Youth Employment and The Last 30 Years of the Minimum Wage in the United States

The below chart illustrates the impact of minimum wage changes on the youth (aged 16-19) employment rates in the US over the last thirty years.

The red line represents the real minimum wage from 1983-2012 (in 2012 $ x 7 for scale purposes) as provided by the US Department of Labor.  The blue line represents the youth employment rate as reported by the US Bureua of Labor Statistics.

What the graph illustrates:

From 1983 until 1990 the purchasing power of the minimum wage was falling while youth employment increased.

There is an inflection point in 1990 where the value of the minimum wage spikes and youth employment falls.  In March 1990, the last month before the minimum wage increased to $3.85 the youth employment rate stood at 47.1%.  In April the next year, following an increase in the minimum wage to $4.25, the youth employment rate stood at 42.8%.  In a single year, one out of ten teenagers with jobs lost them.  The slide continued.  By the following March the youth employment rate had fallen to 40.2%.

The minimum wage increases of 1996 and 1997 had a smaller initial impact on youth empployment.  The youth employment rate fell from 44.4% to 44.1% the month the wage was incrased in 1996 while it fell from 43.2 to 42.8% the monthe the wage was increased in 1997.   The tightening job market of the late 1990’s helped cushion the employment blow of an incrased minimum wage.  The national unemployment rate was below 6% and was below 5% from 1998 until 2001.

The 2001 recession saw a large decrease in youth employment.  This decline stabilized from 2003 through 2007 as the real value of the minimum wage fell.  Increaed globalization decreased the domestic demand for unskilled labor in the US.  The 2007, 2008, and 2009 increases in the minimum wage rate failed to take this lower demand into acount.  The huge drop in youth employment that came with the last round of minimum wage incrases has only begun to stabilize since 2009, as the value of the minimum wage has been allowed to fall.

Between March 1990 and July 2014 the youth employment rate has fallen from 47.1% down to 27.1%.  That is, 44.8% of teenagers who held a job in 1990, no longer hold one in 2014.  Youth employment is almost half of what it was 25 years ago.

A climb up the income ladder begins by placing one’s foot on the lowest bar.  More important  than the wage they earn is the experience, on the job training, and self-respect young people gain.  If socieity truly wants more people moving up the income ladder, it must stop removing the lowest rungs of the ladder.  Sure, if you outlaw a $7.25 job people won’t  legally have them, but the alternative is not a $10.10 job, but rather, no job at all.

If the US increasesed its minimum wage to $10.10 an hour the following would result:

-          An increase in demand for illegal low wage labor (often performed by undocumented illegal immigrants)

-          A huge reduction in youth employment in lower income areas (rural states and inner cities)

-          Increased automation of unskilled work (say hello to the self-serve fast food kiosk that looks like the self-serve airport check-in kiosk)

-          The elimination of tipping as a standard American practice if servers are guarenteed $10,10 an hour whether they are tipped or not

-          A reductin in US agricultural output if the minimum wage applies to the agricultural industry

-          Increased usage of college loans as fewer young people will have access to jobs

If there is any doubt what high minimum wages and highly regulated labor markets give young people, look no further than Europe where the youth unemployment rates are: Greece (57.7%), Spain (54%), Croatia (48.7%), Italy (43%), Cyprus (37.3%), and Portugal (34.8%). Seven and a half million young Europeans between the ages of 15 and 24 are not employed, in school, or in training.

Society cannot take away the lowest rungs on the economic ladder and expect young people to pole vault into the middle class.  We know the outcome of eliminating job opportunities for young people and it is not pretty.  The purchasing power of the US minimum wage is higher now than it has been for most of the last thirty years.  Now is not the time to raise it even higher.

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Should We Transfer Money from the Top 1%?

Are you ready to forcibly redistribute income from the top 1% of income earners to the other less fortunate 99%?  Don’t answer too quickly.  An income of just $32,400 places you in the top 1% of the world’s population.  For $32,400 a year you can be richer than seven billion other people.

