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Commentary By Diana Furchtgott-Roth

Rising Minimum Wage, Rising Teen Unemployment

Governance, Economics Civil Justice

Imagine a news story about the ongoing plunge of the euro without mentioning Greece. That’s like writing about the big increase in the teen unemployment rate without mentioning the parallel increase in the U.S. minimum wage, which rose in three steps from $5.15 an hour in 2007 to $7.25 an hour in 2009.

Just such a story appeared in The New York Times on Monday. Headed “Job Outlook for Teenagers Worsens,” the article described the difficulties teens are having finding jobs this summer. No mention of the increased minimum wage, which is pricing teens, who usually qualify only for entry-level slots, out of the job market.

The increase in the minimum wage, a rider to an emergency appropriations bill providing funding for the troops in Iraq, was one of the first laws passed by the newly-Democratic Congress in 2007. It was signed by President George W. Bush after he vetoed a prior version.

As the adult unemployment rate rose over 5 percentage points from 4.0% in April 2007 to 9.2% in April 2010 (data for May due tomorrow), the teen rate increased by almost 10 percentage points, from 15.6% to 25.4%.

The Labor Department is throwing up yet another obstacle for youngsters who seek to occupy themselves by putting pressure on employers not to offer unpaid internships. Increasingly popular in recent years, internships give young adults experience that they use to get paying jobs in the future.

The Times story, by a contributor named Mickey Meece, mentions several possible reasons for higher teen unemployment - state and local budget cuts, expiration of stimulus funding, and competition for jobs with college graduates and the adult unemployed. But no mention of the minimum wage.

David Neumark, professor of economics at the University of California (Irvine), and William Wascher, an economist at the Federal Reserve, have reviewed over 100 studies on the effects of the minimum wage on employment in a 2007 paper entitled “Minimum Wages and Employment.” They conclude that “among the papers we view as providing the most credible evidence, almost all point to negative employment effects, both for the United States as well as for many other countries.”

Neumark and Wascher specifically mention teens and low-skilled workers. They conclude, “Moreover, when researchers focus on the least-skilled groups most likely to be adversely affected by minimum wages, the evidence for disemployment effects seems especially strong.”

Ms. Meece’s solution-a typical New York Times prescription for more government intervention in markets - “Push lawmakers to come up with money for summer youth jobs programs as Congress did last year.”

In fact, a recently-passed House of Representatives jobs bill, yet to pass the Senate, has allocated $1.2 billion for youth summer jobs programs. Even if signed into law this month, it will come too late for the summer of 2010.

Here’s another approach, one that would not add to the federal deficit. Why not expand the federal minimum wage exception for teens? Under federal law, employers are allowed to pay teens $4.25 an hour for 90 consecutive calendar days, or until their 20th birthday, at which point the wage has to revert to $7.25 an hour.

The minimum wage exception is complex. Employers must show that teen workers don’t displace others. Moreover, if the state minimum laws don’t specifically include a teen exception, teens have to be paid the regular minimum.

Minimum wage laws in two large states, California and New York, don’t mention teens. These states’ 2009 teen unemployment rates, at 33% and 27% respectively, were higher than the U.S. average, then 24%. In contrast, Texas law exempts teens for the first 90 days, and its unemployment rate was 21%, lower than average.

The Times story links teen unemployment to a trend towards unpaid internships, saying: “There is no simple explanation for the large drop-off in summer jobs this decade, though experts say that more high school students are choosing to volunteer and do internships to burnish their college applications.”

No matter the strength of that connection, the Labor Department has been making it harder for teens to get these unpaid, temporary positions, work which some employers later will value as experience. It has issued a new fact sheet describing circumstances under which students can work as interns. Among other criteria, the internship has to be “educational,” whatever that means, and it must benefit the student and not benefit the employer.

These regulations are practically unworkable. What if the student is benefiting from the internship at the beginning of the summer, and then gets bored? Must he quit? Conversely, what if he becomes so experienced that before summer is over he does useful work that benefits the employer? This sort of micro-intervention in labor markets, possibly a response by the Department to union pressure, illustrates regulation run amok.

The new regulations will have a particularly chilling effect on students who want to intern for businesses, since the Labor Department has admitted that it will discriminate against these employers. Deputy Administrator of the Wage and Hour Division Nancy J. Leppink told The New York Times in an article published on April 2, “If you’re a for-profit employer or you want to pursue an internship with a for-profit employer, there aren’t going to be many circumstances where you can have an internship and not be paid and still be in compliance with the law.”

In other words, interning for ACORN is fine, but watch out for that internship with Santa Cruz Capital.

As hard as it is for American teens, it is worse in Europe. There, governments have taken every possible step to discourage teenagers from working. Wages are regulated to be high, it is costly to hire new workers and even more costly to let them go, and summer internships are practically nonexistent. As a result, young Europeans have a harder time getting started up the career ladder than Americans do.

Rather than recoil from the European experience, our political leaders appear intent on recreating it at home. This is bad news for American teens and bad news for America.

This piece originally appeared in RealClearMarkets

This piece originally appeared in RealClearMarkets