Unexpectedly Intriguing!
May 28, 2008

Recently, the weekend edition of the Wall Street Journal presented an article looking at the summer job market (HT: E. Frank Stephenson), which found summer jobs this year to be in short supply:

In the real world, summer jobs are in short supply. Only about a third of teenagers are expected to work this summer, the lowest levels in 60 years, according to the Center for Labor Market Studies at Northeastern University. Summer youth employment has fallen from about 45% of teens in 2000, a downward trend made worse this year by the faltering economy.

The passage above cites a slowing economy as the driving factor lessening the supply of jobs being made available for potential teenage hires, however Division of Labour's E. Frank Stephenson wrote the WSJ to recognize that there's a job demand side of the picture as well:

Your Weekend Journal article "My Virtual Summer Job" (May 16) blames declining teen employment on "a downward trend made worse this year by the faltering economy." Maybe so. Or maybe the reduction in teen employment is caused by the other side of the market -- the demand side -- as increasingly affluent teens and their families forgo summer jobs. Instead of bemoaning that "only about a third of teenagers are expected to work this summer," you might consider the pleasant possibility that two-thirds of teens now have the option of traveling, attending camps, or merely relaxing during their summers.

E. Frank Stephenson
Chairman
Department of Economics
Berry College
Mount Berry, Ga.

Forgetting for a moment that "Sincerely, Donald J. Boudreaux" is the standard form for signing all letters to the editor originating from the econoblogosphere, let's look instead at what both the WSJ and Dr. Stephenson missed, which in this case turns out to be the proverbial elephant in the room: recent increases in the U.S. minimum wage.

We already know that the majority of all minimum wage jobs in the United States are held by people between the ages of 16 and 24, which coincides with the ages of those most likely to be in high school and/or college. Of people within this age group, those in their teenage years, Ages 16 through 19, make up 26.1% of the total number of minimum wage earners, at least as of 2005.

The reason why this is the case is very simple. Young people generally lack the training, education and experience that can command a bigger paycheck in the job market. In fact, even these unskilled and inexperienced young people who start out their work experience earning the minimum wage don't do it for very long. The National Small Business Association surveyed its members and discovered that 73% of their members gave their minimum-wage earning employees a raise above that level within five months of being hired.

Meanwhile, these small businesses make up a disproportionate number of the firms that hire these new workers at the minimum wage. In 1999, the Small Business Administration considered the distribution of low-wage workers by firm size and found that:

Smaller firms tend to have a greater share of minimum-wage workers than larger firms. Of all minimum-wage workers, about 54% work in firms with less than 100 employees, while 46% work in firms with 100 or more employees. In addition, about 66% of all minimum-wage workers are employed in firms with less than 500 employess [sic] compared to 34% who are employed in firms with 500 or more employees.

For reference, small businesses are generally those with anywhere from 5 to 99 employees, while mid-size businesses reach from 100 to 999 employees.

Now that we've set the stage of who earns the minimum wage and who pays it, let's see why increases in the minimum wage are driving teenagers out of the job market.

In July 2007, the federal minimum wage increased from $5.15 per hour to the current $5.85 per hour, an increase of 70 cents or 13.6%. Later this year, in July 2008, the federal minimum wage will again increase by 70 cents from $5.85 to $6.55, an increase of 12.0%, or rather, a total increase of 27.2% from $5.15 per hour from the first six and a half months of 2007.

But that's only the money that's paid directly to the minimum wage earner! Let's go beyond that paycheck and consider the total cost increase for our smaller business minimum wage payer.

First, let's set the benchmark. We find that at $5.15 per hour, if we assume our minimum wage earner works at a small business of 20 employees, has no vacation, sick leave or time off benefits, is paid weekly, does not contribute to a 401(k) plan and does not have health insurance through their employer (not unreasonable for the typical minimum wage earner, as most have this kind of coverage through their parents) and is paid by check, the cost to their employer runs about $8.41 per hour.

While much of this higher amount covers government mandated expenses, such as the employer's portion of Social Security and Medicare taxes, as well as both federal and state unemployment taxes and state workers compensation, administrative expenses of actually delivering the employee their paycheck make up a larger portion of the amount over $5.15 for a firm with just 20 employees.

Now, we'll keep all the same settings and increase the wage per hour from $5.15 to $6.55. At the higher minimum wage that will take effect this summer, the employer in this case will effectively have to pay $9.96 per hour to cover the cost of employing a minimum wage earner.

For all practical purposes, a minimum wage earner will now cost 18.4% more than they did just over a year ago. (As always, if you have different scenarios that you'd like to check out for yourself, you're more than welcome to use our tool to do so!)

Once we add today's higher rate inflation into the picture, you can see that the options for small business owners are limited. Between being squeezed for profits, higher costs of goods and services and now government-mandated higher labor costs, something has to give. At this point in the summer of 2008, hiring teenagers at the minimum wage to work a significant number of hours each week would seem to be it.

Perhaps teenagers have picked up on how unlikely it is they will get a job in this kind of high cost environment and have adjusted their expectations accordingly - traveling, summer camp and "relaxing" might look good in comparison.

As for unintended consequences, as minimum wage jobs vanish and prices rise, teens are spending less, at least according to USA Today. Teen apparel retailers are being pinched through slower sales as teens have less income.

But then, USA Today missed the elephant in the room as to why teens have less income these days as well....

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