World’s Top      Income

1%         $ 32,400

10%       $ 13,745

20%       $ 6,715

50%       $ 1,305

The average income for people in the world is $1,305 a year.  Redistributing income from the rich to the poor would actually mean taking money from people who earn more than $1,305 a year to give it to the world’s poor.  If we define “rich” as the top 20% of world income earners, we will only start taking money from those who make more than $6,715 a year to give it to the poor.  Is there anyone advocating taking money from people in the US who earn less than $10,000 a year?  If not, why not?

A person making the federal minimum wage of $7.25 an hour working 40 hours a week for 50 weeks a year earns $14,500 .  This is enough to place them in the top 10% of income earners in the world.  Maybe instead of debating an increase in the minimum wage we should be debating increasing taxes on these “wealthy” people to help out the poor.

Let’s say that two minimum wage workers who have strong work ethics get married and pool their incomes.  If each partner worked 60 hours a week 52 weeks a year, their family income would be $45,240 which would place them in the richest .41% of the world’s population.  That’s right; you can flip burgers in the US and still be in the richest .41% of the world’s population!  Surely if redistribution from the rich to the poor is moral, we should be taking more money from affluent Americans to help the truly needy around the world.  We don’t do so either because we don’t care about non-Americans or we don’t actually think that income redistribution is just.

In the US a married family with three kids qualifies for food assistance (SNAP) from the federal government if their income does not exceed $35,844.  Said family lives within the world’s top 1% of income earners.  That means that someone feels there is a moral imperative to transfer money from the top half of the top 1% in order to give it to people in the bottom half of the top 1%.  At the same time there is no sense of moral urgency to transfer money from the bottom half of the top 1% to the bottom half of the bottom 1% of the world’s income earners.  Does that make any moral sense?  Of course not.

Shame on politicians who pander to the world’s bottom half of the top 1% telling them they are morally entitled to income transfers from the few people richer than themselves while they simultaneously have no moral claim on their income from the bottom 99%.

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The Lack of Slavery May Be Hurting Economic Growth; Or, How to Miss the Forest of Human Flourishing for the Trees of GDP Growth.

On June 13th, Tyler Cowen published a piece in the New York Times entitled, “The Lack of Major Wars May Be Hurting Economic Growth”.   In it, Tyler suggests that “the very possibility of war focusses the attention of governments on getting some basic decisions right – whether investing in science or simply liberalizing the economy.  Such focus ends up improving a nation’s longer-run prospects.”  This is the necessity is the mother of invention argument.  The focus of the argument is that man will just sit around doing the same thing he did yesterday unless he is forced to change his behavior by some pressing need.

To his credit, Tyler does suggest that more peace even with lower growth may be better than more growth but with the cost of added war deaths.  Still, he surveys academics who are seeking to revive an understanding that war may be good for GDP growth.  To show why this is a dangerous path to go down, I will (sarcastically) substitute “slavery” for “war” in the following parody article:

The Lack of Slavery May Be Hurting Economic Growth

In the first quarter of 2014 the US economy contracted by a 1% annualized rate.  Why is it that the US economy grew so quickly in the 1800’s and how can we recreate that growth?  The World Bank reports that between 2000 and 2005 real per capita income rose 1.46% a year while it rose just .07% a year between 2006 and 2010.  Between 1840 and 1860, southern states’ per capita income rose at a rate of 1.7% per year.  One key difference between the antebellum South and now is their use of slave labor.  Perhaps scholars may wish to reappraise the benefits of slave labor.

The Egyptians built large pyramids and public works with slavery.  King Solomon used slaves to build a temple and other public works.  All roads don’t lead to Rome because they were built by free men.  The Great Wall of China could not have been built without slave labor.  Without that wall, it would be boring to look at the earth from a spaceship. (Never mind that you can’t really see it from space).  Slave cultivated cotton, tobacco, rice, sugar, and indigo drove the southern economy for decades.

