Executive Summary. Figures provided by the U.S. Census Bureau 1 demonstrate that teen employment prospects are dismal:

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2 Executive Summary 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. Figures provided by the U.S. Census Bureau 1 demonstrate that teen employment prospects are dismal: Between 2006 and 2011, the teenage unemployment rate in Montana almost doubled from 10.2% to 19.4%. The highest rate for that period was 24% in Montana teens with less than a high school education have seen their unemployment rate double from 10.4% in 2006 to 20.8% in The average hours worked per week for Montana teens fell from 12.1 to 8 hours a decrease of 34%. The percentage of Montana teenagers who have a job declined from 48.2% in 2006 to 36.6% in From 2006 to 2011, teen employment share in all industries dropped from 6.3% to 4.2%; in leisure and hospitality from 18.9% to 13.9%; in retail trade from 10.2% to 5.2%; and for all other services from 4% to 1.6%. A recent analysis 2 of state-specific employment effects of the minimum wage finds that increases in the federal and state minimum wage rates have accelerated this trend. According to simulations run as part of this analysis, increases in the minimum wage from the base of $5.15 in 2006 to $7.35 in 2011 cost Montana teenagers 1,178 jobs. 3 Teen jobless rates could get even worse as Montana s minimum wage is adjusted annually to the Consumer Price Index (CPI) despite job market realities or unemployment trends. Montana s 2012 minimum wage rate is currently $7.65 and will increase to $7.80 in 2013 if the CPI continues to hover at close to two percent. Minimum wage proponents may see annual increases as raises to poorer workers. What they fail to realize is that minimum wage increases serve as a tax on employers that would otherwise employ more low or unskilled workers if not for higher labor costs. This is especially true for working-age teens as our issue brief will show. Policymakers in Washington, DC and Helena should consider the disproportionate impact that minimum wage increases have on our youth as they struggle to find their first job.

3 TABLE OF CONTENTS I. The Minimum Wage & Teenage Employment in Montana 1 A. Figure 1: Unemployment Rate Comparison B. Figure 2: Minimum Wage and Teenage Unemployment 2 II. Economics of Minimum Wage 2 III. A Free Market in Wages 3 IV. Conclusion 4 V. Footnotes 4 3 Teen Unemployment & the Minimum Wage

4 Teen Unemployment and the Minimum Wage A Montana Policy Institute Issue Brief Glenn Oppel, Policy Director The minimum wage law is most properly described as a law saying that employers must discriminate against workers who have low skills. Milton Friedman The Minimum Wage and Teenage Employment in Montana Montana s economic recovery is being held back by a combination of inflation, lackluster performance in key sectors, and anemic national economic growth. 4 These forces have many employers locked in a vise between higher costs and decreasing profit margins. The good news is that the state economy is stable enough for employers to stay in business, but they are generally not expanding operations or hiring new employees. This is reflected in Montana s current unemployment rate of 6.3 percent, which is currently the second highest it has been over the past decade; although still two percentage points below the national rate. Over the course of the Great Recession, the ranks of the unemployed in Montana increased from 19,200 in January 2008 to a peak of 35,100 in July Even though these numbers have improved in 2012, close to 32,000 Montanans are still jobless. Minimum wage laws that artificially raise the cost of labor above market rates only make matters worse. While Montanas economy was performing at its peak in 2006, Montana voters passed Initiative 151 (I-151) by almost 73 percent, raising Montana's minimum wage to the greater of either $6.15 per hour or the federal minimum wage. The measure also added an annual cost-of-living adjustment to the state minimum wage. At $7.65 per hour, Montana s minimum wage is currently forty cents higher than the federal level and rising, regardless of economic conditions or job prospects for those already out of work. Of course, I-151 supporters did not anticipate the Great Recession and the job-killing effect of minimum wage increases on unskilled workers in Montana and particularly our youth. But that impact is real. Unemployment rates have accelerated faster for working-age teens compared to all other workers see Figure Unemployment % U.S. Montana Teens MT Montana Policy Institute 1

