With Friends Like These …

Fewer than one in six African-American teenagers are employed.  Only 28 percent of African-Americans who have not completed high school are employed.  Faced with these historically low employment rates for young and minority workers, it would be cruel to require employers to pay 38% more per hour for unskilled labor.  Such a mandate would certainly drive teen and minority employment down even further.  Yet this is exactly the policy that Representative Jesse Jackson Jr. (D-IL) is advocating.

The demand curve for unskilled labor slopes down.  Mandating that workers are more expensive to hire does not make them more valuable or productive to employers.  In other words companies faced with a 38% increase in the cost per hour of unskilled labor will reduce their use of unskilled labor.  An increase in the minimum wage would harm the most vulnerable participants in the labor force.  The fact that the majority of Americans support an increase in the minimum wage reflects their economic illiteracy.  The fact that most liberal political commentators and journalists support a minimum wage increase is disturbing.   

An example of progressive pundits’ flawed reasoning is last Saturday’s edition of Up With Chris, when Amy Goodman, host of Democracy Now!, and host Chris Hayes had the following exchange:

GOODMAN: it would have been a wonderful truth for President Obama to offer yesterday … when he was speaking about the economy, let`s increase the minimum wage.  Very little coverage has been done of Jesse Jackson Jr.`s introduction of the bill for the minimum wage, that would mean it would go up to something like $10, which would bring it back to 1968…. He would have massive support.  I think something like, polls show, 70 percent of people would support it.

HAYES: I agree with you. I think we should raise the minimum wage. That would be a good net positive good for people.

President Obama is very unlikely to endorse a 38% increase in the minimum wage because he knows it will kill jobs and further weaken an already fragile economic recovery.  If prosperity was that easy to achieve through legislation Congress should mandate a minimum wage much higher than $10 per hour.

It is ironic that Alan Krueger, the head of the Council of Economic Advisors, is one of the academic economists who contributed most to the misinformation about the minimum wage.  His controversial and flawed academic research with David Card on the minimum wage has been misinterpreted.  A higher minimum wage doesn’t harm all workers or all firms. Workers who compete with unskilled labor may benefit by a large increase in the minimum wage.  Unskilled labor intensive firms are harmed but their more capital-intensive competitors may benefit from a higher minimum wage.  But Chris Hayes is 180 degrees from the truth; a minimum wage increase is a net negative bad for the economy.   More importantly the primary losers are the unskilled workers directly impacted by a minimum wage increase as their employment opportunities disappear.

A higher price mandate is not the kind of “help” that firms want from government.  Companies would lobby against legislation that would raise the price of their products and services by 38%.  The same logic applies to workers; a 38% increase in the cost of hiring unskilled workers will make it much harder for young and minority workers to find employment in an already weak job market.

Don’t Raise the Minimum Wage

The editors at Bloomberg View have called for an increase in the minimum wage.  Last week James Galbraith  repeated his proposal to raise the minimum wage to $12 per hour.  A large increase in the federally mandated wage would be devastating to less skilled and inexperienced workers.  Galbraith and the editors at Bloomberg View would like to see higher wages and incomes for workers at the bottom of the income distribution.  Merely requiring less educated and inexperienced workers to be more expensive makes a bad situation worse.  These workers would benefit instead from education and training that would make them more valuable to employers.

The nearly 40% increase in the minimum wage between 2007 and 2009, combined with the deep recession of 2008-2009, destroyed many jobs for younger workers.  The following chart compares the change in the percentage of the population that is employed, by age group, before and after the recession and minimum wage increases of 2007-2009.  Teen age workers had the biggest decline in employment relative to population, followed by workers age 20 to 24.  Fewer workers age 25 and above are directly impacted by the federal minimum wage of $7.25 per hour, and these workers were impacted less by the recession.

Galbraith’s proposal to raise the minimum wage to $12, or Senator Tom Harkin’s (D-Iowa), proposal to raise the federal minimum wage to $9.80 per hour by 2014, will make it much more difficult for new labor force entrants to find jobs.

Galbraith’s CNN op-ed, as well as his article in Foreign Policy, credits Ron Unz  of the American Conservative with the proposal for a $12 minimum wage.  Unz supports a policy that would reduce demand for immigrant labor, slow immigration from Mexico and Central America, and benefit conservative political candidates.  This is a cynical reason for supporting a federal mandate that will destroy jobs for the most economically vulnerable workers.  It mirrors the arguments in support of a federal minimum wage in the 1930’s made by Senators from higher wage Northern states.  Ron Unz knows that a $12 minimum wage will reduce the employment of Latinos just as Senators from New England knew that the FLSA would reduce employment in Southern factories.

It is understandable that politicians might support a minimum wage that reduces demand for less skilled workers but benefits their constituents and supporters.  It is more puzzling that Bloomberg View and economist James Galbraith support a policy that destroys job opportunities for workers still suffering from the 2008-2009 recession.

I Know What You Didn’t Do Last Summer: Find a Job

The unemployment rate for teenage workers is 23.2%, but that doesn’t fully describe the problems teens face finding summer and part-time jobs.  Employment fell sharply during the recession and no group was impacted as much as teenagers.  Summer employment of teens fell by 2.15 million, or 30%, between 2006 and 2011.  There is no indication that the youth labor market is about to improve; although overall employment increased by about 3 million over the past two years it has not increased for teens.

The following chart shows the teenage employment to population ratio over the past 25 summers.  Employment rates are reported separately for men and women and African Americans and Whites.  The employment to population ratio fell more for men and African Americans than for women and Whites.  In the summer of 2011 fewer than one in 6 African American teens and fewer than one in 3 White teens had summer jobs.

