While the global economic downturn continues to take its toll, a new United Nations agency report contends that young workers may have been hit the hardest, pointing to a dramatic rise in the number of unemployed youth around the world. While analysts list a host of reasons why young people can’t find jobs, there is one culprit, at least in the United States, that some economists say continues to rear its head: The federal minimum wage.
Laws that mandate minimum wages for employees block the lowest skilled workers out of the job market — a demographic largely made up by young people — and contribute to widespread unemployment among the group, economists contend. In order for an employer to justify making a new hire, they must have knowledge that the new employee will contribute more per hour than what they are being paid. So if the minimum wage is set at $7.25 (the current federal standard), unskilled workers who cannot produce that level of income for the company are more likely to be out of a job completely.
“When the government forces employers to pay more, it prices some workers out of jobs,” said Donald Boudreaux, an economist at George Mason University in Virginia. “When you deny teenagers the opportunity to work by pricing them out of the labor market with ridiculous legislation, you create a long term problem because you delay entry into the workforce.”
Over the past two years Americans have faced unemployment rates flirting with the double digits, the highest since the early 1980s. While the unemployment rate currently stands at 9.6 percent for the overall population, the rate for teens is 26 percent. It jumps dramatically to 45 percent for black Americans 16-19 years old. According to the United Nations International Labour Organization study, the numbers are stark around the world as well. About 81 million out of the roughly 620 million economically active youth between the ages of 15-24 worldwide were out of a job, a statistic that has analysts warning of a “lost generation.”
While few politicians would take the politically unpopular stance of calling for the removal of the minimum wage entirely, conservatives on Capitol Hill have voiced sentiment that government wage controls can corrupt the labor market and hinder economic recovery. Minnesota Republican Rep. Michele Bachmann told The Daily Caller that the more control companies have over their pay roll, the better.
“Successful business owners know how to manage their bottom line and hire the best employees. And the unemployment levels we see in youth are just one more symptom of why Democrat policies continue to fail the workers they are claiming to help the most,” Bachmann said.
Bachmann joined 116 of her Republican colleagues in the House by voting against a gradual minimum wage increase of nearly 40 percent in 2007, but the measure eventually passed with bipartisan support in both chambers.
Wisconsin Rep. Paul Ryan, who is considered a rising star in the Republican Party, has also contended that regulations like wage controls can put a damper on growth.
“I reject the false premise that only forceful and sustained government intervention in the economy can secure this country’s renewed prosperity,” Ryan said last month. He joined Bachmann in 2007 to vote against the federal minimum wage increase.
Despite the potential unpopularity of such a proposition, would reducing or eliminating the minimum wage help to reduce unemployment among young people and generate more prosperity overall? It depends on who you ask.
“It’s obviously not the only factor,” Boudreaux said. “But as long as people have contracting rights, if they find that it is worth his or her while to work at a job paying some wage, presumably that is the best use of that person’s time.”
When asked if minimum wage laws negatively affect the unemployment rate, he replied, “Of course.”
Analysts at the Economic Policy Institute, however, point to a recent study on the rising trend in youth unemployment that suggests that there is scant evidence that minimum wage raises contribute to unemployment among young people.
“Since the minimum wage was raised in July, the teen employment rate (the share of people age 16-19 who are employed) fell from 28.9% to 26.2%,” wrote economist Heidi Shierholz in a November 2009 paper. “Could this drop plausibly be attributed to July’s 70 cent increase in the minimum wage? A careful examination of the data finds no evidence to support that conclusion.”
Steven Horwitz, an economist at St. Lawrence University and proponent of eliminating the minimum wage, concedes that price controls don’t always have to result in fewer hires, but government price controls can force companies to cut back elsewhere to make up for the lost revenue. Firms can reduce benefits and working conditions, for instance, or try to squeeze more productivity out of their employees.
While the minimum wage is not the only factor that contributes to widespread unemployment, especially during a recession, Horwitz said it ranks high on his list.
“This is not surprising,” Horwitz said of rising jobless rates. “Certainly minimum wage is the first thing I think of as a possible culprit.”