This week the BLS reported that Americans spend more time sleeping than working.  This preposterous development would never be true in a country with slavery.  If one man could benefit from the work of another, you better believe the latter is going to be forced to work a solid sixty to eighty hour work week.   In the mid 1800’s, male US slaves worked on average 70 hours a week.  Slave women averaged 60 hours of work a week.  Even slave children averaged 40 hours or more of work per week (Roger Ransom and Richard Such, One Kind of Freedom 1977).  Furthermore, slaves were forced to work in the gang labor system which helped to make slave agriculture 28% more efficient than free agriculture (Robert Fogel and Stanley Engerman Time on the Cross 1974).

The employment to population ratio for US adults aged 16 and over in May was 58.9%.  Under slavery, the employment to population ratio was 100%.  As soon as slaves were emancipated, the gang labor system disappeared and free blacks reduced their hours worked by a third.

Outside of a few exceptions, there are not many industries that even employ children any more.  At age eight I was working a paper route six days a week. That doesn’t happen anymore.  We could speed up the economy by putting these unproductive eaters to work.  I have four kids who could really use a job.

Come to think of it, poverty and starvation used to be really good motivators for innovation and work.  If one starved if they refused to work in the fields, people had a tendency to show up for work.  As mankind has decreased their poverty rates, their hours worked have fallen which has been a drag on economic growth.

It turns out that the use of sticks may be an effective way to increase GDP.  Whether a master uses a whip, or a foreign enemy points the tip of their spear (or nuclear war head) at one’s head, one may respond with more work and do so with greater intensity.  The threat of starvation may in fact yield advancements in farming and certainly helps employment rates.

To summarize, the problem with our economy is that we don’t want to kill/enslave others like we used to.  People are so rich they cannot even be bothered to get out of bed to go to work.  This massive existence of peace and wealth is ruining the economy.  If only we were poorer and meaner we could have faster economic growth.

With the pace of automation we are experiencing it won’t even be long until robots are doing all of our work for us.  Then where will the economy be?  At least we can enslave robots.  They are not yet a constitutionally protected class.  Maybe we have our robots attack your robots…..

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The Rest of the Story: Employment Recovery?

The Bureau of Labor Statistics released the April Jobs numbers today.  The AP reported the following as their big story: US Gains 288K Jobs, Most in 2 Years; Rate 6.3%.  The unemployment rate fell in one month from 6.7% to 6.3%.  That sounds great, but in honor of the late Paul Harvey, “and now, the rest of the story”.

Here are the raw numbers from the BLS:

Civilian noninstitutional population        +181,000

Civilian labor force                                      -806,000

Employed                                                      -73,000

Not in labor force                                        +988,000

Employment –population ratio                -.07%

Conundrum #1: How did the US economy create 288,000 jobs in the same month where 73,000 fewer people had jobs?

Answer:  The economy destroyed more jobs than it created.  The new jobs number conveniently leaves out the jobs that were lost each month.  A dynamic economy has job churn every month where some jobs are created while others are destroyed.  It is however, an odd world where a net decrease of 73,000 jobs is lauded as good economic news.

Conundrum #2: How can the unemployment rate fall even as fewer people have jobs?

Answer:  The unemployment rate is calculated by dividing the number of adults without a job but actively looking for one by the number of people with a job or actively looking for a job.  Last month over 800,000 people who were unemployed stopped looking for work.  They didn’t get a job. They just gave up looking for a job.   The employment rate fell by .07% meaning fewer American adults had a job in April than they did in March.

The takeaway:  Be careful of government statistics.  Beware further of the spinning of government statistics.  Anyone who sees a decrease in employment as a good sign for the economy is delirious.  Said people will also suggest that the lackluster .1% growth rate in first quarter GDP just means the economy has more room to grow in the future.

Job killing taxes, regulations, and increased transfer payments reduce employment.  And now you know the rest of the story.

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Give, Share, and Take are not Synonyms

A major cornerstone of the US rule of law comes from the definition and enforcement of property rights.  Long before the nation’s founding, private property had been recognized under British common law. The British did not invent private property either, as the concept goes back as long as recorded history.   Once private property was recognized, the following came into view:

Share: to have or use (something) with others

In order for sharing to occur, one who owns private property must permit another to also have use of the property.  They don’t forgo the use of the property themselves.  If a kindergarten teacher told Peter to share his toy truck with Paul, then Paul could play with the truck along with Peter, but Paul could not exert ownership of the truck.  Paul could not take it home and exclude Peter from playing with it.  People often use the term “share” when what they mean is “give”.

