Minimum wage laws are intended to ensure a living wage. This goal is achieved only if unskilled or inexperienced workers can find and keep jobs. Figure 8 shows the effect of imposing a $6 minimum hourly wage in a competitive labor market for unskilled workers, where the equilibrium wage is $5 and equilibrium employment is 7 million workers. As Panel A illustrates, 2 million unskilled workers are laid off when a $6 legal floor is imposed on hourly wages. Another million enter the job market at this higher wage, so 3 million out of 8 million are now unemployed, and the unemployment rate among the unskilled rises from 0 to 37.5 percent.

 

Figure 8 Minimum Wages and Unemployment

 

      Minimum-wage laws can cause involuntary unemployment among workers with few marketable skills. This especially harms young people denied experience that would enhance their future employability. As workers are disemployed in markets covered by minimum wages (Panel A), they move to uncovered markets (Panel B) paying lower wages--paper delivery, mowing lawns, or odd-job self-employment. Or they may take "off-the-books" jobs that violate the minimum wage law. But not all workers are absorbed in uncovered markets. Some may become "hard-core' unemployed, while others drop out of the labor force. Still others may become criminals.

 

      Jobless workers adjust in several ways. The million who entered the market will seek work elsewhere, but lower wages elsewhere will cause most to leave the market. The two million unemployed workers will seek work in labor markets not covered by minimum wage laws (mowing lawns, delivering papers, etc.), shown in Panel B. This increases the labor supply in this uncovered market by 2 million workers, and wages fall to $4.50 per hour. A million workers find work, but a million do not. Thus, wage floors create surpluses of workers and unemployment just as surely as price floors for goods cause surpluses of goods. And in today’s globalized world, factories have a third option other than staying in business with the wage laws or shutting down because it’s not profitable enough to remain in business: they can move their facilities abroad to a nation with lower wage restrictions. Minimum wage laws deprive some unemployed workers of job opportunities, and can cause them to give up hope.

        Our society has tried numerous cures for teenage unemployment. Asked if he was making any progress towards inventing a light bulb, Thomas Edison replied, "Why certainly. I've learned 1,000 ways you can't make a light bulb."[1] Edison eventually developed a good light bulb, but he abandoned failed experiments. Society has not fared as well. In the 8 years before 1955 when minimum hourly wages first crept over $1, teenage unemployment rates hovered around 10 percent; in the 20 years after 1974, when the minimum wage first exceeded $2, teenage unemployment averaged over 18 percent.[2] Misguided policies may contribute heavily to persistent teenage unemployment–especially for members of minority groups.

     

      Figure 9 shows that between 1948 and 1951, male African-American teenagers had lower average unemployment than whites. African-American teenagers lost steadily thereafter, now suffering twice the unemployment experienced by white teenagers. Panel B suggests that many male African-American teenagers may be so discouraged that declining proportions try to find work, while labor force participation rates among white teenagers have grown slightly over time.

 

Figure 9 Teenagers and the Minimum Wage

 

As minimum legal wages have risen (Panel A), male African-American teenagers apparently have lost jobs to male Caucasian teenagers. As a result, many male African-American teenagers have dropped out of the labor market (Panel B).

 

      Minimum wage laws also illustrate how regulations may subtly benefit special-interest groups. These laws create surpluses of unemployed workers who are primarily young and unskilled. Why do labor unions lobby for higher minimum wages even though union workers earn wages much higher than these floors? Misguided humanitarianism may play a role, but another reason is that wage floors limit the ability of unskilled workers to compete with skilled workers. For example, if two unskilled workers willing to work for $4.50 hourly apiece can, together, do the same job as a $10-per-hour union worker, a $5.50 minimum wage eliminates their ability to compete.

     

Most studies confirm a positive relationship between teen unemployment and the minimum wage rate, but the power of this effect remains controversial. One 1994 study discerned virtually no immediate unemployment effects from higher minimum wages, but other researchers who subsequently re-examined the same data have disputed this result.  Undisputed, however, is the fact that unemployment rates among teenagers–especially minority member males–have shown a strong upward trend since the 1950s.  Is only 20 percent of this trend attributable to higher minimum wages as some analysts have concluded, or is the number more like 80 percent as other researchers indicate? Even specialists in this area continue to disagree.

 

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