Question For Supporters Of The Minimum Wage

Given by economist Don Boudreaux:

In the U.S. in 1948, quoting my colleague Walter Williams, “the unemployment rate for white 16-17 year olds was 10.2 percent while that for blacks was 9.4 percent. Among white 18-19 year-olds, unemployment was 9.4 percent and for blacks it was 10.5 percent.” Today (October 2013) the unemployment rate for white 16-19 year olds is 19.4%; the unemployment rate for black 16-19 year olds is 36.0% – nearly double the rate of white teenage unemployment. (In 2006 – the year before the current recession began – the unemployment rate for white 16-19 year olds was 13.2%; the unemployment rate for black 16-19 years olds was 29.0% – slightly more than double the rate of white teenage unemployment.)

That is, the unemployment rate of black teenagers in 1948 was comparable to that of white teenagers, and about 2.5 times higher than the overall unemployment rate of 3.8%. Today, the unemployment rate for black teenagers is much higher than that for white teenagers, and nearly 5 times higher than the overall unemployment rate of 7.3%. (In 2006, the year before the current recession began, the unemployment rate for black teenagers was 6.3 times higher than the overall unemployment rate of 4.6%.)

How do you explain these data? Are American employers more prejudiced in 2013 than in 1948 against teenagers? More importantly, are Americans more racist in 2013 than they were in 1948?

These facts about teenage unemployment are straightforwardly explained by the standard economic theory that predicts that a legislated minimum wage causes the lowest-skilled, most poorly educated, or otherwise least-desirable workers to be the first to be fired and the last to be hired. What is your alternative explanation?

18 Responses to “Question For Supporters Of The Minimum Wage”

  1. Jon says:

    I’ve actually been looking for data on this, contrasting the ratio of black and white youth unemployment with minimum wage. Not having good luck so far. I think it’s tough to reach a conclusion here and attribute this to minimum wage with just these two data points (1948 and today). Further data would help though.

    I think it’s true though that recessions simply hit blacks harder. Also keep in mind in the intervening years we’ve convened a drug war which was specifically designed to target blacks without appearing to. So today I believe something like half of all black males aged 18-24 are somehow linked to our corrections system, whether incarceration or probation or whatever. These I expect would be factors. As you know I wouldn’t agree that the blame lies with minimum wage, but I’d ask you to consider that there are many factors that could contribute to this. Do you really think it could be as simple as minimum wage?

    I think Walter Williams is very quick to draw conclusions that lead to stories preferred by the rich man. Exploiters always pretend that their designs are due to benevolent intent. “We’re just keeping minimum wage low because we want what’s best for blacks.” This is a great narrative for the rich owners because naturally they want to keep minimum wage down and have more in their pockets. So you can see how the right wing has an incentive to accept this narrative. Be wary of the “We do it for the good of the poor, and it just so happens to align with the interests of the rich” arguments.

  2. Jon,

    You write: I think it’s true though that recessions simply hit blacks harder.

    Why? Please elaborate on this. Absent minimum wage legislation, this statement doesn’t make sense. Absent regulations preventing a market clearing house, there is no reason that blacks should be hit harder in a recession – even accounting for racism, lower quality education in the ghettos, etc, even drug charges.

    Again – please elaborate.

  3. LaurenceB says:

    First of all, this smells of data cherry-picking. I’m willing to bet that a graph of black unemployment between 1930 and 2013 is not even close to a straight line. So why pick 1948? Is there a reason for that? The first national minimum wage laws were enacted in 1938, not 1948, so that’s not it. Why not start with 1938? And why pick 2013? The minimum wage has been constant for the last four years, so why not use 2009? Also, since the minimum wage in nominal dollars dropped pretty steadily from about 1970 through 2005 or so, shouldn’t there have been a decrease in black unemployment during that period if Williams’ theory is correct? So was there one?

    I suspect I know the answer to some of these questions.

    But let’s assume for a moment that black teenage unemployment tracks at least sort of well to increases and decreases in the nominal minimum wage from 1938 up until 2009 (and, again, I doubt that it tracks particularly well). Would that prove that the minimum wage causes unemployment in teenage blacks? Well, not really. It would give the theory more credence of course, but it wouldn’t prove anything. The fact is, so many changes have happened since the 1940’s that we could blame such a trend on just about anything.

