Keating: A Minimum Wage Closes Doors

April 8, 2021

by Maryann O. Keating, Ph.D.

Job availability for inexperienced workers is the primary reason why most economists object to raising the minimum wage.     

The proposedRaise the Wage Act of 2021 (H.R. 603) would raise the federal minimum wage in steps to $15 an hour by 2025. Presently, most states have set a higher minimum wage, but this plan would eliminate a sub-minimum wage that allows businesses to pay teens less during the first 90 days of work. Going forward, it would become a crime both for anyone to accept or anyone to offer a position below the Federal minimum wage.  

Yet, the nonpartisan Congressional Budget Office indicates that, if the bill were passed, young, less-educated people would account for a disproportionate share of the expected 1.4 million workers losing their jobs over the next four years. The unemployment rate for those between 16 and 19 hit almost 32 percent in April 2020 and remained elevated at 13.9 percent in February 2021 compared with an overall jobless rate of 6.2 percent.

Indiana reports that out of current high school students, without disabilities, approximately 131,683 will fail to graduate. Presumably, most of these will enter the job market sometime during the next four years.   

Although 18 percent of Indiana high school students are enrolled in Career and Technical Programs, colleges and universities is the dominant post-high school path.  Over 70 percent of high school graduates in the U.S. enroll in college. Those prepared for college will succeed but college remains a somewhat risky investment for many students, parents, and state. For those enrolled, 50 percent will drop out.  

A recent study analyzes high school graduates who choose not to attend college. Unsurprisingly, these students share similar characteristics with those enrolled in college and university who are least likely to complete an undergraduate program.  

For many high school graduates, the potential earnings from attempting but not attaining a degree are too low to justify the risk and costs of enrolling. Unless there is a dramatic increase in college preparedness, premiums earned by those actually obtaining a degree will result in household incomes becoming more unequal (Athreya and Eberly, “Risk, the College Premium, and Aggregate Human Capital Investment,” American Economic JournalMacroeconomics 2021, 13 (2)).

The solution to long term income inequality is not to in any way impede skill acquisition for those lacking a college degree. A rough estimate suggests that over 60,000 young Hoosiers every year enter the labor force without a degree; yet, each of them have unrealized potential. These entrants might initially welcome a $15 an hour position, but this is insufficient to maintain a household, marry, and raise a child. Admittedly, such a lifestyle would be a stretch even for two full time workers. 

Entrants into the labor force need a career ladder to earning a good income, not a floor in terms of a minimum wage. Certain employers, if it were legal, would be willing to negotiate on the job training and compensation commensurate with a worker’s productivity.  One entrepreneur indicates that she is willing to hire 10 temporary employees annually knowing that she is likely to recover her total investment with approximately two of these new hirers.  Of course, once these two attain transferable skills they seek higher salaries elsewhere!   

Consider those without a relative in the trades or lack family acquaintances to offer them an unpaid internship. They must hit the help-wanted ads and try to get their foot inside the door.  The goal over time is to learn how to generate value that exceeds what an employer is willing and able to pay.   

The best advice that Charles King, director of South Bend’s YMCA Urban Youth Services, received was:  “If you are going to take a job and not go to college, you need to stick to that job and make sure that you are excellent and above average” (”Following in his Mentor’s Footsteps,” South Bend Tribune, March 29, 202l, A1). 

How does a person negotiate in good faith and display excellence? Who is watching his or her back? Career paths do not often proceed in a straight line. In retrospect, we recall when organizations offered us a helping hand. Valuable employment information was often conveyed by trusted associates in social organizations.  

Previously, hospitals and trades offered rigorous apprenticeship programs with small stipends. The telephone company, affectionately called “Ma Bell,” oriented certain workers on the line towards professional training and upper management. Unfortunately, most companies now rely on families, universities and government to finance the training of new employees.  

Military service formerly was also an option. Presently, the U.S. Army permits up to 10 percent of candidates for recruitment to have a GED or alternate secondary school certificate. However, the most viable route to enter the armed services is to have a high school diploma or at least 15 college credits.  

Therefore, the majority of young Americans earn their first paychecks working in restaurants, hotels and personal care. International visitors to the U.S. often comment on the excellent service provided by friendly competent young workers. Unfortunately, opportunities to work in the service sector are extremely vulnerable to restrictive policies.   

Nader Masadeh, CEO of Buffalo Wings & Rings, suggests that employers would, if the Wage Act passes, first attempt to raise menu prices. Then, if they had to cut staff, teens and other unskilled inexperienced workers would be the first to be let go (“Wage Floor of $15 Is Seen as an Obstacle for Teens,” The Wall Street Journal, March 29, 2021, A2).     

It is necessary to question whether household income inequality is primarily the fruit of government policies. Has the flexibility of employers willing to hire and train inexperienced youths been unnecessarily reduced? If so, we must seriously reconsider all state policies, including occupational licensing, that keep people down.   

Economists do not have a model for gainfully employing everyone, but they do know that a mandated wage rate exceeding the value added of inexperienced workers destroys job prospects and reduces life-long incomes for those on the bottom rung of the ladder.   

Maryann O. Keating, Ph.D., a resident of South Bend and an adjunct scholar of the Indiana Policy Review Foundation, is co-author of “Microeconomics for Public Managers,” Wiley/Blackwell.


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