Give: to make a present of; to put into the possession of another for his or her use

If Peter wants to make a present of his toy truck to Paul, then Paul would indeed have the right to take home the truck and exclude Peter from playing with it.  It may not be nice of Paul to do so, but it would be his right.  Peter benefits from this transaction if he feels warm and fuzzy that he was able to voluntarily transfer ownership of his property to Paul for Paul’s pleasure.  Perhaps Peter considers Paul to be a friend and Paul’s increased happiness makes Peter happy.  If it does not make Peter happy to give his truck to Paul, Paul might well go home without a truck unless he takes Peter’s.

Take: to get into one’s hands or into one’s possession, power, or control

If while Peter was playing with his truck in front of Paul, Paul decided that he really wanted Peter’s truck, he could take it from Peter (providing he is stronger than Peter, or the kindergarten teacher agrees that Paul should get Peter’s truck and is more powerful than Peter).  Much like the scenario where Peter gave his truck to Paul, by taking Peter’s truck with enforcement from the teacher, Paul gains exclusive control of the use of the truck.  Paul can prevent Peter from coming to Paul’s house and playing with the truck.  The key difference is that Peter is unlikely to feel better as a result of the taking.  Why might Paul take Peter’s truck and therefore deprive Peter the option of sharing/giving his truck with/to Paul?

Covet; to feel inordinate desire for what belongs to another

Covetousness is specifically listed as a sin in the 10 Commandments.  That means that as long as people have claimed private property, others have looked enviously at their neighbors’ stuff.  As a result, much of government’s early role was dedicated to the protection of property rights from foreign invasion and thieves (the two largest groups of covetous people).  While taxes were not levied equally on everyone, everyone could share in the benefit from the protection of property rights.

Through time governments expanded their scope to encompass the provision of public goods such as roads, aqueducts, gardens, parks, and public buildings.  While tax revenues were assessed to people at various levels, all could share in the benefit the public goods provided. Rich and poor travelers alike could use the road between market towns.  Only after the implementation of the personal income tax did the US federal government use federal tax revenues in earnest for roads, sewers, parks, and public infrastructure.

Ever since the New Deal (and in large part due to the Great Society), the nature of government has changed.  The federal government has been collecting larger amounts of tax revenue while dedicating smaller and smaller portions of the spending to the provision of public goods and the protection of property rights.

In 2013, only 3% of the federal budget was spent on transportation and infrastructure. Defense spending totaled 19% of all federal spending.   By contrast, 24% was spent on Social Security, 12% on safety net programs, and 22% on subsidized personal health care.  By 2014 more than 2//3 of all federal spending was taken and given rather than taken and shared.  The US federal government first morphed from being the chief protector of property rights into the chief sharer of property.  More recently they have morphed again into the chief taker and giver of property.

When Paul buys a steak with his food stamps, Peter is not invited to Paul’s house to share the steak with him.  When Paul receives free medical visits, Peter does not get his blood pressure checked as well.  When Paul gets a check in the mail from the government, he does not have to buy Peter so much as a thank you card.

While politicians continue to talk about using the tax code for people to share their income/wealth with others, they have been dramatically changing their behavior.  The US federal government does a lot of taking and very little sharing anymore.  They take from Peter to give to Paul rather than allowing Peter to give to Paul or even making Peter share with Paul.

This is why our public infrastructure is crumbling and politics has become more divisive.  Government has replaced taking and sharing (which unites people around common public interests) with taking and giving (which deprives people the joy of giving while losing common public goods).  Those that were happy sharing are much less happy giving, and those who used to have to share are now never satisfied with what they are able to take.


