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 Richmans' Trade and Taxes Blog

The Minimum Wage Should Not Apply to Teenagers or the Unskilled
Raymond Richman, 7/1/2014

Economists are divided on how much unemployment the minimum wage causes but there is little doubt that a legal minimum wage decreases the demand for unskilled workers. What wage potential employers are willing to pay depends on what the employer believes that hiring an additional worker would be worth to him. No employer will hire a worker unless he believes the worker will contribute as much value as the worker costs. Who is hurt the most by a minimum wage? Teenagers having no work experience and unskilled 20 or over without work experience. And as the data shows, black teenagers and the black unskilled are affected the most, an unintended consequence.

There seems to be little chance for abolishing the current federal minimum wage of $7.25. There is increasing pressure to increase it as already has been done in some states. Twenty-two states have minimum wages above the federal minimum. According to the US Bureau of Labor Statistics only 1.5 million workers are actually employed at the federal minimum. So how do we end this tax on teen-agers and the unskilled?  For the former, it is easy. Eliminate or reduce the legal minimum wage insofar as it applies to teen-agers and the unskilled looking for work.

The data clearly justify this policy change. Compare the unemployment rates of teenagers and the rest of those in the civilian labor force. The unemployment rate during the first quarter of 2014 was 6.5 percent for those 20 years of age and older but 20.9 percent for those aged 16 to 19. WhBee teenagers had an unemployment rate of 20.9 percent, black teenagers 34,5 percent, Latin teenagers 24.4 percent and Asian 15.4 percent. Black male teenagers has the scandalous astronomical level of  42 percent.

Lowering the minimum hourly wage applicable to teenagers and the unskilled to $5 would provide an annual wage of more than $10,000. It is not unreasonable to expect up to 50% of the unemployed teenagers would find employment. Since some 5,785,000 unemployed teenagers were unemployed during the 1^st quarter of 2014. 2,891,000 would find employment and their annual earnings would amount to $28.9 billion dollars. If so, the national minimum wage of over $7.25 per hour has cost teen-agers nearly $29 billion.

Once employed and having a good work experience, they would find employers bidding for them and bidding up their wages. The average wage in the leisure and hospitality sector, the lowest paid group reported by the U.S. Bureau of Labor Statistics, in May, 2014 was $13.73 per hour, in Retail Trade it was $16.96, while the average worker in the private sector including the highly skilled, received $24.38 per hour..

Getting a first job is very important to an individual’s skill development. If one has to pay an unskilled worker an amount of money that exceeds the expected skill he is expected to acquire by on-the-job training in a reasonable time on the job, employers will be very reluctant to experiment and to employ additional workers whereas if wages are lower, employers will be more willing to take a chance on hiring. Unfortunately teenagers do not know why they are unable to find a job and are easy prey to those who argue that it is the fault of the capitalist system. No it is simply another instance of government price controls which always results in shortages when it sets a maximum pice, or, as in this case a minimum wage one has to pay for labor, that limits the demand. Governments that establish a minimum wage should be forced to hire everyone willing to work for that wage.

The high wages of skilled labor is attributable to the fact that skilled labor produces a high value per hour. How does a skilled laborer acquire his or her skill? Some by education and training, by schooling and technical education, and some by experience, by skills obtained by working on-the-job. The unskilled acquire skills on-the-job by training, observation and experience. Employers train unskilled workers to do some task that has value for them. The unskilled worker acquires a skill. Those who excel in the task are likely to be rewarded by training to do a job that creates even more value and is rewarded by increased pay. The process has produced our high living standard.

One economic truth is that employers will not hire additional workers unless the expected value added by the additional worker is at least equal to or less than to the wage they have to pay. Employers with a greater degree of monopoly power are more likely to be able to pass on the increased cost of wages to their customers, whereas employers in highly competitive industries will be less able to pass the burden of increased costs to their customers.

If all employers in highly competitive industries have to pay the increased cost of a   minimum wage, their customers will have to bear the burden in the form of increased prices. Fast food and less-expensive restaurants will lose customers as some of their customers will eat out less frequently. They will become less profitable and some may even close. Expensive restaurants and hotels will be affected little by a small rise in costs of relatively unskilled employees, whose pay is a small proportion of the price of their final product.

The minimum wage is another example of government interfering in the economy to the detriment of general economic well-being. Unfortunately, in the case of the minimum wage, its burden falls almost entirely on teenagers and the unskilled and it is especially hard on black teenagers as the data show. Teenagers and the unskilled unemployed should not be subject to more than a nominal minimum wage.

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