    Sure, Steve Forbes might blame it on the minimum wage.

    But Alan Keyes would blame it on the loosening of morality and weakening of the family unit.
    And Mark Kirkorian would blame it on increased immigration.
    And Jess Jackson would blame racism.
    And Nick Gillespie would blame incarceration rates and the drug war.
    And Matt Yglesias would blame urban stagnation and “white flight”.
    And K.J. Lopez would blame the decline of religiosity.
    And Bill Bennett would blame the worsening of the education system.
    And Jimmy Carter would figure out some way to blame the intervening wars.
    And, so on and so on and so on…

    And now, although no one asked for it, here’s my opinion:

    From everything I’ve read, raising the minimum wage likely does have a very small negative effect on the unemployment rate for black teenagers. But with almost every policy decision, there are losers and winners, and the goal is to have only a very small number of losers. I think the significant benefits of a higher minimum wage for many families, (black families included) outweighs the possibility of a very minimal increase in the teenage black unemployment rate, so I therefore support an increase in the minimum wage.

    And, finally, I agree with Jon that these crocodile tears from Republican economists over black teenage unemployment don’t seem very genuine. The overwhelming majority of Republicans oppose a hike in the minimum wage simply because they believe it will hurt business, not because they think it will hurt black teenagers. They should just be honest about that.

  4. LaurenceB,

    You write: So why pick 1948? Is there a reason for that? The first national minimum wage laws were enacted in 1938, not 1948, so that’s not it. Why not start with 1938?

    To answer the general question, 1948 was probably picked because it represents the liberals favorite era – right after WWII where unions were strong, immigration was limited, and the economy was soaring. But 1938 would have also been a great year to pick, as then, racism was so strong that the true effects of the minimum wage were out in the public and justified accordingly:

    Proponents of the minimum wage, when it was legislated in 1938, were disproportionately from Northeastern high-wage states where a minimum wage would be binding only on a very small segment of the labor force. They used it to narrow the differential in wages between the Northeastern states and the Southeastern states, where black men were a much higher fraction of the labor force and where the minimum wage would be binding on a much higher fraction. I posted about the role of Senator John F. Kennedy in the 1950s and his explicit statement that he wanted to hobble competition from black labor.

    Regarding the other factors: racism, weakness of the family, immigration, incarceration rates, education, etc would all have little to no impact in a price clearing market. To use a non-political analogy, lets compare labor to hotel vacancies. Assume you were a customer who wanted to get a hotel. Would you assume, simply because Motel 6’s had lower quality rooms than say Hilton Hotels, that they always have a higher vacancy rate? Of course not. Why? Because Motel 6’s can always – and DO – lower their rates relative to Hilton Hotels. In such a situation, it’s perfectly normal for Hilton Hotels to have more vacancies, or vice versa…in other words, there is not, and should not be, any correlation between room quality levels and vacancy rates. Now take a situation with price regulations: if there was a minimum wage rate that required every hotel guest to pay Hilton Hotel prices, then YES, in that situation, Motel 6 would then have a drastically higher vacancy rate than Hilton Hotels. But in a price clearing market, people would simply pay less for Motel 6’s – and the occupation rates of a Motel 6 vs a Hilton Hotel will not be directly related to factors involving quality. Same with employment. Sure, racism would drive down the wages of blacks. Sure, our shitty public schools would harm blacks more than whites. Sure, competition from immigration would drive down the wages of blacks. But this just means Blacks wages would be lower – not necessarily that there wouldn’t be any jobs. Incarceration rates are irrelevant, as the unemployment rate measures people looking for jobs – and those in prison are obviously not looking for jobs.

    So again, I fail to see how a proponent of the minimum wage – taking into account a price clearing market for wages – could justify an inherently higher unemployment rate for blacks. The most they could say is its random, some years higher unemployment rates for blacks, other years for whites…but the magnitude difference and consistency of it always being poor, uneducated, minorities, as the group suffering from higher unemployment rates points to a price control and/or regulations – and the minimum wage is certainly part of the problem (along with mandated healthcare, vacation time, overtime regulations, etc).

    You write: I think the significant benefits of a higher minimum wage for many families, (black families included) outweighs the possibility of a very minimal increase in the teenage black unemployment rate, so I therefore support an increase in the minimum wage.

