Is the Federal Minimum Wage Too High for the Long-Term Unemployed?

by Reihan Salam

In Bloomberg View, Michael R. Strain of the American Enterprise Institute makes a commonsense argument about the long-term unemployed that nevertheless runs against the political current. There is considerable evidence that employers are skeptical of job applicants who have been unemployed for a long period of time, even if these applicants appear to have relevant qualifications and work experience. The reason is that employers fear that they might be missing something — if this applicant is so terrific, why hasn’t she already been hired by someone else? Could it be that there is some warning sign that I can’t discern? Then there is the very real possibility that a worker’s skills have atrophied during a long spell of unemployment. Getting her back into the swing of things might take time, and time is money. In a rapidly growing economy, employers don’t have the luxury of scrutinizing job applicants quite so closely. But when unemployment is very high, they do. Short-term unemployment is, remarkably, lower than it was before the recession, while long-term unemployment is substantially higher. 

So raising the federal minimum wage might be particularly hard on the long-term unemployed, as employers already disinclined to take a chance on such workers will have to pay a higher price to do so. (A higher minimum wage might also entice more productive workers who have exited the labor force back into it — think of an experienced retiree who is happy to have left the working world behind, but who is tempted back into the job market by the promise of a higher wage. Many employers would much rather higher this worker than a worker who has been involuntarily unemployed for a long stretch.)

Strain proposes lowering the minimum wage for the long-term unemployed to $4-an-hour make these workers look like a risky proposition. Hiring them will still entail some measure of risk, but the upfront investment will be somewhat smaller. At the same time, he proposes coupling this reduced minimum wage with a wage subsidy that will increase the effective hourly wage to (for example) $8 an hour. The really remarkable thing about Strain’s proposal is that it is quite affordable. His back-of-the-envelope calculation is that if a fifth of the long-term unemployed take a $4-an-hour, full-time, year-round job, the cost of the $4-an-hour subsidy to taxpayers would be $6 billion. Bringing this workers back into the world of work would presumably generate far more than $6 billion in value, particularly if some share of these workers gain the experience and confidence they need to start earning more. 

Proponents of minimum wage hikes will no doubt condemn Strain for calling for increasing “welfare” spending, or for engaging in crony capitalism for recognizing that not all employers will want to take a chance on the long-term unemployed at the current minimum wage (or a higher one). Much depends on whether you think of employers as villains or as realists, who are making the best decisions they can with respect to their businesses.

Strain’s discussion brings to mind a recent observation by Tyler Cowen:

[W]hen I read about demand-side shocks which induce unemployment, I am reminded of the work of Alan Krueger.  In two papers, one of which is quite recent, and does not stem from the Heritage Foundation, Krueger shows rather convincingly that the unemployed maintain reservation wages which are simply too high.  They would be better off lowering those wages, being more realistic, accepting work, and getting back on their feet again. 

It could be that there are some workers who really are eager to get back on their feet, and to accept a somewhat lower “training wage” to do so. Many long-term unemployed workers might be particularly willing to make this choice if a federal wage subsidy saw to it that they’d still be able to earn a reasonable income. But employers are barred from enabling these workers to make this choice.