MINIMUM WAGE DISINFORMATION

By Spencer

On the conservative/ libertarian blogs our friends keep telling us that increasing the minimum wage causes teenage unemployment to rise. They base their argument on the basic economic principle that if the price of something goes up the demand will go down. That is a basic principle of economics but as with all economic principles it has the unstated assumption that everything else is equal.

I have never said that the principle is wrong, all I’ve ever said is that when I look at the data it does not support our friends’ conclusions. When I look at the data what I see is that the teenage unemployment rate seems to move in lockstep with the unemployment rate for other age groups. Actually, if I run a regression of the teenage unemployment rate against the average unemployment rate for people over 35 I get very good results that says the teenage unemployment rate is some 3.8 times the unemployment rate for those over 35.

In economics we have this other great principle known as the omitted variable. This suggests that those who are claiming that increases in the minimum wage cause teenage unemployment to go up are leaving something out of their analysis.

The evidence seems to strongly suggest that their omitted variable is the business cycle.

Since 1960 there have been 17 increases in the minimum wage and if you look at the data you find that about half of them have been associated with an increase in the teenage unemployment rate. The half of the minimum wage increases that were associated with rising teen unemployment were also associated with a recession.

Since 1960 every significant rise in teen unemployment except for the one in 1963 has been associated with a recession. Clearly, the 1963 rise was not due to the minimum wage as the early 1960s minimum wage increases were too far before the wage hike or after it.

So you come up with a rule of thumb that seems to work without exception.
A minimum wage hike followed by a recession causes teenage unemployment to rise but
a minimum wage hike followed by an economic expansion has no impact.

So I ran a simple regression of the teenage unemployment rate as a function of two variables.
One was the adult (over 35) unemployment rate and the second was the minimum wage.
This is based on the premise that the adult unemployment rate captures the bulk of the business cycle impact on the teenage unemployment rate.

What I found was that the adult unemployment rate accounted for about 87.5% of the teenage unemployment rate and the minimum wage accounted for only 12.5%.

So maybe some of our conservative/libertarianism friends can explain why my work suggesting that the minimum wage has a negligible impact is wrong and their position that the minimum wage alone causes teen unemployment to soar is correct.