More N&O-nomics: hiking the miminum wage stimulates the economy, leads to more jobs for the young

Imposing a minimum wage has unintended negative consequences that harm the very people it is meant to help. That is not an item of controversy. Four out of five economists agree with the proposition that “A minimum wage increases unemployment among young and unskilled workers.” Few subjects attract that much agreement among economists.

This regrettable but predictable and completely avoidable negative policy effect has been discussed in The Locker Room for years. Examples abound (and these are just some highlights, not the complete list): here economist E. Frank Stephenson dismisses the idea increasing it will strengthen the economy, here its myths are dissected, here an economist calls it “apparently benevolent but completely wrong,” here its irrepressible myths are dissected again, here economist Walter Williams draws from economic literature surveys and history to show its harmful effects (especially against poor black youth and unskilled workers), here our own economist Dr. Roy Cordato discusses a recent study and also explains how the minimum wage negatively affects the poor, young, and unskilled, and here yours truly ruefully notes the accuracy of his predictions of negative employment effects among the poor, young, and unskilled following a 41 percent hike in the minimum wage.

‘There are better anti-poverty tools than the minimum wage’

That’s the title of a recent James Pethokoukis post, in which he surveys some literature on the subject. Please read the whole thing; here is a quick scan:

Only 3% of workers age 25 and over earn the minimum wage or less. About half of all minimum wage (or less) workers are age 24 or younger, many of whom presumably live at home with their parents. The 2010 study “Will a $9.50 Federal Minimum Wage Really Help the Working Poor?” by researchers Joseph Sabia and Richard Burkhauser found that a federal minimum wage increase from $7.25 to $9.50 per hour — higher than the $9 that President Obama has proposed — would raise incomes of only 11% of workers who live in poor households.

In a 2012 study, Sabia and Robert Nielsen found “no statistically significant evidence that a higher minimum wage has helped reduce financial, housing, health, or food insecurity among the poor.” Why? You have to earn a wage to benefit and 55% of poor, less-educated individuals between ages 16 and 64 don’t work. Indeed, nearly 90% of the wage earners who benefited from the 40% increase in the federal minimum wage between 2007 and 2009 were not poor. They lived in households with an income two or three times the poverty level.

Would raising the minimum wage cause job losses? Lots of conflicting studies here. But a 2013 literature review by David Neumark, J.M. Ian Salas, and William Wascher concluded “that the evidence still shows that minimum wages pose a tradeoff of higher wages for some against job losses for others, and that policymakers need to bear this tradeoff in mind when making decisions about increasing the minimum wage.” And research last month from Texas A&M economists Jonathan Meer and Jeremy West find raising minimum wage levels may discourage firms over the long-term from hiring new workers. And that may be particularly true thanks to continuing — even accelerating — advances in automation.

The News & Observer last week (Aug. 30) published a risible overreaction to Gov. Pat McCrory’s gibe about journalists’ understanding of economics. The core defense in editor John Drescher’s piece was this:

We don’t pretend to be economics experts. But we know people who are. We interview them frequently and tell you what they said.

That same morning, the N&O’s readers were treated to an editorial entitled “Federal minimum wage must rise to help working people survive.” In it N&O editors argued:

  • The federal minimum wage “probably ought to be $10” per hour.
  • It would have “multiple positive effects.”
  • It “might provide such workers with a little money to spend with other merchants” and thus be “something positive going into local economies.”
  • It would “serve as a stimulus in the overall economy,” which would do something unspecified but apparently positive for the job market for teenagers.

If you doubt that last bullet point, here is how the N&O attempts to make that case:

This scenario has an impact elsewhere in the economy. The job market for teenagers looking for summer work or part-time work has shrunk to the all-time low point because of a lack of jobs and because what jobs there are may be filled by older workers. So those teens, who ordinarily might be using their wages for entertainment, don’t have it, and those who might need to save all they make to cover school expenses are looking at a situation where their ends will never meet. One economist called the current problem a “Great Depression” for young people.

A raise in the minimum wage ought to serve, then, as a stimulus in the overall economy. Absent that increase, those on the lowest rungs of the wage ladder, who haven’t had an increase in the minimum wage rate since 2009, will be in a state of stagnation. And the country’s overall recovery will be slowed. The same is true in North Carolina, where the unemployment rate is too high and has been so for too long.

My question: Which economic experts have been feeding the N&O this nonsense?

Here is the process by which the N&O implies, counter to widespread agreement among economists and established research, that increasing the minimum wage would positively affect teenage employment:

  • Businesses suddenly weather a 38 percent price increase in their lowest-wage workers (as well as price increases in other workers previously earning less than $10/hr)
  • There are no layoffs because the demand for workers is, counter to the very foundation of economics, perfectly inelastic — they’d pay them anything and they would all stay in business (which is why the argument stays the same whether you argue for President Obama’s $9/hr, the N&O’s $10/hr, or $15/hr)
  • All this money for higher wages will not come at the expense of anything else; it will filter into the economy like a windfall
  • The stimulus effect of this windfall wage increase will cycle back to businesses, which would then be able to afford to hire even more workers at the 38 percent higher minimum wage
  • The new hires will be populated by teenage workers who had previously not been hireable at $7.25/hr

There is consistency here, at least. The N&O has previously argued that cutting the sales tax (vis-a-vis eliminating the temporary 1% increase) created an uptick in unemployment. The economic model in use there apparently considers artificially higher prices, be it on wages or on consumer goods, to be good for the economy.

Jon Sanders / Director of Regulatory Studies

Jon Sanders studies regulatory policy, a veritable kudzu of invasive government and unintended consequences. As director of regulatory studies at the John Locke Foundation, Jo...

Reader Comments

  • Atnor

    I’ve seen what the N&O reporters and editorial writers consider sound economic thinking. I’ve read their stories and editorial pieces for years, and I’ve seen who they consider “experts” , who they call in for quotes and background info, and which judgments they give credence to.

    Sorry… I’m not impressed. All that N&O exposure hasnt provided me much confidence that their in-depth understanding on many issues is all that sound. Especially more recently. Sadly, superficial sound-byte coverage is about all we’ve come to expect from many media sources – the N&O isnt alone in that.

    Luckily, fewer and fewer people seem to be bothering with what they write. 🙂

    Lots of good links here, thanks… I’ve added a bunch to my ever-growing “to read” pile 🙂

  • Kirk D. Smith

    Clearly, the N&O currently enjoys over achieving highly productive employees, great advertising income, expanded readership, domination over all competing interests.

    Yep, that is why I don’t buy or read their tripe!