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Kentucky’s Budget and Tax “Reform”

Kentucky’s taxing, spending, and borrowing policies are haphazard at best.  At worst, they are working to impoverish average Kentuckians.  In 2012, the poverty rate in Kentucky was 18.6%, well above the national average of 14.9%.  A big reason why Kentucky’s poverty rate is so high is that Kentucky’s employment rate currently ranks 39th among US states.  It is difficult to climb out of poverty without showing up for work.  A mere 56.2% of adult Kentuckians have a job.  What Kentucky needs is a sound budget complete with tax reform that stimulates job growth in the Commonwealth.

On the positive side, Governor Beshear’s tax reform proposal reduces some business taxes, slightly reduces the marginal income tax rate from 6% down to 5.9%, and expands the earned income tax credit. On the margin, these all make work more profitable.  On the negative side, the governor’s tax reform proposals collectively seek to raise Kentucky’s tax burden by $210 million a year.  A whopping $73 million of this money comes from increasing the marriage penalty for married income tax filers.

Rather than simplify the state tax code, the governor’s proposals unduly complicate it.  The business and personal tax cuts are financed by increasing sales taxes on “selected” services.  Extending the sales tax to all services would do a better job of broadening the tax base allowing for further reductions to state income tax rates.  Instead, the governor picked out certain industries to pay fewer taxes such as the horse, beer, wine, and distilled spirits industries, while increasing taxes on other industries such as fitness facilities, home security system providers, landscaping companies, and car repair service providers.  The governor further relies on raiding 51 funds to cover $370 million of spending.  Using one-time money to cover recurring expenses is an act of fiscal desperation.

The proposed $210 million tax increase does not cover the governors proposed increase in state spending.  In Kentucky, oddly, a balanced budget only means the legislature can spend what it collects in taxes plus what it borrows.  The governor has proposed $1.96 billion in new state borrowing over the next biennium.  From 1992-2003 Kentucky borrowed and spent $4.24 billion more than it collected in taxes.  From 2004-2015 they will have borrowed and spent $11.18 billion more than it collected in taxes.  Kentucky already has one of the worst bond ratings in the country.  Adding nearly $2 billion in new debt will increase the percentage of the budget that is needed to service state debt thereby putting further strain on future budgets.

Governor Beshear again chose to ignore proven job creating policies such as becoming a right to work state, or dumping prevailing wage laws.  Doing the latter would save taxpayers more money than the governor proposed in new tax increases.  States that de-emphasize state income taxes and allow workers a right to work without joining closed shop unions have created significantly more jobs in the last decade than have states that punish work and worker choice.

Policy makers have a choice.  They can pursue pro-growth economic policy, or they can continue to pretend that they can borrow and spend their way to wealth.  Unfortunately the governor has chosen the latter.   All Kentuckians will pay as a result.

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Seven Habits of Highly Effective Economies

Stephen Covey first published The Seven Habits of Highly Effective People in 1989.  My children can name all seven habits because they are drilled into them at their local public school.  More effective people undoubtedly would create a more effective economy.  Below I attempt to apply the seven habits to an effective economy.

Habit 1: Be Proactive

The whole point of this habit is to take personal responsibility for your actions.  It is to realize that one’s own decisions determine the effectiveness of one’s life.  The Victorian concept of deserving and undeserving poor comes to mind.  To be sure, poverty in the US can be caused by illness, accident, age (being born into a poor family), or inability to find work.  Still, it is a concept best applied to people born into Third World countries who, due to no fault of their own, face institutional barriers to becoming wealthy.

Choosing to drop out of school, have children out of wedlock, take illicit drugs, commit crimes, and not show up for work are qualities in no short supply among America’s poor.  These are all active choices people make that directly result in poverty.  Take any two states in the US and you will find if one state has more high school dropouts, out of wedlock births, illicit drug use, and criminal activity, while maintaining a lower employment rate, it will be the poorer of the two.

When citizens take responsibility for their own choices they are being proactive.  Proactive people are highly effective people.  A collection of proactive people produce proactive economies.

Habit 2: Begin with the End in Mind

The idea is to discover one’s values and one’s goals.  Countries that want to be prosperous must think about how that wealth is created.  Economic freedom, for instance, is highly correlated with per capita GDP.  People who save a portion of their income begin with end of prosperity in mind.  People who spend their entire income and then max out their credit cards quickly come to an end with the beginning in mind.

