A High Minimum Wage Doesn’t Always Kill Jobs, but It Does Kill Job Opportunities for Teens

March 14, 2014

Just one day after running an article on a study that claims increasing the minimum wage “doesn’t have a drastic, negative impact on employment,” The Seattle Times featured a study that shows the employment rates for teens in Washington and Seattle are in steep decline.

The two stories show that a high minimum may not drag down overall employment in a large, complex economy because its negative effects fall hardest on young workers.  Washington has the nation’s highest minimum wage, and has the sixth highest teen jobless rate, at over 30%.

Numerous studies have shown a high minimum wage has the greatest impact on the least skilled workers, such as teens just entering the job market.  The fewer skills and experience a worker has, the less their output is worth to employers; when their output is worth less than the minimum wage, employers opt to hire more skilled workers. Simply put, a high minimum wage encourages employers to hire older applicants with job skills and a work history over young, unskilled teens with no work experience.

In a recent study, economists at the University of California-Irvine and the Federal Reserve Board found, “…the evidence still shows that minimum wages pose a tradeoff of higher wages for some against job losses for others, and that policymakers need to bear this tradeoff in mind when making decisions about increasing the minimum wage.”

So while some workers benefit from a higher wage, the tradeoff is many unskilled workers, such as teens, are priced out of jobs. This is what has happened in Washington state.  Clearly, our state's high minimum wage has had a drastic, negative impact on employment for teens.

There is the argument that our state’s high teen unemployment rate is not the result of high wages that are too high, rather because more students are choosing to go to school instead of work.  There is also the argument that the high rate was fueled by the Great Recession, which resulted in older workers desperate for work taking the entry-level jobs typically filled by teens.

Regarding the former argument, teen employment has not dropped because more teens are opting to go to school; rather the reason more students are going to school instead of work is because there are so few jobs available for teens. The decision to go to school is easier to make when jobs are not available.  And education can help young workers find a job by giving them an edge over other applicants.

As for the latter argument, the recession cannot be blamed for our state’s poor teen employment ranking. Since 2002, well before the recession, in all but one year Washington has ranked among the top ten states with the highest teen unemployment rate. The single exception was 2007, when Washington briefly broke out of the top ten to rank 12th. 

Our state’s high minimum wage encourages older workers who have retired, or want to supplement a primary earner’s income, or want to work part time, to return to the workforce in the entry level jobs usually held by teens. The teen unemployment study featured in The Seattle Times even makes the connection that the sharp decline in our state’s teen employment “coincides” with our state’s enactment of a high minimum wage. 

Still, the study’s author focuses more on job creation as the cure for high teen unemployment.  “A lot of this would be solved if there were more jobs, period.”  That is certainly a valid point.  However, even this point circles back to the consequences of a high minimum wage. 

Recent reports from the state Employment Security and Commerce departments show young startup firms that pay lower wages are creating the most jobs in Washington state. It is not the large businesses that pay super-high wages that are creating jobs and hiring people, it is the small businesses with entry-level type jobs that pay less.

Increasing the wages these lower wage startup companies must pay their workers will undoubtedly have a negative impact on job creation.  A new business in a typically low wage industry, such as retail, often operates on a very narrow profit margin and will find it more difficult to succeed, grow and create new jobs if forced to pay artificially high wages. Instead of creating three new jobs, they may only be able to create two.  And some entrepreneurs may decide the costs of doing business are simply too high and decide against even trying to start their new business.  In this unfortunate circumstance, no new jobs are created. 

In many instances, businesses are choosing to move towards automation to reduce labor costs.  Service industry CEOs have cautioned that a higher minimum wage is “encouraging automation.”  Automation, in the form of tablet ordering, self-check out and other labor saving measures can reduce the number of necessary employees by 20%–25%.  Even Microsoft co-founder Bill Gates warns that a higher minimum wage would “encourage labor substitution” and incentive employers to “buy machines and automate things” and ultimately “cause job destruction.”

He’s right. According to the Bureau of Labor Statistics, the number of businesses taking advantage of the cost savings of automation has increased 23% over the past 10 years, while total employment at these businesses has decreased by 6%. The trend will get bigger, not smaller.  Earlier this week Starbucks announced it will soon release an app allowing customers to order and pay from smartphones.  Such efficiency translates into fewer workers.

The general consensus of decades of minimum wage studies is that a 10% increase in the minimum wage reduces teen employment by 1 to 3%.  The 60% increase headed to Seattle could mean an 18% decrease in the city’s already low 25% teen employment rate. That would be a drastic, negative impact on employment for teens.