Teen employment and minimum wages
by Spencer England
Last week Kevin Erdmann at the idiosyncratic whisk blog published this chart to demonstrate how minimun wages have caused teen employment to suffer.
It is an interesting chart, but it suffers from the sin of omitted variables.
I constantly see similar charts from those opposing the minimum wage were they seem to assume that nothing impacts teen employment except the minimum wage. They apparently believe that the business cycle never impacts teen employment or unemployment. For example, we just suffered the second worse recession in US history that caused adult unemployment to soar. But in their analysis, the great recession had no impact on teenagers. They claim that the last jump in teen unemployment was entirely attributable to minimum wage increases.
I suggest we look at a different chart that shows three variables:the teen unemployment rate, minimum wages and recessions.
First, notice in this chart that there were period in the 1960s, the late 1970s and the mid-1990s when the minimum wage rose and the teen unemployment rate fell. Something you would never know from studying Kevin’s chart or other opponents of the minimum wage arguments against the minimum wage. I don’t know how many times Ive heard the claim that raising the minimum wage always causes employment to fall. The data massively contradicts this claim.
Next, observe in this chart that every rise in the teen unemployment rate was associated with a recession. The only exception was one small rise in 1962. This raises an important question. Was the rise in the teen unemployment rate caused by the rise in the minimum wage or the recession? In answering this question observe that every recession saw the teen unemployment rate rise and that the teen unemployment rate fell in every business expansion. On the other hand the relationship between teen unemployment and the minimum wage is inconsistent. The only time a rising teen unemployment rate has been associated with a rising minimum wage was when there also was a recession.
Note, that there also were recessions when the teen unemployment rate rose but the minimum wage was was unchanged. A rising minimum wage during a business expansion has always been accompanied by falling teen age unemployment rates– something that opponents of the minimum wage would prefer to overlook. Since 1960 there have been eight recessions. In three of them –1970, 1981 and 1990 — there was no increase in the minimum wage, but the teen unemployment rate rose sharply. Moreover, in the business expansion of the 1960s, the late 1970s and the mid-1990s rising minimum wages was accompanied by a falling teen unemployment rate. Since 1960 there have been 18 increases in the minimum wage, but only about half of the increases were accompanied by a rising teen unemployment rate and each of those was in a recession. A higher minimum age in a business expansion has always been accompanied by a fall in the teen unemployment rate.
I am not arguing in favor or in opposition to a minimum wage. All I ask for is an honest discussion and it sure looks to me like Kevin Erdmannd and others arguments are factually challenged.
A second way to look at the impact of the business cycle on teen unemployment is to compare the teen unemployment rate to the adult–over 25 years old — unemployment rate. If the two rates have a different history it would suggest that different factors drive the teen and adult unemployment rate. That is what you would expect if the minimum wage has a big impact on teen unemployment but a very small impact on adult unemployment. Since 1950 the teen unemployment rate has averaged some 3.1 times the adult unemployment rate. The correlation between the two unemployment rates is 0.98, strongly implying that the same economic factors drive both measures and that the business cycle plays a major role in determining the teen unemployment rate.
OK, it is a valid question to ask why the teen unemployment rate is 3.1 times the adult unemployment rate. Opponents of the minimum wage will argue that the existence of the minimum wage generates this difference between teen and adult unemployment rates. They may be right. But it is unproven.
Kevin also presented data on teen employment that was also based on the premise that nothing impacted teen employment but the minimum wage. I would like to introduce what I think is a major omitted variable that has had a major impact on teen employment. That variable is the teen population. In the post WW II era we had a very unusual pattern of teen population growth. Because of the baby boomers aging. In the 1960s and 1970s baby boomers passing through their teens caused the teen population to rise rapidly. But after 1978 the baby boomers aged out of their teen years and were replaced by the baby-bust generation.
Consequently, the teen population actually fell in the 1980s.
The next chart shows the relationship between the teen population and teen employment. Population is on the left axis and employment is on the right axis. Both axis have the same scale, but the employment axis starts above zero so you can see the tight relationship between teen population and teen employment.
As you can see in the next chart from 1950 to 2000, on average, some 44% of the teen population was employed. But in the 1980s the share of the teen population employed was above the 44% average. This is completely contrary to the claim that the minimum wage caused teen employment to fall in the 1980. The falling teen population was what caused teen employment to fall in the 1980s. See, if you claim everything was due to the minimum wage and ignore anything else that might have played a role, it is easy to demonstrate that the minimum wage caused every bad development.