5 I-151 resulted in Montana s minimum wage rate increasing annually from $5.15 in 2005 to $7.35 in 2011 a rise of almost 43 percent. Even when controlling for negative job impacts of the recession, there is still a corresponding relationship between a rapidly increasing minimum wage and rapidly increasing unemployment rates for working-age teens see Figure 2. 6 Although teen unemployment dipped slightly from 24 percent to 19.4 percent from 2010 to 2011, the rate is still nearly double that of However, if the minimum wage had remained at 2005 levels as the job market shrank, we may have saved nearly 1,200 jobs almost three percent of the teen workforce from 2005 to Not only does increasing the minimum wage compound unemployment trends for working-age teens; it also discourages them from even looking for a job. Data show that the percentage of Montana teenagers who have a job declined from 48.2 percent in 2006 to 36.6 percent in On top of that, average hours worked per week for Montana teens fell from 12.1 to 8 hours a decrease of 34 percent. Teen employment share in particular industries is also dropping. Between 2006 and 2011, teen employment share in all industries dropped from 6.3 percent to 4.2 percent; in leisure and hospitality from 18.9 percent to 13.9 percent; in retail trade from 10.2 percent to 5.2 percent; and in all other services from 4 percent to 1.6 percent. Working-age teens are getting squeezed out of industries that traditionally have provided that first job and all-important experience and work ethic to prepare them for productive futures. It is unlikely that the situation will improve for working-age teens in Montana any time soon, especially as the forecast for economic growth is bleak. 8 Montana s current minimum wage is $ th highest in the nation. It will likely be adjusted upward again to $7.80 in 2013 based on the current CPI. 9 And, of course, it will continue to increase year after year, further pushing employment opportunities out of the reach of working-age teens. Economics of a Minimum Wage Even after adjusting for the job-killing effects of the recession, Montana teens lost 1,200 jobs due to minimum wage increases from 2005 to One would be hard-pressed to find a ubiquitous public policy that better illustrates the law of unintended consequences than the minimum wage. Artificially raising wages by government fiat causes employers to undertake cost saving measures that tend to reduce employment opportunities for workers, particularly those that are unskilled or low-skilled. Despite the fact that this economic truth is strongly supported by nearly two decades of research, 10 policymakers and voters continue to support minimum wage increases. Unemployment % $15.00 $13.00 $11.00 $9.00 $7.00 $5.00 $3.00 Minimum Wage $1.00 Unemployment % Minimum Wage 2 Teen Unemployment & the Minimum Wage

6 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. Industries that rely heavily on unskilled labor exhibit the most sensitivity to increased labor costs because unskilled labor can be more easily removed or replaced. 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, as demonstrated for working-age teens. Employers have other options at their disposal to offset increasing labor costs that can also hurt skilled workers. They may hire fewer new workers while piling A FREE MARKET IN WAGES All things being equal, in a free and competitive market, producers will compensate workers at wages that fit into the calculus of profitability and production costs. In such a market, producers that pay workers at low wages relative to this calculus risk losing those workers to competitors offering higher wages. Naturally, entrepreneurs are willing to pay more in order to lure workers away from competitors. To put it simply, lowballing workers on the going rate is antithetical to sustainable profits. The great economist Ludwig von Mises summed it up in Human Action: The market wage rate tends toward a height at which all those eager to earn wages get jobs and all those eager to employ workers can hire as many as they want. more hours on current employees to meet production demands. Or employees may have to accept fewer benefits to maintain an overall labor cost below the value of goods or services that they produce. In industries where consumers are less sensitive to price, companies may raise their prices to keep up with rising labor costs. This may enable employers to maintain hiring levels, but continuing upward pressure on prices due to artificially rising labor costs will eventually dampen demand and present employers with a double whammy during a recessionary period rising production costs and slacking consumer demand. Why would an employer contemplate expanding operations when hiring more workers means charging higher prices to a cash-strapped public? Employers are more likely to maintain the status quo than set in motion such a vicious cycle. What is particularly perplexing about proponents of minimum wage increases is that such raises rarely help the people they are intended to. According to a Cato Institute study released in June, 11 the majority of workers earning the minimum wage are young, parttime, or workers from families not classified as poor. Citing Bureau of Labor Statistics information, the study says that there were 1.8 million paid-hourly employees that were paid the federal minimum According to the last two decades of research on the minimum wage, there is overwhelming evidence that raising the wage increases unemployment for the least skilled. Montana's minimum wage increased 43 percent from 2005 to wage of $7.25 in About half were teenagers or young adults aged 24 or under percent of this group lived in families with incomes two or more times the official poverty level. Only 20.8 percent of all minimum wage earners were family heads or spouses working full time. In fact, according to the Cato Institute study, The popular belief that minimum wage workers are poor adults (25 years old or older), working full time and trying to raise a family is largely 2Montana Policy Institute 3