Traditionally, teen employment has been higher during the summer months than the school year.  The following chart shows that nearly half of White teens and one quarter of African American teens were employed during the school year as recently as 2000.  Since then employment rates have fallen dramatically, but more for men than for women.  In the fall of 2011 only 25% to 30% of White teens and 15% of African American teens were employed.

Teenage women are now slightly more likely to be employed than teenage men.  This means that young women are not only more likely than young men to complete high school and enroll in college, they are more likely to work while in high school.

Teen joblessness is an especially serious problem in poor areas and neighborhoods.  According to the American Community Survey the areas with the lowest teen employment rates include: northwestern Mississippi, the Bronx, parts of Louisiana ravaged by Hurricane Katrina, and the south side of Chicago.  A summer job, with an opportunity to acquire basic labor market skills, could be a valuable experience for the youth in these areas.

Teen employment has fallen steadily over the past 25 years and quite dramatically since 2006.  There is little doubt that the recession accelerated the decline in job opportunities for teens.  Although the FLSA allows a temporary sub-minimum wage for teens, it is also likely that the 40% increase in the minimum wage from 2007-2009 adversely affected the youth labor market.

High school seniors now graduate with less work experience than at any time since the Labor Department began tracking these data in 1948.  This would be less of a concern if high schools provided the vocational skills demanded in the 21^st century labor market.  The job market for new high school graduates is likely to lag the rest of the economy until graduates can acquire marketable skills while on-the-job and enrolled in school.

Two New NCAA Regulations That Will Improve College Football

Last month Tyler Cowen and Kevin Grier offered an explanation of the persistence of the college football bowl system.  They believe the BCS will continue despite the greater revenue generated by a championship tournament, because schools benefit from bowl game publicity and players gain from the bowl experience. The sparse attendance and low ratings of many lesser bowl games makes me skeptical of their publicity value. There are impediments to change, however, so here I propose two new regulations to ease the transition to a playoff system. First, allow non-bowl teams to hold practices until a national champion has been crowned and second, require teams to evenly split gate receipts for regular season non-conference games.

Practice times and player contact is restricted by the NCAA during the off-season. An important non-financial gain from bowl participation, especially for younger teams with more returning players, is the ability to schedule additional practices. If all teams were allowed the same practice time, regardless of their bowl status, teams would be less interested in participating in minor bowl games.

Defenders of the status quo argue that the bowl system makes college football’s regular season the most compelling in sports; one loss could eliminate a team from BCS title consideration. The status quo also encourages many boring September games because Athletic Directors rationally schedule very weak non-conference opponents. The past 12 participants in the BCS championship game played 45 non-conference games. Two thirds of their opponents were not ranked in the top 80 teams, and one of three was outside the top 125 teams in the country. The implication is clear: to improve chances of advancing to the BCS title game a team should schedule 2/3 of nonconference games against vastly overmatched opponents.

The NCAA encourages non-conference mismatches by allowing a team to keep all gate receipts after paying a nominal fee to a weak opponent to come to its campus. The NCAA should require gate receipts to be split evenly with the visiting team (as in the NFL) for all non-conference games. This simple rule would reduce the financial return to scheduling weak opponents. Teams would also take more scheduling risks with a 16 team playoff because a single loss would not end a team’s title hopes.

Many of the 35 bowl games that are played each year would be interesting inter-conference match-ups if they were played in September and replaced the annual parade of lopsided games. Television revenue would be enhanced by the promise of more and better early non-conference games.

I prefer a 16 team tournament that culminates with a game between the last two surviving teams, whether or not they are the “best” teams in the country. Sports contests are entertaining because upsets are possible and outcomes are uncertain. March Madness would be far less compelling if the selection committee chose the country’s 4 highest seeded teams as the Final Four and replaced the rest of the tournament with 60 meaningless basketball “bowl” games.

The rules changes I have proposed are sensible even with a bowl system. First, colleges and universities would be treated uniformly with respect to gate receipts and practice times, whether or not they are football powers. Second, powerful teams would be discouraged from scheduling games against vastly weaker opponents which should result in better non-conference regular season games.

Answering Tim Harford on the Minimum Wage

In Saturday’s Financial Times Tim Harford asks the question “Can the Minimum Wage Create Jobs?”  The simple answer is yes, but not as many as it destroys. Any policy has winners and losers and the minimum wage is no exception. The losers are young and unskilled workers who become more expensive but no more productive to prospective employers. The winners include semi-skilled workers who compete with minimum wage workers and producers of the capital equipment that companies use to economize on unskilled labor. Crony capitalism is not limited to tax breaks, subsidies and bailouts; the minimum wage can also benefit unions threatened by cheaper non-union workers.

Harford cites the “amazing” and controversial Card and Krueger study which showed that a higher minimum wage didn’t reduce employment in fast food restaurants in New Jersey. Putting aside possible problems with their data discussed by other economists, Card and Krueger looked for job losses at restaurants with the least labor intensive food preparation methods in the history of mankind. (e.g. most have outsourced the task of filling cups with ice and soft drinks to their customers to save labor costs). A higher minimum wage raises the relative cost and price of made-to-order sandwiches in labor intensive competitors and may actually increase demand at fast-food restaurants. The Card and Krueger study says nothing about how a higher minimum wage affects the aggregate employment of unskilled labor.

Harford correctly notes that minimum wage laws attempt to treat a symptom of a larger problem. The real problem is that many young workers lack the skills that employers demand. Unfortunately the minimum wage makes it more difficult for young adults to acquire vocational skills because it makes on-the-job training programs less viable. Companies will provide general training only if workers “pay” for it through a lower wage because a company loses its investment when trained workers (who received full pay) leave. The minimum wage limits the ability of young workers to “pay” for on-the-job training and apprenticeships. This is especially costly if vocational and for-profit schools are ineffective alternatives for developing marketable skills.