The Unintended Consequences of Minimum Wage Hikes: A Study on Teen Unemployment

Strategic Insights -

The recent federal minimum wage increase to $7.25 has led to a surge in teen unemployment, with the rate remaining near 25% a year later. This is not a coincidence, and research suggests that the increase has resulted in fewer opportunities for teens and other less-skilled job seekers. A study by William E. Even and David A. Macpherson for the Employment Policies Institute reveals that the 40% pay raise has left at least 114,000 teens without a job.

Key Takeaways:

  • The federal minimum wage increase to $7.25 resulted in a 6.9% drop in employment for teens in states where all three hikes were binding, and a nearly twice as severe drop of 12.4% for teens without a high school diploma.
  • The study estimates that the 40% increase in the federal wage caused over 114,000 fewer employed teens, with even higher numbers when considering long-term reductions in hiring made possible by increased use of automation.
  • Research shows that extended periods of unemployment as a young adult can reduce future earnings and increase the risk of future unemployment.
  • Targeted policies such as the earned income tax credit can more effectively fight poverty than a higher minimum wage.
  • Nearly two-thirds of all workers earning the minimum wage receive a pay increase within a year, making it more difficult for teens to get that important start early in life.
  • Even and Macpherson's research suggests that the rise in the minimum wage played an important and unfortunate role in the dramatic increase in teen unemployment.
  • The study compared the experiences of teens in various states to tease out the respective effects of the minimum wage hike and the economic recession.

Statistics:

  • 25%: Teen unemployment rate near the $7.25 federal minimum wage increase.
  • 114,000: Estimated number fewer employed teens due to the 40% increase in the federal wage.
  • 6.9%: Drop in employment for teens in states where all three hikes were binding.
  • 12.4%: Drop in employment for teens without a high school diploma in states where all three hikes were binding.
  • 1 in 5: Unemployed teens searching for work for six months or more.
  • $50/hour: Hypothetical minimum wage increase to demonstrate the impact on job opportunities.
  • 8/6/10: Date of William E. Even and David A. Macpherson's article in Investor's Business Daily.

Sources:

  • William E. Even and David A. Macpherson's article, published in Investor's Business Daily on August 6, 2010.
  • Employment Policies Institute.
  • Investor's Business Daily.