Working for a better economy, better governance and a better society

By Merrill Matthews

Minimum wage-increase critics assert that arbitrarily hiking the cost of labor has its largest negative impact on the least skilled workers, which tend to be younger people just entering the workforce. If that’s true, we should be able to see some correlation between U.S. minimum wage increases and a rise in youth unemployment—and we do.

The accompanying Federal Reserve Bank of St. Louis graph tracks youth unemployment since 1970.

Graph of Unemployment Rate for Youth in the United States (DISCONTINUED)

According to the Bureau of Labor Statistics, Congress increased the minimum wage, which had been $1.60, in 1974 ($2.00), 1975 ($2.10) and 1976 ($2.30). Congress skipped 1977 and started a run of four successive years: 1978 ($2.65), 1979 ($2.90). 1980 ($3.10) and 1981 ($3.35). Correspondingly, youth unemployment began rising in 1974.

The next minimum wage increase came in 1990 ($3.80) and 1991 ($4.25). You will see on the graph that youth unemployment starts to rise in 1990 and peaks around 1992.

There was a minimum wage increase in 1996 ($4.75) and 1997 ($5.15), but youth unemployment continued a several-year decline, making this increase the anomaly.

The last minimum wage increase came in 2007 ($5.85), 2008 ($6.55) and 2009 ($7.25), and so did an increase in youth unemployment.

Thus there is an identifiable correlation between minimum wage increases and rising youth unemployment. The 1996-7 anomaly is likely explained by strong economic growth, which can mitigate the damage normally caused by bad economic policies.

Interestingly, every recession since 1970—the gray areas in the chart—was preceded by a rise in youth unemployment. Indeed, rising youth unemployment looks like a leading indicator of a coming recession.

Now, correlation does not mean causation. There are a lot of factors that affect unemployment and recessions. But the minimum wage-increase/rising-unemployment correlation is so close that dismissing any connection, as Team Obama wants to do, is economic blindness or political spin.

Merrill Matthews is a Resident Scholar with the Institute for Policy Innovation. Read more at www.ipi.org.