Minimum wage hikes and education
From Tech Central Station:Â
Most of the arguments over minimum wage hikes center on the impact on employment.Â
Basic price theory from Econ 101 tells us that employers faced with higher wage bills will hire fewer workers. Proponents of higher minimum wages counter with various empirical studies purporting to find no loss of jobs and various theoretical explanations for why standard price theory might not apply to this market. Opponents of wage hikes counter with their own studies and theories. And so the weary day wears on.
But another issue is, what will people who are eligible for the minimum wage be doing instead of earning it?Â
At the outset, it is critical to recognize that the minimum wage debate is mainly a debate about how much working teenagers and twenty-somethings in their first job ought to make. The federal Bureau of Labor Statistics reports that (in 2002):
“Minimum wage workers tend to be young. About half of workers earning $5.15 or less were under age 25, and slightly more than one-fourth were age 16-19.”
The 16-19 age group is largely made up of kids who are in school. Under age 18, they’re almost certainly in high school. They are very likely not supporting families — except possibly the families of the owners of theaters, fast food joints, and shops in malls. Raising the minimum wage for these people can get them to make decisions that are not the best for their futures:
If you stay in school, you sacrifice current wages for higher future income. If you drop out, you likely will have a lower lifetime income, but start making money immediately.
…
Although there are several ways for a business to make capital budgeting decisions, the simplest and most relevant to our hypothetical teenager is net present value. You therefore should discount to present value the net stream of income that would be generated by each of your choices.
The problem is that research in behavioral economics suggests that young people tend systematically to err in assigning discount rates; specifically, because they tend to be systematically biased in favor of current consumption, they tend to use too high a discount rate in making such calculations. As a result, the prospect of an immediate income will be given too much weight in their calculus and the prospect of higher lifetime earnings in the future too little weight and, when deciding between work and a present paycheck versus staying in school and deferral of income, they will tend to err towards the former.
In conclusion:
The foregoing analysis has two specific implications for minimum wage policy. First, a differential lower minimum wage for those who have not completed a high school degree should result in a lower dropout rate.
Second, and here is where I think Schwarzenegger is wrong, the minimum wage ought to be indexed. Under current law, we get episodic large hikes in the minimum wage. In the interim between hikes, inflation tends to erode the value of the minimum wage, which will encourage teenagers to stay in school. In the year that a large hike occurs, however, the growth in the minimum wage far outstrips inflation, which tips the balance in favor of work. An indexed minimum wage, which grew steadily and no faster than inflation, would avoid the potential for biasing the choice between work and school.
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