    This is, in my opinion, an honest assessment of the view most people have. Most people who support the minimum wage that I have discussed this issue with, don’t dispute that there is some negative affects. The logic is just too clear. They just feel that the small negative harm is outweighed by the positive good. It’s a magnitude difference, not a fundamental disagreement.

    But here is where the logic breaks down. First, the people who bare most of the negative affects are, like the unemployment rates above, the people at the bottom rung of the ladder. Minorities. The uneducated. Ex-cons. Single parents. Non-english speakers. etc. The people who enjoy most of the benefits (see here: 4/5’s of those on minimum wage are NOT poor), are at the higher end of the ladder: college kids. White. Educated. Strong family support.

    Second, it’s not just a reduced wage that negatively affects those on the bad end of the minimum wage law: often, it’s being shut out of the labor market completely. So it’s really a trade-off between ‘completely eliminating entrance into the job market’ for those on the lowest end of the economic ladder vs ‘a few marginal income percentage gains for mostly those already on a relatively higher end of the economic ladder’. To put it a different way: it’s a marginal financial gain to many, primarily those who are already on the better end of the labor market, but a drastic curse for a few, primarily those who are already on the worse end of the labor market. So its not apples to apples here. Sure, those who suffer from the minimum wage are fewer – but their pain is drastically more painful. Just look at interns – many college interns would offer their services for free, just to get their foot in the door of some companies. The minimum wage, in contrast, closes the door on its low end ‘interns’.

    Economist Don Boudreaux explained the trade-off this way:

    If I agreed that it’s desirable to raise the minimum-wage by 40 percent if doing so throws only one-percent of low-wage workers into unemployment, then I should also agree that annually taking $10,000 or so from each member of one-percent of the population of low-skilled workers and giving the proceeds to the other 99 percent of low-skilled workers is an acceptable policy if, for example, some generous private philanthropist pledged to magnify the resulting gains enjoyed by each of the members of the 99 percent of the low-wage population who enjoy the redistribution
    of incomes confiscated from the unfortunate and abused one-percent….Of course, I would oppose any such policy.

    …and this analogy is granting the proponents of the minimum wage an extreme hypothetical: that a 40% raise in the minimum wage would only lead to a 1% employment loss. Of course, I believe the true numbers, given a 40% minimum wage increase, are alot more harmful than a mere 1% employment loss – but even granting these extremes, I’d still oppose the minimum wage.

    Third, because of the second point above, the minimum wage leads to long term problems, as a low paying job, in many ways, is the entry point to the labor market. NBER study states:

    The evidence indicates that even as individuals reach their late 20’s, they work less and earn less the longer they were exposed to a higher minimum wage, especially as a teenager. The adverse longer-run effects of facing high minimum wages as a teenager are stronger for blacks. From a policy perspective, these longer-run effects of minimum wages are likely more significant than the contemporaneous effects of minimum wages on youths that are the focus of most research and policy debate.

    Fourth, and final point, let’s not kid ourselves that Democrats too have their own selfish incentives to favor the minimum wage – even when the harmful affects are clear. After all, raising the minimum wage helps unions – the less the price difference between non-union wages and union wages are, the better the unions bargaining power. It also makes liberal states labor markets more competitive: again, the less the disparity is between the labor costs of say California vs Texas is, the more jobs will flow to California, etc. Lastly, limousine liberals are, mostly education white people – and clearly, the minimum wage is a net win to that cohort of society.

  5. LaurenceB says:

    I guess I really only have four things to say in response:

    1. You seem to be trying very hard – too hard I think – to make this a poor vs. rich issue when it simply isn’t. The folks who benefit from a higher minimum wage are poor, just like the very, very small number of folks who may possibly see a negative effect. Middle class and wealthy people are pretty much not part of this discussion.

    2. You didn’t try very hard to convince me that this particular argument isn’t a case of egregious data cherry picking. Do you agree that it probably is?

    2. I think our disagreement at this point is probably mostly a difference in weighing consequences and trade-offs. You seem to be very confident that raising the minimum wage will cause black teen unemployment and you seem to think it will be significant. Meanwhile my reading on this is that there is not anything near unanimity among economists. Even so, I am perfectly willing to accept that there might be some small effect simply because I am aware that among conservative economists this is widely accepted, and I know that there have been some studies that seemed to indicate it. (Although I recall reading about at least one recently that showed no correlation at all.)

