Tuesday, December 31, 2013

Raising The Minimum Wage Hurts America's Youth

If you listen to President Obama, raising the minimum wage is nothing but a win-win situation.  It will pull people out of poverty and strengthen the middle class.  But, whenever the Federal government injects itself into business activities, there are many more losers than there are winners in the process.  And, when it comes to raising the minimum wage, one of the biggest losers is youth employment.

The reason for this is simple.  A higher minimum wage results in unemployed adults (those age 24 and above) being more willing to compete with unemployed youths (those16 to 24 years of age) for entry-level job openings. In turn, employers are more likely to hire adults with proven work records versus young people with little or no work experience.

To prove my point, you need only look at a couple of charts.  The first chart is that of the Civilian Unemployment rate for the years 2007 through and including all of 2011. (Note: the chart and its data are extracted from FRED - the Federal Reserve's economic database. The red notations are mine.).

In the world of economics,  the measurement of unemployment rates is considered a "lagging" indicator.  This means that, when there is an economic downturn, like a recession, it takes a few months into the recession before employers actually realize that their businesses are being hurt and they need to start laying people off.  Then, when a recession ends, there is a similar lag before employers start rehiring again and the unemployment rate declines. On this chart, I have noted these "lags" in red.  But, there's something odd about this chart.  In May of 2007, the unemployment rate uncharacteristically rose prior to the recession; moving from a low of 4.4% to 5% before leveling off in late 2007. 

To understand what was happening in 2007, you need to look at a similar chart of youth unemployment; which is a subset of the above chart.

Now, unlike the prior chart, I've included 2006 data to show just how flat the Youth Unemployment Rate was in the year prior to 2007.  But, in 2007, there was a dramatic increase; months before the recession hit.  The sole reason behind this was the passage and implementation of the Fair Minimum Wage Act of 2007 where the minimum wage went from $5.15 an hour to $5.85 in 2007; upped again to $6.55 an hour in 2008; and, again, in 2009 to the current rate of $7.25/hour.

Further proof that adults have been literally "stealing" entry-level jobs away from our nation's youth comes from how slow youth unemployment has recovered in comparison to overall unemployment.  In 2010, both youth unemployment and overall unemployment rates topped out.  Since then, general unemployment has been lowered to a 7% rate from its high of 10.1%; a 31% improvement.  On the other hand, youth unemployment has only moved downward from a height of 18.4% to the current rate of 16.5%; a mere 10.3% improvement. 

The problem with sustained high youth unemployment is the fact that society, in general, is jeopardized.  For one, idle youths due to high unemployment rates have resulted in a 40% rise in gang membership in the period 2009 to 2012; as reported by the FBI.  And, I'm quite sure that trend didn't abate in 2013.

Additionally, social programs like Social Security and Medicare are highly dependent on a broad base of younger workers paying into these systems in order to support the high cost of retiring workers.  Without younger workers in the workforce, the two programs could go bankrupt a lot earlier than projected.  More importantly, the increase in the minimum wage and, the sustained high rate of youth unemployment, may be creating a permanent underclass of marginally employable workers or totally unemployable workers who will be stuck in poverty for their whole lives.  Just the opposite of Obama's belief that raising the minimum wage will pull people out of poverty.  To that point, the high youth unemployment rate may be one of the primary reasons why the record high number of people in poverty, 46.5 million, hasn't come down one iota since 2010.  This at a time when general unemployment has improved by more than 30%:
Besides what I've shown above, there have been dozens of research studies that have proven that raising the minimum wage costs jobs and hurts the economy; but, liberals like the President, and other activists, continue to ignore the truth.

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