The Effect of Minimum Wages on the Labor Force Participation Rates of Teenagers

Content

Congress has been considering a hike in the federal minimum wage from $5.15 to $6.15 an hour or higher. It has been estimated that such a raise would affect over 10 million workers, many of whom are teenagers. A considerable body of research shows that while such increases might raise the wages of some workers, it would also eliminate jobs and work opportunities for others. For example, by one consensus view of this effect, a 10 percent increase in the minimum wage would reduce the employment of teenagers overall by anywhere from 1 to 3 percent.

However, this estimate ignores the fact that employers may react in other ways to a minimum wage hike. For example, when employment costs rise, employers may eliminate some fringe benefits such as training, paid insurance, transportation, or parking, so that the total compensation of workers does not rise even though wages increase. Employers may also raise their expectations of workers, including requiring greater work effort, punctuality, and less absenteeism in the workplace. Employers may increase the hiring standards for entry-level jobs, such as requiring more education or work experience. If higher minimum wages also reduce voluntary job separations, this reduces the stock of job vacancies, making it more difficult for job-seekers to find jobs.

Many of the predictable adjustments by employers to a higher minimum wage reduce the attractiveness of work. For example, if increased hiring standards and lower job vacancies increase the time and effort necessary to find an acceptable job, some potential job-seekers will decide to pursue other activities such as work at home or schooling. If increased requirements are imposed on workers, or less training is available, this may reduce the attractiveness of work itself. Walter Wessels, a professor of economics at North Carolina State University, has studied the effect that higher minimum wages have on the likelihood that teenagers will choose the employment option (i.e., to be employed or look for work). He studies teenagers, who tend to be strongly affected by minimum wage increases because many are in entry-level jobs.

In the first study in 20 years to examine this question, Dr. Wessels concludes that when minimum wages go up, fewer teens on average choose the employment option. This overall outcome is entirely consistent with the findings by others that minimum wage hikes cause teens with greater skills and experience to work more and those with fewer skills and experience to work less. Because work by teenagers has been shown to have beneficial long-term consequences on their subsequent labor force success, Dr. Wessels’ study implies that higher minimum wages reduce the future economic well-being of those who are displaced from work and discouraged from seeking work when they are teens.

Study Design - Theoretical Framework
Dr. Wessels argues that the best way to estimate the effect of the minimum wage on the value of being in the labor market is to examine its effect on labor force participation rates. The author recognizes that changes in the minimum wage can affect both the demand for and supply of labor force participants. However, he believes that the main effect of the minimum wage is through the demand side. If supply side effects occur, they are likely to reduce the supply of labor force participants through (1) raising the earnings of other family members (i.e., an income effect); (2) increasing lifetime potential earnings from work (i.e., a wealth effect); or (3) increasing the value of future work relative to current work. (a relative wage effect). Dr. Wessels believes these effects will be small because (1) minimum wages have little effect on family income, particularly for families below the poverty line; (2) wealth effects are small because the minimum wage affects teenagers for only a small fraction of their working life; and (3) he finds no evidence that teens shift their labor supply toward the future in response to a minimum wage hike.

If the minimum wage has little effect on the supply of teenage labor force participants, then its primary effect will be through its effect on the demand for labor force participants. The demand for labor force participants (manifested by employers’ wage offers and hiring activity) determines the value of being in the labor force. If this value is increased, more participants are drawn into the labor force; if the value falls, participants leave the labor force. An increase in the minimum wage may increase wages for some, but reduce employment opportunities for others, as employers substitute capital and higher skilled labor for minimum wage labor. Also, if a minimum wage hike reduces labor turnover, this results in fewer job openings, making it more difficult for new labor force entrants to find jobs. Moreover, employers may respond to increases in the minimum wage by cutting back on nonwage compensation such as health benefits and on-the-job training. Employers may also respond by reducing the flexibility of work hours or by increasing job requirements such as the pace of work. These nonwage responses make work less attractive compared with home work, leisure, or school, and reduce the value of work to actual and potential labor force participants. All of these factors operate to affect the value of being in the labor force.

Data and Estimation
Dr. Wessels uses quarterly data on the labor force participation rates of teenagers from 1978 through 1999 to assess the effects of several rounds of increases in national minimum wage rates. He was able to consider the 1978-1981, 1990-1991, and 1996-1997 increases in the national minimum wage. He finds that from 1978 to 1999, the percentage of teenage workers earning at or less than the minimum wage has generally fluctuated between just above 50 percent to just below 17 percent, and has been under 40 percent since 1991. Historically when this percentage has fallen to about 17, Congress has raised the minimum wage.

After controlling for the effects of the business cycle, per capita income, adult wage rates, and the number of teens affected by a minimum wage hike, Dr. Wessels finds that these minimum wage hikes reduced teenage labor force participation rates. These declines were statistically significant for teenagers overall, and also for whites, males, and females considered separately. Specifically, his research shows the 1978-1981 hikes reduced labor force participation by 6.85 percent (3.615 percentage points), the 1990-1991 hikes, by 4.09 percent (2.07 percentage points), and the 1996-1997 hikes, by 2.78 percent (1.31 percentage points).

Conclusion
Dr. Wessels concludes that increases in minimum wages have adversely affected young workers, as evidenced by the reduction in their willingness to work or seek employment following such increases. He reasons that this decline in teenage labor force participation is a direct result of minimum wage–induced declines in the monetary rewards from teens seeking and accepting work.