates. If we don't have a free market we will end up with rationing; that is just basic econ 101. Where did they leave their common sense?

I am reminded of Judd Gregg, who realized early on that his principles would not allow him to work for a socialist, and then promptly turned down Obama's offer of a position.

The Lab-Rat said...

One for you Scott http://www.gallup.com/poll/121814/More-Disapprove-Than-Approve-Obama-Healthcare.aspx

Scott Grannis said...

Obama continues to make mistakes. His agenda is too far to left. He's moving way too fast. He's letting others write the legislation and he ends up being a cheerleader for a massive turd of a bill. He's making way too many speeches, abusing the bully pulpit to the point where people are going to stop paying attention.