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How minimum-wage increases kill both jobs and careers

James Pethokoukis of the American Enterprise Institute summarizes the findings of a new study on the drawbacks of increasing the minimum wage:

A new NBER working paper from Jeffrey Clemens and Michael Wither of the University of California, San Diego, suggests that the 30% increase in the average effective minimum wage over the late 2000s “reduced the national employment-to-population ratio — the share of adults with any kind of job — by 0.7 percentage point” between December 2006 and December 2012.

That works out to 14% of the total working-age decline during that period. Clemens and Wither basically looked at what happened to workers in states that were affected by federal minimum wage hikes versus what happened in states that weren’t. They also adjusted for the differing state-level impact of the Great Recession.

Pethokoukis goes on to have some fun with the more blockheaded left-wing denials of this basic truth.  He also quotes a section of the report that talks about the damage to careers and long-term income mobility, in addition to lost jobs:

… we find that binding minimum wage increases had significant, negative effects on the employment and income growth of targeted workers. Lost income reflects contributions from employment declines, increased probabilities of working without pay (i.e., an “internship” effect), and lost wage growth associated with reductions in experience accumulation….

We also present evidence of the minimum wage’s effects on low-skilled workers’ economic mobility. We find that binding minimum wage increases significantly reduced the likelihood that low-skilled workers rose to what we characterize as lower middle class earnings. This curtailment of transitions into lower middle class earnings began to emerge roughly one year following initial declines in low wage employment. Reductions in upward mobility thus appear to follow reductions in access to opportunities for accumulating work experience.

This is a grimly fascinating point about wage controls: they interfere with the ability of enthusiastic workers to improve the value of their capital.  An out-of-touch Democrat who bounced from college, to a law firm, to a lifetime in politics naturally has little appreciation for the value of “accumulated work experience,” while viewing “economic mobility” as a gift dispensed by government.  The idea that dedicated work at a lousy entry-level job generates valuable work experience runs contrary to their ideology, which seems low-income workers as hapless pawns on the chess board of central planning.

Who wants to work hard at a minimum-wage job to accumulate burger-flipping experience?  What you really need is six figures of government-backed debt so you can get a college degree that magically transforms you into a member of the Sainted Middle Class.  As Instapundit’s Glenny Reynolds remarked recently, “Home ownership and college aren’t causes of middle-class status, they’re markers for possessing the kinds of traits — self-discipline, the ability to defer gratification, etc. — that let you enter, and stay, in the middle class.  Subsidizing the markers doesn’t produce the traits; if anything, it undermines them.”  

The Left retains a cargo-cult view of middle-class status: redistribute income to create its trappings, and it will descend from the sky to settle around the shoulders of the poor like a warm, fuzzy, subsidized blanket.  In truth, the traits that allow workers to improve the value of their human capital by accumulating work experience and developing a reputation for quality service are also the traits that facilitate the climb into middle-class independence.  Like so many other things in life, those who earn middle-class status tend it more carefully than those who receive it as a “gift.”

For anyone who isn’t a dyed-in-the-wool lefty, it’s easy to understand how artificially increasing the cost of labor reduces demand, resulting in higher unemployment after a minimum wage hike.  Raising the cost of labor also makes employers less willing to take a gamble on marginal employees, including young people seeking entry into the labor market, and those returning after a protracted spell of unemployment.  The most challenging finding of this report is the way higher minimum wages compromise the income growth of targeted workers… but as the above excerpt notes, it’s really not that hard to understand.  Higher minimum pay leaves employers with less room to reward exceptional workers, makes them quicker to lose patience with those who are under-performing, and makes them “lean” harder on the good employees.

A healthy labor market produces many opportunities, for both the new worker and the experienced employee.  You want employers giving a whole lot of people a chance to prove themselves… and you want to give those people incentives to excel.  You want both employers and employees to appreciate the superior value of long-term business relationships.  Ideally, the veteran employee becomes not just a valuable asset, but a business opportunity in his own right: the cook who does so well that his long-term employer decides to open a new restaurant and put him in charge.  No exercise of government power can guarantee an abundance of such happy outcomes, but regulations that increase the cost of labor can certainly make them less common.

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How minimum-wage increases kill both jobs and careers

In a vibrant economy, risk-taking and the pursuit of excellence are rewarded.

James Pethokoukis of the American Enterprise Institute summarizes the findings of a new study on the drawbacks of increasing the minimum wage:

A new NBER working paper from Jeffrey Clemens and Michael Wither of the University of California, San Diego, suggests that the 30% increase in the average effective minimum wage over the late 2000s ??reduced the national employment-to-population ratio ?? the share of adults with any kind of job ?? by 0.7 percentage point? between December 2006 and December 2012.