Teaching students that economic freedom and fiscal responsibility are ideals to be valued and sought after help them to set end goals that define how they begin their economic lives.

Habit 3: Put First things First

This is the physical manifestation of the first two habits.  For economies these are the public policies that allow them to implement the first two habits.  This begins with educational policy which does not shy away from financial literacy, the importance of savings, and the importance of taking responsibility for ones choices.  Countries that are effective teach their children the value of education, family planning, healthy consumption habits, honesty, integrity, and industriousness.

Governments that run up debt and unfunded pension liabilities are not beginning with the end in mind,  (see Greece and Detroit).  Social safety net programs that refuse to address criminal activity, laziness, drug use, or out of wedlock births do long term damage to those who need the safety net the most.

By focusing government policy on increased consumption today regardless of future consequences, countries doom their citizens to a permanent underclass.

Habit 4: Think Win-Win

There is no habit more imbedded in a free market economy than think win-win.  Free market economies are based on voluntary exchange.  Voluntary exchange, by its very nature, involves two or more parties that believe they are benefiting from a transaction.  If I buy a banana from the store, the store wins by having my money and I win by obtaining a tasty potassium conveyance.

Rent seeking activity is the enemy of win-win.  When countries allow individuals and companies to lobby government officials for special favors or access to others’ wealth they are not engaging in win-win thinking.  While individuals can become wealthier by making wealth or taking wealth from others, a country (absent an offensive war that takes other countries’ wealth) can only become wealthier by creating wealth.

Because trade and exchange are win-win, lowering trade barriers is a key ingredient to being a highly effective economy.

Habit 5: Seek First to Understand, Then to be Understood

Countries that encourage people through the political process to first ask, what’s in it for me don’t possess habit 5.  J.F.K.’s corollary was “Ask not what your country can do for you; ask what you can do for your country.”  Politicians who promise to take other people’s stuff to give it to those who support them do their society a disservice.  By classifying people into categories, based on income, race, ethnicity, gender, or other qualifying characteristics, governments pit one group against another.  They attempt to convince voters that their lives would be better but for people in other groups.

Effective economies are made up of people who see value in everyone – even the bourgeois capitalists.  Venezuela is not an effective economy.

Habit 6: Synergize

This habit encourages people to use the strengths of people through positive teamwork.  Adam Smith refers to this as specialization and division of labor. It is what he concluded in his Inquiry into the Nature and Causes of the Wealth of Nations (1776) as a key determinant of the effectiveness of an economy.

Giving people the autonomy to seek out and use their strengths requires that they have property rights to their work product.  This allows them to specialize and trade with others.  Large amounts of government regulations regarding the production and transfer of goods and serves work to decrease an economies synergies.

Habit 7: Sharpen the Saw

Constant self-improvement makes people more effective over time. Countries that believe that the best is yet to come are effective if they devote their time and resources to improvement in knowledge, technology, infrastructure, and wealth creation.  Countries that disincentivize self- improvement through highly progressive tax codes are not effective economies.  Tax codes should be set up to encourage rather than discourage continuous self-improvement.

Taken together, the same habits that make individuals effective, also work to make economies effective.  What is good for the goose is also good for the gander.  Perhaps it would be worth encouraging the educational establishment to apply the seven habits to macroeconomic policy.  If they did so, we would find our economy to be entirely more effective.

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Minimum Intelligence: Recent History of the Minimum Wage and Teenage Employment

Between 1955 and July 2013, the employment rate of teenagers aged 16-19 fell from 43.4% to 26.6%.  Rising family incomes surely allowed some youngsters to avoid the workforce altogether and rely on their parents for their material needs and wants.  However, rising incomes is only a small part of the story.

The teenage unemployment rate in 1955 was 11.1%.  Adding together those teenagers with a job to those who wanted a job but could not find one, brought the teenage labor force participation rate to 54.5%.  Last month the teenage unemployment rate stood at 23.7%.  This brings the current teenage labor force participation rate to 50.3%.  While the employment rate among teenagers fell 16.8 percentage points, only 4.3 percentage points (or less than ¼ of the change) was due to fewer teenagers looking for work.

