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Monday, January 4, 2016

The “Sub-Minimum” Wage: An Escape Hatch for Young Workers

Reviving a forgotten provision of labor law

On New Year’s Day, fourteen states raised their minimum wages, with increases ranging from small adjustments for inflation to major hikes of 10 percent or more. Minimum wages do more harm than good, and they particularly hurt the young.

Teenagers and individuals in their early twenties often lack the skills that make them valuable to employers. Therefore, they must learn these skills on the job, while not producing much for the businesses who hire them. When states (or the federal government) set high minimum wages, hiring unskilled young people will not make financial sense for most employers.

The youth (ages 16 to 24) labor force participation rate currently stands at 55 percent, down from 66 percent in 1994. While there are many reasons for this decline, the role of minimum wages cannot be ignored.

One little-known provision in federal law allows employers to pay a special “sub-minimum” wage to people under the age of 20 for up to 90 days. The sub-minimum is $4.25, or 59 percent of the federal minimum of $7.25. The exception is a small one, but it does provide a window for some young people to gain the experience they need to command a higher wage.

The problem is that many states do not include similar exemptions for young people when they raise their minimum wages, and those that do are usually much less lenient. When state and federal minimum wages differ, the higher standard applies, rendering the federal youth minimum wage out of reach for many young people looking for work.

Of the fourteen states that raised their minimum wages on Friday, seven do not include any provisions for young people. Five others have sub-minimum wages, but set them at high rates that nearly equal their normal minimums. Only two — Alaska and Michigan — allow their young citizens to work for the federal sub-minimum wage.

These exemptions are critical. Evidence shows that young workers are hurt most by increases in minimum wages, while those over 35 years of age are hardly affected at all. Indeed, older workers may actually benefit from minimum wage hikes as employers substitute more valuable skilled labor for unskilled.

Increasing youth employment should be a top priority for policymakers, as young people have been hurt the most by the weak economic recovery. Unfortunately, only 21 percent of minimum wage earners are under 20 and thus eligible for the federal sub-minimum wage, according to the Bureau of Labor Statistics. Even fewer qualify for state sub-minimum wages, for which the eligibility threshold is often 18. Federal and state governments should raise the eligibility age for access to the sub-minimum wage, as well as lengthen the 90-day limit to maximize the experience young people may gain from starter jobs.

Including sub-minimum wages in state minimum wage regimes is a simple policy that could create many new opportunities for young people, particularly minorities or those lacking a college degree. In their perennial drive to hike minimum wages, states should not forget the young.

Cross-posted from e21.