Raise Your State's Minimum Wage? Why Be Like California?

Visit a high school, any high school in America, and ask students about their summer plans. Few of them will be looking for a job. With the teen unemployment rate over 20 percent, even fewer of them will be able to find one.

Back in 1974, and 1984, and even as recently as 1994, about 55 percent of high school students sought employment. In 2004, the percentage declined to 44 percent. Now, it is about 33 percent. Times have changed, and the higher minimum wage does not help. We are condemning these teenagers to unemployed summers with the current $7.25 hourly minimum wage, and raising the minimum wage to $10.10 will make it even harder.

In a global economy, where competitive countries battle for business with well-trained, disciplined, experienced employees, America is putting itself at a disadvantage by keeping young Americans off the first rung of the career ladder.

Make no mistake-few workers stay at the minimum wage level very long. Only three percent of American workers earn the minimum wage. The other 97 percent make more, not because of government regulation, but because that is the only way that employers can persuade them to stay.

In Saturday's New York Times, University of California (Berkeley) professors Michael Reich and Ken Jacobs praised cities and local governments for enacting their own higher minimum wage laws. Reich and Jacobs have concluded that the effects of the $13 per hour minimum compensation package in San Francisco are "strong and positive."

There is nothing wrong with different localities adding to their own fiscal problems by raising their minimum wages above the federal level as long as they are prepared to live with the consequences. If the wages cause residents and businesses to move out of state, reducing tax revenue and increasing unemployment rates and pension liabilities, cities have only themselves to blame.

Of the five states with the lowest unemployment rates in January (North Dakota, Nebraska, South Dakota, Utah, and Vermont), ranging from 2.6 percent in North Dakota to 4 percent in Vermont, only one, Vermont, has a minimum wage that is higher than the federal minimum wage. In January the national unemployment rate was 6.7 percent.

Of the five states with the highest unemployment rates (Rhode Island, Nevada, Illinois, California, and Michigan), ranging from 9.2 percent in Rhode Island to 7.8 percent in Michigan, all have state minimum wage laws that are higher than the federal wage law. California's unemployment was 8.1 percent in January, the fourth highest unemployment rate in America.

Internal Revenue Service data compiled by the non-partisan Tax Foundation reveal that from 2000 to 2010 California lost a net $29.4 billion in adjusted gross income and 1.2 million residents to other states.

Despite Reich's and Jacobs's assurance that "none of the dire predictions of employment loss have come to pass" in San Francisco, California is in poor fiscal shape.

Although research published by Reich, together with University of Massachusetts (Amherst) economist Arindrajit Dube and University of North Carolina economist T. William Lester, concludes that raising the minimum wage has no employment effect, other economists disagree.

University of California (Irvine) professor David Neumark, in a paper forthcoming in the Industrial and Labor Relations Review, writes that the strongest evidence linking unemployment to increases in the minimum wage comes from teenagers and other low-skill groups, without regard to industry.

A February Congressional Budget Office study shows that 500,000 low-skilled people could lose their jobs by 2016 due to an increase in the minimum wage to $10.10 from $7.25.

Earlier this month 500 economists, including Nobel laureates Vernon Smith, Eugene Fama, Robert Lucas, and Edward Prescott, signed a letter opposing increases in the federal minimum wage. "Although increasing wages through legislative action may sound like a great idea, poverty is a serious, complex issue that demands a comprehensive and thoughtful solution that targets those Americans actually in need," they wrote.

If you were running a business, and the minimum wage rose from $7.25 to $10.10, your first step would be to lay off your least-skilled workers. Future workers would have to produce more. You might do less on-the-job training and hire workers who already have experience.

One reason that academics find little overall change in employment when the minimum wage is raised is that only three percent of employed workers make minimum wage. That is small change in a pool of 138 million nonfarm payroll workers.

Further, even if total employment shows little change when minimum wages rise, the skill mix of employees can change. That is, employers can hire a similar number of workers, but substitute high-skill for low-skill employees. Employment levels may remain the same, but evidence shows that more high-skill workers and fewer low-skill workers are hired. This leaves low-skill workers and teens with no options except unemployment.

This is not where America wants to be. Young people are dropping out of the workforce, discouraged by lack of job opportunities. In 2013, 55 percent of workers aged 16 to 24 were participating in the labor force, compared to 62 percent in 2003, a 10-year decline of 7 percentage points.

If young people were spending more time in school, lower labor force participation would equal an investment in skills for future high-paying jobs. That would be good for young people, and good for the economy. But the percentage of 16- to 24-year-olds enrolled in high school, college, or university has barely changed over the past decade, rising from 56 percent to 56.3 percent.

The record is clear. States that choose not to raise their wages above the federal minimum have lower unemployment rates and healthier economies. Yes, Professors Reich and Jacobs, state and local governments are free to increase their minimum wages. But who wants to be like California?