Blame Minimum Wage for Youth Joblessness: Echoes

Margins matter. That's what New Hampshire lawmakers were really saying to their governor, John Lynch, last week when they overrode his veto of legislation that limited increases in the minimum wage.

The law ties the New Hampshire minimum wage to the federal wage of $7.25 an hour. The effect is to guarantee New Hampshire employers an advantage of somewhere between $0.15 and $1.00 an hour over employers in other New England states, where minimum wages range from $7.40 an hour in Rhode Island to $8.25 an hour in Connecticut.

New Hampshire officials may be thinking of young job-seekers. Unemployment in the state for 16-19 year-olds averaged 18 percent in 2010. (Horrible enough, though well below national average of 25.9 percent, according to the Bureau of Labor Statistics.) And the minimum wage affects youths disproportionately: about half of those paid the federal minimum or less are under age 25.

Do penny differences really count when it comes to employment? The case that they do is stronger than it used to be — especially when it comes to less productive workers like teens.

Particularly problematic for these teens is the federal minimum wage, an old fixture of the American workscape. In 1938, President Franklin D. Roosevelt signed the Fair Labor Standards Act, which placed direct upward pressure on wages. The act set the modern national minimum wage at $0.25 an hour, and established a maximum work week of 44 hours.

One idea driving FDR was that when workers put in fewer hours — or are less productive, or use older machinery — that's a bonus, since more workers are necessary to do a job. At the time, Roosevelt explicitly blew off suggestions that marginal costs hurt the economy. In a fireside chat, he told Americans not to let "calamity-howling executives with an income of $1,000 a day" tell them "that a wage of $11 a week is going to have a disastrous effect on all American industry."

Not everyone concurred with this assessment. Southern companies were especially concerned, because their wages were farther below the new legal level than were wages at Northern companies. Benjamin Anderson, a Chase Bank economist, noted that the act devastated Puerto Rico, where employers simply couldn't afford the new rate.

As for the merits of work sharing, even some of FDR's colleagues were skeptical, especially economic adviser Rexford Tugwell. Tugwell suggested to fellow New Dealers that if work-creation was the idea behind the act, construction projects should be undertaken with spoons, not shovels. (George Mason University's Russell Roberts attributes this line to Milton Friedman, but Friedman probably got it from Tugwell.)

For a long period after World War II, Roosevelt looked right. Over the decades the wage climbed in many steps: from $0.40 (1945) to $1.00 (1956) to $1.60 (1968) to $2.90 (1979) and $4.25 by 1991. There were periodic protests, and some officials enforced the wage conservatively. In New Hampshire, unions tried to block the appointment of Newell Brown to the federal post of wage and hour administrator because they suspected that Brown wouldn't enforce the minimum wage strongly enough. Many companies and politicians told themselves that workers were increasing productivity so much that the wage was worth paying. As for teen employment, for many years the business cycle seemed to affect it more than anything else, as a 2010 paper by Teresa Morisi documents.

Still, the national faith in the benignity of the minimum wage was partly self-deception. Politicians could set wages as they liked only as long as the U.S. had no competition. Beginning in the 1960s, of course, global competition materialized and then quickly intensified.

That duly pushed up unemployment among marginal workers like youth. Bureau of Labor Statistics data show unemployment for 16-19 year-olds usually hung below 10 percent until the 1960s, when double-digit youth unemployment became the new norm.

Today, we're Puerto Rico. Our teens are too unproductive relative to low-wage workers in other economies for employers to withstand strong mandatory pay increases.

Though exceptions for teens exist, including a lower wage allowable for 90 days, these are often negated by more rigorous state laws, as Diana Furchtgott-Roth, former chief economist at the Labor Department, has noted. A 2007 study by Charlene Kalenkoski and Donald J. Lacombe of Ohio University found that a 10 percent increase in the effective minimum wage is associated with a 3.2 percent decline in youth employment.

Yet the U.S. continued to raise the minimum wage even after the most-recent recession began, so that in 2009, it moved to $7.25 an hour, an increase of 41 percent from 2006. This in turn has surely contributed to our appalling youth-unemployment rate.

It's not as monocausal as Representative Michele Bachmann, now a presidential candidate, made out when she argued that abolishing the minimum wage could wipe out unemployment. But Bachmann was closer to correct than her critics allege.

When it comes to youth employment, especially, the marginal is central.

(Amity Shlaes, a Bloomberg View columnist and a senior fellow in economy history at the Council on Foreign Relations, oversees the Echoes blog. The opinions expressed are her own.)

© Copyright 2011 Bloomberg

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