While there may be many causes that have conspired to increase the teenage unemployment rate in the US, one direct source cannot be denied: the increase in the federal minimum wage.  The chart below illustrates the change in the minimum wage since 2002 (in constant 19996 $) along with the change in the youth employment rate. (I note the employment rate because the proponents of increasing the minimum wage argue that more teenagers will seek work if work becomes more rewarding).

The 2007 increase in the minimum wage took a stagnant youth employment rate and placed in on a downward trend.  Only two years after the final round of increases came in 2009 did the emplyment rate stabilize.  In July 2007 (which predates the recesssion which officially began in December of 2007) the minimum wage was increased from $5.15 an hour to $5.85 an hour.  Teen employment fell the first month of implementation and continued to fall.  In July 2008, it was raised to $6.55 an hour;  teenage employment fell by a larger amount than the year before and continued to fall.  In July 2009, the minimum wage hit $7.25 an hour and there was an even larger percentage drop in teen employment even though the recession had  officially ended in June 2009.  What was a recovery for the nation was not one for teenagers as their employment rates did not start increasing until 2011 and still remain lower than where they were at the end of the recession.

Date                    Teenage Employment Rate

June 2007           35.0                                                  June 2010           25.1

July 2007            34.7                                                  July 2010            25.5

June 2008           32.8                                                  July 2011            25.2

July 2008            32.1                                                 July 2012            26.7

June 2009           29.0                                                  July 2013            26.6

July 2009            28.6

Slight job gains for teenagers have only materialized because the minimum wage has stopped increasing.  Those who are now pushing for a $10.10 federal minimum wage would drive teenagers out of employment even faster than was done with the last minimum wage increase.  As noted above, the higher the minimum wage goes relative to the teenager skill set, the greater the loss of employment for teenagers.

Annectdotally, I was working a minimum wage job at a small movie theater when the minimum wage went from $3.80 to $4.25 in 1991.  The immediate impact of the increase was felt by the employees of our theater.  Management fired some of my fellow teens.  Those that remained had to work harder.  In addition to starting the movies in the projection booth, I now had to work the conession stand before and between movies.   My hourly wage increased, but so did the amount of work that was expected of me.  The other thing that happened is that we immediately increased the price of concession items to pass the labor cost onto movie watchers.  Higher unemployment, harder work, and increased inflation are my first hand memories of that joyous day when the government intervened in the life of this teenager to make it better.  Too bad for the teens who lost their job or who now had to pay more to see a movie.  Some say that was a small price to pay for “progress”.   I am not among them.

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Pain and Gain: The Economic Principle, not the Movie

What’s not to like about increasing living standards for everyone?  Most people agree that economic growth is good because it allows people to have better access to food, clothing, shelter, health care, education, entertainment, and other nicer stuff.  A few don’t like economic growth because they mistakenly believe growth is bad for the environment or bad for the soul, though even the Amish are beginning to embrace non-agrarian businesses in search of a higher standard of living.

What is the best way to increase one’s standard of living in the short term?  Work.  Long term? Gain skills that are in demand and then work to use them.  As Peggy Noonan notes today, work is good for both the soul and the pocketbook.  Monday is Labor Day where we give many people the day off of work to honor their productivity throughout the year.  The problem is that the US labor force participation rate is the lowest it has been in 34 years. A smaller percentage of people in the US are actually working than at any point in a generation.

It is one thing if people don’t think they need to work because they feel they already have everything they want.  However, this is not the case with the majority of Americans.  Not only do many want their standard of living increased, they feel that such an increase is owed to them regardless of whether they work more or gain more desired skills. Some suggest we are entitled to cheese puffs, a house, all you can consume health care, and a college degree whether or not an able bodied person works, or bothers to study.

Yesterday, across the nation, fast food workers went on strike for higher wages.  They demanded more pay for no more work or no new skills.  Politicians are often sympathetic to the cry of people who want more without doing more.  Minimum wage laws try to circumvent the laws of supply and demand by mandating higher wages for low skilled work.  The result of higher minimum wages is a teenage employment rate that has fallen from 38% in 2003 to 26.6% last month.  Employers don’t hire employees whose marginal productivity is less than the wage they are forced to pay.  Now we have a generation of kids with no labor market experience and no sense of work related purpose.

