Tuesday, December 30, 2008

Solving the Problem of Too Much Teenage Employment

By raising the Ohio minimum wage from $7.00 to $7.30. That's 4.3%. Though when you add in the employer portion of Social Security and Medicare, it's closer to 4.6%. (est. FICA on $0.30 @ 7.15% is an additional $0.02 per hour). If you're a kid or unskilled / inexperienced worker looking for a job, this is bad news.

Minimum wages are one of those things that sound good, as long as you're disconnected from reality.

The unfortunate reality is that employment and wages are mostly determined by the expectation that the worker will produce products or services that generate more revenue than the cost of his employment.

State mandated increases in nominal wages do not change this reality. They just make it more likely that less productive workers will be let go, or that empty positions will not be filled.
This tends to disproportionately impact minorities and teenagers (and other unskilled / inexperienced workers), who lose opportunities for entry level jobs where they will learn key employment skills, like a) showing up on time; b) customer service; c) working with others; and d) handling money and responsibility.

Now, in a growing economy with strong wage growth, this could probably have been absorbed with minimal impact. In a recessionary economy, featuring job losses, uncertainty, lower sales revenue, losses instead of profits, etc., the impact will be magnified. In this case, increasing a rigid floor on nominal wages will exacerbate the employment problem.

Minimum wage increases sound 'progressive' – after all, who doesn't want to give the poor a raise? - but the results are anything but 'progressive', since the increase in unemployment and lack of job growth doesn't do much for the poor, now does it?