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Why the Minimum Wage Law Causes Unemployment
The Effects of the Minimum Wage on Teenage Employment
We have looked at the relationship between minimum wage rates and unemployment for two demographic groups that historically have been at the low end of the wage and skill spectrum: teenagers and nonwhites. We graphed the purchasing power of the minimum wage (or the real minimum wage) and the unemployment rate of teenagers over the 12-year period from 1983 through 1994, using quarterly data from the U.S. Department of Labor.22 Following the reasoning above, we expected to find a strong positive relationship between the two variables. Figure II shows the results.
- Teenage unemployment rates fell from the 22-23 per cent range in early 1983 to less than 15 percent by the beginning of 1990, at the same time that the real minimum wage was falling from about $5.15 to under $4.00 (in late-1994 dollars).
- The minimum wage rose in two steps in 1990-91 and teenage unemployment rose with it, peaking a few months after the new minimum peak in the second quarter of 1991.
- Subsequently, teenage unemployment rates fell, although not to the low levels of 1989 or early 1990, coinciding with the decline in the real minimum wage because of inflation.
On the whole, the teenage unemployment rate moves in tandem with changes in the real minimum wage.
A criticism of the reasoning behind Figure II is that the changes in the teenage unemployment rate reflect in large part changes in overall unemployment. The fall in teenage unemployment in the middle and late 1980s, for example, might be expected since unemployment in general was falling, probably for reasons largely unrelated to the minimum wage laws.
To deal with this, we calculated what might be termed the "excess unemployment" of teenagers, determined by subtracting the overall unemployment rate from the teenage rate. This calculation measures the extent to which teenage unemployment exceeds the norm for the whole population. Figure III shows the strong correlation between the real minimum wage and excess teenage unemployment. When the real minimum wage fell, the disparity between teenage and "normal" unemployment also fell; when the real minimum wage rose in 1990-91, the disparity grew, only to decline again in the past two years in response to the fall in the real minimum wage.
A picture is worth a thousand words. Figure III shows that teenage unemployment has been raised by increases in the real minimum wage over the past dozen years. The use of alternative statistical techniques (e.g., regression analysis) confirms the finding, and the relationship is highly significant in a statistical sense. While a more elaborate analysis incorporating a number of control variables would be needed to measure the unemployment effects with any precision, it is clear from this analysis that the loss of jobs from a 90-cent minimum wage hike would be measured conservatively in the hundreds of thousands.