Data about the President’s Minimum-Wage Proposal

by Veronique de Rugy

The president announced last night that he would use an executive order to increase the minimum wage to above $10 for those working on new federal contracts. As Jim noted over at Campaign Spot, the motivation is fairly straightforward: It pleases unions.

Richard Berman: “The Center for Union Facts analyzed collective-bargaining agreements obtained from the Department of Labor’s Office of Labor-Management Standards. The data indicate that a number of unions in the service, retail and hospitality industries peg their base-line wages to the minimum wage… The two most popular formulas were setting baseline union wages as a percentage above the state or federal minimum wage or mandating a flat wage premium above the minimum wage.”

And now you see why raising the minimum wage is such an intense priority for Democrats. A higher minimum wage means higher wages for union workers, which means higher union dues, which gives unions more money to spend during campaign season.

But then the president also said that he hoped Congress would raise the minimum wage for everyone. My colleague Keith Hall sends this data about the 1.8 million people earning the minimum wage today. It gives us an idea of how an increase in the minimum wage could affect them:

Raising the minimum wage from $7.25 to over $10/hour raises the cost of hiring these workers by nearly 40 percent. There is no chance that this rise in cost will address the biggest problem facing these workers — complete lack of employment.

Minimum wage earners are mostly young, single, unskilled, and work part-time.

 Most are under 25 years old (56 percent). 

Two-thirds are single and never married (66 percent).

Two-thirds have a high school degree or less (67 percent).

 Nearly three-quarters work less than full time (73 percent).

He adds that most of those under 25 don’t work (so increasing the minimum wage isn’t likely to help them). In fact those under 25 in America have an employment rate of just 47.4 percent – down from 53.1 percent in 2007.  They have an unemployment rate that is twice the national average (13.5 percent – up from 10.5 percent in 2007).

But that’s not all. There are 10 million Americans that are earning within a dollar of the minimum wage ($7.5 to $8.5 per hour). Hall explains that for this group, a rise in minimum wage to $10 per hour will raise the cost of hiring these “near minimum wage” earners by over 30 percent.

About half are under 25 years old (51 percent). Nearly half of all employed teens fall into this category (47 percent)

Most have a high school degree or less (62 percent)

About two-thirds work less than full time (66 percent)

More than half live in households making above $35,000 per year (5.3 million)

More than a million of them live in households making over $100,000 per year.

In other words, it is likely that the people the president is trying to help are exactly the ones who will be hurt by a raise in the minimum wage. These guys are already under-employed or unemployed at the current minimum-wage level and it is unlikely that their situation will improve after employers have to hike the salary of unskilled workers, especially in this economy. 

This is sad considering that these are already the people who have been hurt by the weak recovery. Younger people have been hit particularly hard in recent years. Last summer I summarized their situation in an article for Reason called “The Kids Aren’t All Right.” Here is a tidbit:

Fewer than half of Americans today between the ages of 18 and 25 are employed. For those in that cohort actively on the job market, the unemployment rate is 16 percent, versus 6 percent for job-seekers aged 25 and above.

These young folks are also more likely to be long-term unemployed: While accounting for just 14 percent of the labor force, they make up 19 percent of the long-term unemployed, defined by the BLS as 27 weeks or longer.

The lucky few young’uns with jobs of some kind also suffer from rampant underemployment. In a recent blog post, Diana Carew of the Progressive Policy Institute wrote: “In July 2013, just 36 percent of Americans age 16-24 not enrolled in school worked full-time, 10 percent less than in July 2007.” In other words, of these 17 million young Americans, 5.6 million were working part-time, 3.2 million were unemployed, and 8.4 million were out of the labor force altogether.

This jobs crisis will have long-term consequences for young Americans. A forthcoming paper in the American Economic Journal: Applied Economics on Canadian college graduates by the economists Philip Oreopoulos, Till Von Wachter, and Andrew Heisz shows that in economies like ours, during normal times, the average person sees 70 percent of career wage growth in the first 10 years on the job. That is terrible news for people who are unemployed or underemployed at the start of their careers. The study also shows that those unlucky enough to graduate during a recession will suffer a 9 percent pay hit from the start of their careers-and it will likely take them a decade to climb out of that hole.

Considering these people will need paying jobs to pay for all the unfunded liabilities coming their way, one would hope that the president would not add to their current problems.