    3. Lastly, and I don’t mean to be rude, but I think your understanding of Democrats’ motives is bizarre. I simply can’t imagine where you got the idea that Democrats care so much about California vs. Texas or unions. That’s really wild. Is there some Democrat somewhere that you can point us to who has frames his or her support for raising the minimum wage in those terms? I’d be interested in seeing that.

  6. darfferrara says:

    HP, I think your explanation of the minimum wage are spot on. The long term effects of the minimum wage on people are not just unemployment for a short period of time, they are long term and significant. I remember a study that showed that people who enter the workforce during a recession have a significantly lower lifetime earnings than people entering the workforce during boom years. The same logic applies to those who lose jobs due to minimum wage laws. These people don’t accumulate the human capitol that allows them to advance.

    The other point to be made is that there are much better ways to help the poor! The EITC was custom made for helping the poor. A guaranteed minimum income is also a much better idea. Why otherwise smart people push for a minimum wage increase when these other options are available is beyond me.

    Laurence, I disagree with your point 1. I’ve heard statistics that only something like 15% of minimum wage gains go to poor head of households. If the goal is to help those people push for the EITC. As to point two, I think that you are probably right that the data was cherry picked. Boudreaux is something of a polemicist, and he would want to make his point as strongly as possible. This doesn’t mean that he isn’t correct, or even that 1948 was a good point to compare. Remember that in 1948 we had just recently demobilized from the war, and were entering something of the “modern” economy.

  7. LaurenceB,

    Which premise below do you disagree with:

    1. Many people on the minimum wage are NOT poor. Think college kids. Teenagers of middle class families. (I also provided a link from CBO that states that 4/5’s of people on the minimum wage are NOT poor).

    2. The negative affects of a minimum wage increase would disproportionately impact those with less marketable skills: single parents, minorities, non-english speakers, ex-cons, etc.

    This is really the crux of my argument. Especially #2. And even economists who support the minimum wage wouldn’t dispute #2.

    Given these two premises, everything I said above just falls into place.

  8. LaurenceB says:

    I absolutely disagree with #1.

    The CBO report being referenced by Mankiw is just pointing out that many people who make minimum wage live in a household where some other individual(s) earn enough wages to move the household income above the poverty index. That’s an interesting factoid, but it doesn’t make the individual “not poor” in any real sense of the word.

    If a homeless person is staying at a shelter, does that mean he’s not homeless? If my buddy without a car borrows my car every day does that mean he owns a car?

    Think about it for a second – Isn’t it possible, indeed likely, that many of those individuals are living in a household with other wage earners because they can’t afford to live alone? And does that decision suddenly make them no longer poor? And more to the point – Didn’t this rather obvious stuff ever occur to Mankiw? (Is empathy even a “thing” for conservative economists?)

    I think #2 is probably true if you modify it slightly to begin thusly: “Assuming there are negative effects, then…”

  9. LaurenceB,

    Living in a non-poor household was only part of the reason. The largest reason is probably because most people on the minimum wage are people barely entering the labor market, those under 24 years of age (see here).

    Now sure, these are ‘poor’ by earned income standards. But many of these people are college kids, or simply newly High School graduates still living at home. Hardly the image people think about when the minimum wage is discussed.

  10. More importantly LaurenceB, I still dont see how any of the explanations above would explain an inherently larger unemployment rate for minorities, blacks, and in general the marginalized absent a price control regulation.

    Opponents of the minimum wage have a theory that explains the data….now, you disagree with said theory, but have failed to even provide a first cut theory/hypothesis that could explain the data as well.

  11. LaurenceB says:

    Is “the data” you are referring to the stuff from Boudreaux? Because if it is, I’m sure I can give you equally valid data that will demonstrate a correlation between higher employment for blacks when the minimum wage increases. Cherry picking data is not difficult. Would you like to see me do that? It really would be very, very easy. We both know there is very likely to be some span of years during the last 80 years or so during which black employment grew while the minimum wage grew, So all I have to do to demonstrate Boudreaux’s correlation in reverse is to “cherry pick” those years. Voila!