That works out to 14% of the total working-age decline during that period. Clemens and Wither basically looked at what happened to workers in states that were affected by federal minimum wage hikes versus what happened in states that weren??t. They also adjusted for the differing state-level impact of the Great Recession.

Pethokoukis goes on to have some fun with the more blockheaded left-wing denials of this basic truth.  He also quotes a section of the report that talks about the damage to careers and long-term income mobility, in addition to lost jobs:

? we find that binding minimum wage increases had significant, negative effects on the employment and income growth of targeted workers. Lost income reflects contributions from employment declines, increased probabilities of working without pay (i.e., an ??internship? effect), and lost wage growth associated with reductions in experience accumulation?.

We also present evidence of the minimum wage??s effects on low-skilled workers?? economic mobility. We find that binding minimum wage increases significantly reduced the likelihood that low-skilled workers rose to what we characterize as lower middle class earnings. This curtailment of transitions into lower middle class earnings began to emerge roughly one year following initial declines in low wage employment. Reductions in upward mobility thus appear to follow reductions in access to opportunities for accumulating work experience.

This is a grimly fascinating point about wage controls: they interfere with the ability of enthusiastic workers to improve the value of their capital.  An out-of-touch Democrat who bounced from college, to a law firm, to a lifetime in politics naturally has little appreciation for the value of “accumulated work experience,” while viewing “economic mobility” as a gift dispensed by government.  The idea that dedicated work at a lousy entry-level job generates valuable work experience runs contrary to their ideology, which seems low-income workers as hapless pawns on the chess board of central planning.

Who wants to work hard at a minimum-wage job to accumulate burger-flipping experience?  What you really need is six figures of government-backed debt so you can get a college degree that magically transforms you into a member of the Sainted Middle Class.  As Instapundit’s Glenny Reynolds remarked recently, “Home ownership and college aren??t causes of middle-class status, they??re markers for possessing the kinds of traits ?? self-discipline, the ability to defer gratification, etc. ?? that let you enter, and stay, in the middle class.  Subsidizing the markers doesn??t produce the traits; if anything, it undermines them.”  

The Left retains a cargo-cult view of middle-class status: redistribute income to create its trappings, and it will descend from the sky to settle around the shoulders of the poor like a warm, fuzzy, subsidized blanket.  In truth, the traits that allow workers to improve the value of their human capital by accumulating work experience and developing a reputation for quality service are also the traits that facilitate the climb into middle-class independence.  Like so many other things in life, those who earn middle-class status tend it more carefully than those who receive it as a “gift.”

For anyone who isn’t a dyed-in-the-wool lefty, it’s easy to understand how artificially increasing the cost of labor reduces demand, resulting in higher unemployment after a minimum wage hike.  Raising the cost of labor also makes employers less willing to take a gamble on marginal employees, including young people seeking entry into the labor market, and those returning after a protracted spell of unemployment.  The most challenging finding of this report is the way higher minimum wages compromise the income growth of targeted workers… but as the above excerpt notes, it’s really not that hard to understand.  Higher minimum pay leaves employers with less room to reward exceptional workers, makes them quicker to lose patience with those who are under-performing, and makes them “lean” harder on the good employees.

A healthy labor market produces many opportunities, for both the new worker and the experienced employee.  You want employers giving a whole lot of people a chance to prove themselves… and you want to give those people incentives to excel.  You want both employers and employees to appreciate the superior value of long-term business relationships.  Ideally, the veteran employee becomes not just a valuable asset, but a business opportunity in his own right: the cook who does so well that his long-term employer decides to open a new restaurant and put him in charge.  No exercise of government power can guarantee an abundance of such happy outcomes, but regulations that increase the cost of labor can certainly make them less common.

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Written By

John Hayward began his blogging career as a guest writer at Hot Air under the pen name "Doctor Zero," producing a collection of essays entitled Doctor Zero: Year One. He is a great admirer of free-market thinkers such as Arthur Laffer, Milton Friedman, and Thomas Sowell. He writes both political and cultural commentary, including book and movie reviews. An avid fan of horror and fantasy fiction, he has produced an e-book collection of short horror stories entitled Persistent Dread. John is a former staff writer for Human Events. He is a regular guest on the Rusty Humphries radio show, and has appeared on numerous other local and national radio programs, including G. Gordon Liddy, BattleLine, and Dennis Miller.

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