The other interesting point this chart shows is that after 2000 the share of teens employed fell sharply. Note, this is annual data. It hard to blame this on the minimum wage since there were no minimum wage changes in the early 2000s. Actually, labor economists are well aware of the drop and there have been numerous academic papers on it. Labor economist’s consensus is that because of the very high returns to education, teenager are increasingly realizing that working a minimum wage job is a very poor use of their time. They will be much better off in the long run spending their time in an activity that will look impressive on their college applications. Lets face it, working part time at a minimum wage job does not carry much weight in an application to a better school. It is a rational economic decision for teens to avoid minimum wage employment.
There is one other set of data that is very relevant to any discussion of teen employment and the minimum wage. The data is the share of teens earning the minimum wage. This data only goes back to 2002, but it appears to be very important. In the business cycle leading up to the great recession over 90% of employed teens earned more than the minimum wage. Even after the great recession and a round of three large minimum wage increases the share of teens earning more than the minimum wage still was over 75%.
First, this data strongly supports the thesis that teen participation in the labor market fell sharply in the early 2000’s because the minimum wage was below teens reservation wage. Teens found more valuable uses of their time than working at a minimum wage job.
Second, the data only goes back to 2002, but if only a small portion of employed teens actually worked at the minimum wage in earlier cycles. it call into question the entire practice of using teen employment data to analyze the impact of minimum wage changes.
This data suggest that the problem with the minimum wage may not be that it is too high for employers to hire teenagers. Rather it suggest that the problem with the minimum wage is that it is too low to induce teens into the labor market.
Finally, i regressed the teen unemployment rate against four variables.
1. Adult unemployment
2. A dummy variable for recessions that is one when the economyis in a recession and zero when it is in an economic expansion. This series is created by Haver Analytics and is in their databases. I used it to create the recession shading in my first chart here. Moreover, the St. Louis Fed also uses it to create recession shading in their charts. So Im not playing games with the dummy variable. It is a widely used and recognized variable among economist.
3. The teen population.
4. The minimum wage.
The regression says that the business cycle and teen population dominate the teen unemployment rate and that the minimum wage is insignificant.
What does teen unemployment look like compared to employed and actively seeking employment over 55s?
My gut says that during recessions there is a tendency for retirees to come out of retirement and work low wage jobs to supplement their income, and this comes at the expense of young people (who have other committments in their lives like school and don’t have the same degree of schedule flexibility, and are generally (possibly correctly) viewed as less responsible)
I recently wrote an article about how an increase in the minimum wage rate increases unemployment. You can read it here: http://wp.me/p3N9zD-4e
I don’t read Erdmann as claiming that his chart is the final word on the minimum wage. In any case, I have written a detailed response to this post: http://wp.me/p4gZ0w-W
I’m puzzled as to why the burden of proof should be on those who think the minimum wage hurts the young and the less skilled. With Teen unemployment over three times the adult unemployment rate, why advocate a policy that is so theoretically and empirically suspect? Why bend over backwards to give the benefit of the doubt to minimum wage advocates? Does that make sense from a cost-benefit vs. risk standpoint?
Most of the studies cited just look at what business reactions are to a
wage hike not to what actually happens to the general business
environment under the new conditions.
The NYT had a story that covered how small businesses were affected when
Washington State increased the min wage. They looked specifically at
businesses on the border with Idaho whose min wage was 50% lower. What
was expected was a run of businesses across the border to Idaho. The
actual result was the economic climate picked up so dramatically that
the state’s major business lobby, the Association of Washington
Business, changed their position and no longer fought the minimum-wage
law.
The story can be found at,
http://www.nytimes.com/2007/01/11/us/11minimum.html?_r=1&
“Highest Minimum-Wage State Washington Beats U.S. Job Growth ” March 5, 2014
When Washington residents voted in 1998 to raise the state’s minimum wage and link it to the cost of living, opponents warned the measure would be a job-killer. The prediction hasn’t been borne out.
In the 15 years that followed, the state’s minimum wage climbed to $9.32 — the highest in the country. Meanwhile job growth continued at an average 0.8 percent annual pace, 0.3 percentage point above the national rate. Payrolls at Washington’s restaurants and bars, portrayed as particularly vulnerable to higher wage costs, expanded by 21 percent. Poverty has trailed the U.S. level for at least seven years.
http://www.bloomberg.com/news/2014-03-05/washington-shows-highest-minimum-wage-state-beats-u-s-with-jobs.html