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Minimum Wage Increases Have Accelerated Unemployment for Montana Teens

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Photo courtesy of Todd Huffman/Flickr

The Following is a guest column by Glenn Oppel, Policy Director of the Montana Policy Institute:

Helena – As the Great Recession persists, unemployment remains a key concern in Montana and the nation as a whole.

Although the jobs situation in Montana is somewhat better than the national average, the unemployment rate for working-age teens (16-19) is historically very high. Moreover, fewer and fewer teens are actually entering the workforce. We’ve found that one reason teens are not finding employment is that they’re being priced out of the labor market.

From 2006 to 2011, the teenage unemployment rate almost doubled from 10.2 percent to 19.4 percent. Meanwhile, the average hours worked per week for Montana teens fell from 12.1 to 8 hours – a decrease of 34 percent. The percentage of Montana teenagers who had a job declined from 48.2 percent in 2006 to 36.6 percent in 2011. Teen employment share in all industries dropped from 6.3 percent to 4.2 percent.

It may ruffle some feathers to say it, but one of the key factors contributing to teen unemployment here is a 43 percent increase in the state minimum wage from $5.15 in 2005 to $7.35 in 2011. While accounting for the effects of the recession, analysts at the Employment Policy Institute recently calculated that minimum wage increases over that period alone caused the loss of 1,178 jobs for Montana teens. With more economic woes and more minimum wage increases on the horizon, teens should not expect their job prospects to improve in the foreseeable future.

What proponents of perpetual minimum wage increases overlook in their zeal to ostensibly help the least fortunate among us is that disregarding market forces can often lead to unintended consequences. Minimum wage proponents completely ignore the forces of supply and demand. Labor is just like any commodity in that when you increase its price, consumers will demand less of it. Why would policymakers want to decrease the demand for labor when people are most in need of jobs?

Employers generally react in predictable (and rational) ways when faced with annual increases in the minimum wage. Their initial response is to compare the increased labor costs to the value of labor productivity. If the productivity of a particular worker is $6.50 per hour but the federal or state government forces an employer to pay $7.65 per hour, it stands to reason that that worker is going to lose their job. In a recession when profit margins are shrinking and cost-cutting measures become more necessary, perpetual minimum wage increases only exacerbate job losses for unskilled workers.

In industries where consumers are less sensitive to price, businesses may raise their prices to keep up with rising labor costs. Doing so may enable employers to maintain hiring levels, but continuing upward pressure on prices due to artificially rising labor costs will eventually drive customers away and present employers with a double whammy during a recessionary period – rising production costs and slacking consumer demand.

The growing ranks of unemployed working-age teens suffer more than just the lack of a paycheck. Teens acquire skills in early employment that make them more marketable to future employers. Research shows that high school seniors that worked part-time earn more later in life than their counterparts who did not hold a job. Other research has found that even a six-month spell of unemployment for teens can have a lasting impact on earnings and employability.

Our legislature has options to take small steps toward improving employment prospects for unskilled and low-skilled workers such as teens. They can start by repealing the state minimum wage law. That would slightly ameliorate unemployment by taking our minimum wage down to the federal rate of $7.25, 55 cents less than the likely state minimum wage of $7.80 starting in 2013. Outside of outright repeal, eliminating the inflationary index that mandates annual increases even during times of high unemployment would at least limit future damage.

Ultimately, however, the ball is in Congress’s court. Drastically reducing or even repealing the minimum wage entirely could translate into hundreds of thousands of jobs for unskilled and low-skilled workers – the same workers that are putting pressure on the public purse by receiving unemployment insurance or public assistance. Either change could even attract a good portion of those coveted manufacturing jobs shipped overseas because of our nation’s comparatively high labor costs

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