The Affordable Health Care Act mandates that people be given health benefits without any increase in work or skill set.  Try as they might, politicians cannot over-rule supply and demand.  Employer responses have been to cut wages, lay off workers, and cut the number of hours worked by part time workers.  The goal of better access to health care for all is laudable.  Taking short cuts that do not involve increased work and or job skills will never be sustainable.

Can we have a better life with greater ability to pay for our needs and wants?  Sure.  Will we be able to achieve this while working less?  Don’t count on it.  No Pain, no Gain.  It is as true in life as it is in the gym.

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Job creation, not more taxes, will spur Ky. prosperity

The following appeared in the May 27th edition of the Lexington Herald Leader.  It was written as a response to Jason Bailey’s May 4th  editorial in the same paper.

Jason Bailey, director of the Kentucky Center for Economic Policy and a member of the Governor’s Blue Ribbon Tax Reform Commission, argued that the Bluegrass state needs to take “bold revenue action” to fund increased government spending.  Bailey is correct that Kentucky’s fiscal house is not in order. He also is correct that the commonwealth’s tax code could stand some improvement. Unfortunately, his policy prescription of higher taxes and more government spending will only make matters worse for the average Kentuckian.

According to the Federation of Tax Administrators, Kentucky ranked No. 13 in 2011 for tax burden as a percentage of personal income of any state government in the country.  Of Kentucky’s neighboring states, only West Virginia ranked higher. Virginia, Tennessee and Missouri all ranked in the bottom 10 states for tax burden as a percentage of personal income.  If the commonwealth’s tax burden already is at the high end of the national average, why is Bailey suggesting that Kentucky’s problem is a lack of revenue?

In 2011, Kentucky ranked No. 9 for state government spending as a percentage of gross state product (GSP). The only neighboring state to rank higher was West Virginia. Illinois, Indiana, Tennessee and Virginia all ranked among the 10 lowest-spending states.  By advocating for higher taxes and more government spending in Kentucky, Bailey appears to have West Virginia envy: If only Kentucky were more like West Virginia, our problems would be solved.

In 2012, Kentucky had the third-highest state debt as a percentage of GSP of any state. Illinois was our only neighbor in the top half of states for debt-to-GSP ratio.  And it gets worse. In 2011, Kentucky ranked seventh for unfunded public pension liability of any state. Unpaid promises today become tomorrow’s debt.  In summary, the problem plaguing Kentucky is that it is spending too much, not too little.

Does the commonwealth have a tax problem? Yes, but not in the way Bailey thinks.  Tax revenues already are high relative to incomes in our state. Increasing taxes further will only chase more jobs from the commonwealth.  In 2010, Kentucky ranked No. 43 for employment-to-population ratio of any state. Only seven states in the country (including West Virginia) showed up for work less than Kentuckians. Higher income taxes would only further discourage work in the commonwealth.

Kentucky’s relatively small labor force compared to its population tells us that the income tax base is not very broad. It requires high rates to generate revenues.  These high rates cause jobs to move elsewhere, making it even harder for Kentuckians to find gainful employment. The governor’s tax commission was wise to suggest lowering income-tax rates, but should have gone further in its proposed rate decrease.  Also, only 11 states have a more centralized tax policy than Kentucky.

Real growth-inducing reform would decentralize taxing and spending out of Frankfort, reduce tax revenue, spending and debt relative to Kentucky’s income, and shift the remaining tax burden from a narrow tax on workers to a broader tax on consumers. Only then will Kentucky be truly fiscally competitive with surrounding states.  In short, Bailey suggests that an increased dose of fiscal poison will cure ailing commonwealth finances when, in fact, what is needed is a strong dose of fiscal responsibility, decentralization and job-spurring tax reform.

Kentucky cannot tax, borrow and spend its way to the promised land, but it can work and save its way to prosperity — if only state leaders would let it.

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