    Or are you referring to the data from more credible studies that you have links to? If you are, then – as I have mentioned before – I would be more than happy to concede that the conservative economists may have a point, although unlike you, I would also take into consideration opposing studies from liberal quarters.

    Bottom line: This isn’t about helping rich people at the expense of poor people. It’s about helping lots of poor people even if there is a very small slice of poor people who are hurt. It’s not a perfect thing, but it’s a good thing.

  12. darfferrara says:

    LaurenceB, don’t you agree that the EITC is a better system? It doesn’t do harm to low-income earners and it is much better targeted at low-income persons. Do you at least agree that pushing for an expanded EITC is better than pushing for increasing the minimum wage?

  13. LaurenceB says:

    I do agree with you that the EITC is better. But can’t we do both? This gap between rich and poor in the U.S. really is getting out of hand.

  14. darfferrara says:

    I just wonder why you would want to do both. If the EITC does all the good that the minimum wage does, does none of the bad, and does it more cost effectively, then why not focus on improving the EITC. Expand it, index it to inflation, make it more generous, all without the harms, small or large but almost certainly there with the minimum wage.

  15. LaurenceB says:

    Short answer (and I may be mistaken about this) is that I think that EITC only targets or mostly targets families, not individuals. I think it takes the combination of the two to get everybody. Again, that’s just my off-the-cuff understanding – I could be wrong about that.

  16. LaurenceB,

    Apologies for the late response. Been a crazy work week.

    Data: let’s assume, arguendo, that Black/Minority/Marginalized citizens etc characteristically have tended to always have a larger unemployment rate than Whites.

    My question to you is: why would that be the case? I’ve given you my theory: Namely, labor regulations. Of which the minimum wage is one of many (healthcare requirements, vacation pay, sick days, etc). Maybe I am wrong. But it’s atleast a theory with sound logic. What’s your hypothesis that could explain an inherently larger unemployment rate for a Blacks/Minorities/Marginalized workforce?

  17. LaurenceB says:

    Agreed that Whites have generally tended to have a larger unemployment rate.

    Here are my thoughts on that:

    There’s no reason (in fact it’s highly unlikely) that this is due to only one factor. More likely it is a combination of things. Certainly, there are some labor regulations that might contribute to that. Although, in my opinion, their contribution is probably relatively minor.

    If I were to pick what I personally think is the major contributor to this unfortunate fact, I think i would choose “networking”. And by “networking” I mean the system by which most of us choose a profession and find employment – which is basically Who Do You Know? and To Whom Were You Born? and Who Do You Go To Church With? and Who Were Your Classmates? I don’t think it’s any revelation that Blacks are less likely to have the employment “networking” advantages that Whites do. Don’t you agree?

  18. Sure, networking has an impact, especially the higher the income ladder one goes. But I doubt it has any significant impact on the low end.

    Here I am discussing minimum wage jobs specifically. I don’t know many people that got a minimum wage job by networking. I got my first job (lower than the minimum wage, btw, and under the table), by calling and walking in, randomly to places. Minimum wage jobs are, after all, usually the first entry into the market – they are, where working networks begin to form.

    Also, labor regulations (of which minimum wage jobs are one of) increase the power of networking. Think about two situations:

    Company A opens up a branch with a higher than average wage. In other words, its entry level jobs pay some percentage more than typical prevailing entry level jobs.

    Company B opens up a branch with the same average wage as its neighbors. Entry level jobs go for no more, and no less, than typical entry level jobs in the area.

    Which company is going to have more applicants? Of course company A. And with more applicants than job positions, networking becomes a factor.

    Getting a job from Company B, however, shall be no different than getting a job from any other company.

    In other words, by driving wages higher than market rates, minimum wage creates a higher demand for jobs than otherwise – and of course, in such situations networking matters. But again, this is because of the minimum wage as well.

    Either way, networking may explain why person X might not get into company Y. But it can’t explain why person X can’t get any job, even though a job is desired.

    Here is another counter example: If networking was the big factor here, why do illegal immigrants have a lower unemployment rate than native born?

    My point is this: the only thing that causes shortages (or surpluses) are price controls. And the only price controls involved here are labor regulations, of which the minimum wage is one.

    No other explanation fits the anomaly better, IMHO.

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