7 untrue. Just 4.7 percent match that description. Indeed, many minimum wage workers live in families with incomes well above the poverty level. 12 Conclusion Working-age teens bear the brunt of the unintended effects of annually increasing minimum wage rates and they suffer more than just the lack of a pay check. Teens acquire skills in early employment that make them more marketable to future employers. Research published by the Journal of Labor Economics found that high school seniors that worked part-time were earning higher wages, within six to nine years, than their counterparts who did not hold a job. 13 Our legislature has options that would constitute small steps toward improving employment prospects for unskilled and low-skilled workers such as teens. Start by repealing the state minimum wage law. That would slightly ameliorate unemployment by defaulting End Notes to the federal minimum wage of $7.25, which will be 55 cents less than the likely state minimum wage increase to $7.80 starting in Outside of outright repeal, eliminating the inflationary index that assures annual increases is another incremental change worth consideration. 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. 1 Current Population Survey (CPS) conducted by the Bureau of Census for the Bureau of Labor Statistics available at 2 William E. Even and David A. Macpherson, The Teen Employment Crisis: The Effects of the Federal Minimum Wage Increases on Teen Employment, The Employment Policies Institute, July Simulations estimate the change in 2011 employment for Montana that would result if the minimum wage was reduced to its January 2005 value of $5.15. The simulations are based on models including a state-specific time trend. 4 Patrick Barkey, Montana Economic Outlook: Recovery Still Stuck in the Starting Gate, 2012 Economic Outlook, University of Montana Bureau of Business and Economic Research, pp. 6-7, umt.edu/econ/forecast.asp. 5 Chart developed from Current Population Survey (CPS). 6 Chart developed from Current Population Survey (CPS) and Montana Department of Labor. 7 Even and Macpherson, Barkey, Bureau of Labor Statistics at Jobs provide teens with more than a paycheck. They acquire career skills in early employment that make them more marketable to future employers. 10 David Neumark and William L. Wascher, Minimum Wages and Employment, Foundations and Trends in Microeconomics, Vol. 3, No. 1-2, Mark Wilson, The Negative Effects of Minimum Wage Laws, Policy Analysis No. 701, The Cato Institute, June 21, Ibid., p Christopher J. Ruhm, Is High School Employment Consumption or Investment?, Journal of Labor Economics, Vol. 113, No. 1, February Teen Unemployment & the Minimum Wage

8 THE MONTANA POLICY INSTITUTE is a nonpartisan 501 (c)(3) policy research organization that equips Montana citizens and decision makers to better evaluate state public policy options from the perspective of free markets, limited government, individual rights and individual responsibility. To learn more visit us at NOTHING WRITTEN here is to be construed as an attempt to influence any election or legislative action. PERMISSION TO REPRINT this paper in whole or in part is hereby granted provided full credit is given to the author and the Montana Policy Institute. Copyright 2012