One of the leading economic policy challenges of our time is the persistent decline in workforce participation among working-age Americans. Economists from left to right have cited declining workforce growth as one of the principal barriers to our future economic growth, and thus to our future prosperity. It’s important to understand the causes of declining workforce participation if we are to take effective action to mitigate it. Unfortunately, economists are still struggling to fully understand – let alone offer consensus solutions to – this problem.
A recent study performed for the Mercatus Center by renowned labor economist David Neumark and Cortnie Shupe explores an especially illustrative trend: specifically, declining work by teens aged 16-19. While workforce participation by young U.S. adults has been in general decline for the last few decades, the decline among teenagers has been especially steep. In 1994 the labor force participation rate of all those aged 16-24 stood at over 66 percent but declined to 55 percent by 2014. This decline was sharpest among individuals aged 16-19: their job-holding rate dropped from nearly 53 percent in 1994 to just 34 percent in 2014.
The reasons for this decline matter, both to our understanding and to the welfare of the individuals involved. If the work decline has occurred simply because teens and their families are correctly calculating that they are better off staying in school without simultaneously holding a job, then the trend might be benign. If so, we might expect these individuals to add to their long-term earnings potential by delaying their entry into the job market. But if instead the decline has occurred because it is getting harder for teenagers to find work they would otherwise benefit from, that is a problem warranting solution.
The Neumark-Shupe study examined various possible causes of the decline in teenage work since 2000. One was whether legislated minimum wage increases were effectively pricing more teenagers (who have comparatively less job experience and fewer established skills) out of the job market. Another candidate explanation was increased competition from immigrants filling low-skill and entry-level jobs that might otherwise have gone to native-born teenagers. A third possible explanation was an increased return on education, informing a rational decision by teens to choose the long-term benefits of more time at school over the near-term benefits of employment.
Neumark and Shupe summarize their results as follows: “All three factors – the increase in the minimum wage, rising returns to schooling, and a higher immigrant share – help explain the decline in teen unemployment and more generally changes in teen employment and school enrollment. But the predominant factor underlying changes in teen employment and enrollment that began in 2000 – in particular, for those age 16-17 – is the higher minimum wage. Changes in immigration played a more limited role, and changes in returns to schooling appear to have had a negligible influence.”
Let’s discuss the education factor first: it’s true that since 2000 more teens have been enrolled in school, and that this has coincided with the decline in their paid employment. There has also been an increase in the returns to education, meaning that each additional year of schooling adds more to one’s expected income than was formerly the case. But educational returns actually grew faster in the years before 2000, whereas the decline in teenage work has been most pronounced in the years since then. More tellingly, Neumark and Shupe found that the post-2000 drop in teen employment barely diverges from expectations if there had been no changes at all in the returns to education, all other observed variables being equal. In other words, Neumark and Shupe found no significant evidence that increased returns on schooling have been driving teen employment downward since 2000.
Neumark and Shupe did find some effects of increased competition from immigrants upon teen employment levels. Teen employment was measurably lower compared with what would have been predicted if immigration from Spanish-speaking countries had remained unchanged since 1999. But these effects were limited, accounting for only a small fraction of the observed employment decline.
The larger factor explaining the post-2000 decline in teenage work, Neumark and Shupe found, was legislated minimum wage increases, often at the state level. Since 2005 there has been a sharp increase in the national average minimum wage, with several states enacting minimum wages well above the federal level. Teenagers at the younger ages of 16-17 were more likely to be displaced by these minimum wage laws – as one would expect given the lesser skills and experience of individuals at those ages.
Neumark and Shupe found that legislated minimum wage increases had significant effects both in reducing the numbers of those in school who simultaneously held jobs, and in increasing the number of those in school who were not so employed. Minimum wage increases also lowered the number of teenagers employed without being enrolled in school. Viewed from nearly every angle, the recent trend toward higher minimum wages is a significant driver of declining employment among teens.
This might or might not be concerning news were it not for another factor: the effect of this induced unemployment in lowering long-term earnings potential. If the teens who were pushed out of the job market by higher minimum wage laws had instead been receiving educations offering them improved income prospects, there would be less cause for alarm. Unfortunately, that does not appear to be the case. Neumark and Shupe found that “exposure to a higher minimum wage as a teenager is associated with lower wages or earnings as an adult.” In other words, teens whose employment has been displaced by higher minimum wage laws are not, on average, reaping compensating income benefits from extended schooling; instead they experience less income as adults as well. For these teenagers, the income losses arising from delayed entry to the workforce are not being made up by spending more time in school.
The purpose of minimum wage laws is generally to increase vulnerable Americans’ income security. But this tactic comes with a price – specifically, to reduce the opportunities of inexperienced, low-skill workers such as many American teenagers are – to hold jobs. It appears that higher minimum wage laws not only deprive many young Americans of opportunities to earn wages as teenagers, but may even lower their expected income over the rest of their lives. Lawmakers should acquaint themselves with the Neumark-Shupe findings, and reconsider whether recent minimum wage increases are hurting the very people they are intended to help.
Charles Blahous, a contributor to E21, holds the J. Fish and Lillian F. Smith Chair at the Mercatus Center and is a visiting fellow at the Hoover Institution. He recently served as a public trustee for Social Security and Medicare.
Editor’s Note: This piece was originally published by Economics21 at the Manhattan Institute.