How rising minimum wages undercut long-term economic success

How rising minimum wages undercut long-term economic success
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Robots are invading the job market. Each day we see urgent headlines feverishly warning us of our automated futures. While the doomsday predictions of no employment opportunities for humans have yet to come to fruition, the automation revolution has certainly changed the American economy and labor market.

Making sure today’s workers have the skills necessary to succeed in the modern labor market should be a top priority for policymakers — and the best place to start is by ensuring public policies do not sabotage their chances. The skills needed to succeed in our modern economy are often learned by working entry-level, minimum wage jobs at an early age. But as of January this year, 18 states and nearly two dozen cities have inadvertently made long-term economic success more difficult to attain by raising the minimum wage, putting entry-level employment opportunities at risk.

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Over the past several decades, changes in technology, generally, and increased automation, in particular, have drastically changed the kinds of jobs available. Between 1990 and 2014, the U.S. lost more than 6 million manufacturing jobs even though manufacturing output continued to rise. Rather than causing mass unemployment, job opportunities simply shifted industries. Over the same time period, the healthcare and social assistance sectors added nearly 9 million jobs.

 

This shift in job opportunities means that decent paying, more routine, lower-skilled occupations are less prevalent. Even goods-producing occupations, such as manufacturing, now involve working with new technology and require a set of hard, or cognitive, skills that are emphasized in science, technology, engineering, and math (STEM) education. Clearly, these skills are a necessity in achieving economic success in some fields, but the shift away from a goods-based economy toward a service-based economy has shifted the kinds of skills most sought after in the labor market overall. Unfortunately, the recent narrow focus on cognitive skills has caused too many to overlook the importance of noncognitive skills, or soft skills.

Soft skills generally refer to a broad set of competencies, behaviors, attitudes, and personal qualities that enable people to effectively navigate their environment, work well with others, perform well, and achieve their goals. While these skills can be more difficult to measure, economists, such as Nobel laureate James Heckman, and psychologists, such as best-selling author Angela Duckworth, have called attention to their importance as predictors of both educational and career success. Recent research suggests that soft skills are at least as important and could be more important than cognitive skills in predicting future economic success.

Accompanying that research is a wide body of economic literature demonstrating that entry-level jobs are an important factor in gaining the soft skills that will continue to be useful throughout a career. Increasing the minimum wage distorts the entry-level job market, resulting in far-reaching consequences that the current discussion overlooks. While the immediate employment and wage effects of minimum wage increases continue to be hotly debated, the true cost of increasing the minimum wage should not be measured in the destruction of existing jobs, but rather jobs that were never created in the first place. In a 2013 working paper, Jonathan Meer and Jeremy West “find that the minimum wage reduces job growth over a period of several years. These effects are most pronounced for younger workers and in industries with a higher proportion of low-wage workers.”

This does not bode well for future generations, as a 2015 USAID report on soft skills and youth success concluded, “theoretical literature suggests that adolescence and young adulthood are optimal times to develop and reinforce these skills.” This conclusion is similar to a litany of studies that have shown career-long benefits from entry-level employment. In an interview with The Wall Street Journal, Bob Funk, CEO and founder of Express Employment Professionals, one of the nation’s largest job agencies, summarized this view stating, “Those low-paying, entry-level jobs are good training for the soft skills you need for upward mobility.”

But just as scholars and business leaders are reaching consensus on the importance of soft skills and entry-level employment in gaining them — minimum wage increases pose the greatest avoidable threat to those jobs, particularly for younger workers. In a newly released working paper from the Mercatus Center at George Mason University, David Neumark and Cortnie Shupe analyze the significant decline in teenage employment (particularly for 16–17 year olds) and find that increased minimum wages are the predominant factor in this decline. They also find “no evidence that higher minimum wages, which underlie teens shifting from combining work and schooling to being in school exclusively, led to greater human capital investment. If anything, the evidence is in the other direction.”

These findings are consistent with a 2017 working paper from Grace Lordan and David Neumark as well. Lordan and Neumark “find that increasing the minimum wage decreases significantly the share of automatable employment held by low-skilled workers, and increases the likelihood that low-skilled workers in automatable jobs become nonemployed or employed in worse jobs.” The artificial spikes in the destruction of low-skill, entry-level employment caused by increases in the minimum wage mean that for many, especially young adults and teenagers, a primary vehicle for gaining soft skills — an entry-level job — is simply unavailable.

Soft skills are increasingly important in our modern economy, and entry-level employment is a key mechanism to develop and sustain those skills. Trading slightly bigger paychecks for some adults now in exchange for America’s youth missing crucial opportunities to gain the skills for long-term economic success is deeply short sighted. Policymakers should think twice about raising the minimum wage.

Ben Wilterdink (@BGWilterdink) is the director of outreach and policy research at the Archbridge Institute, a nonprofit group aimed at supporting limited government.