Author: randall j. pozdena ph.d.

Making Youth Unemployment Worse

The unintended negative effects of raising minimum wage rates

By Randall Pozdena and Steve Buckstein

President-elect Donald Trump has nominated the CEO of one of the nation’s largest fast food chains to serve as U.S. Secretary of Labor. The food preparation and serving industry employs almost half of all minimum wage workers. It is thus widely assumed that the nominee would be unfriendly to minimum wage regulation. Efforts such as the union-financed Fight for 15 are seeking to raise the federal minimum wage in the food service industry to $15 per hour—a 52 percent increase over the $9.87 average pay rate in the industry today.

The spotlight has thus returned to the issue of minimum wage regulation, including the impact of recent Oregon legislation. SB 1532, passed in 2016, phases in a $14.75 minimum wage in the Portland metro area, and $13.50 and $12.50 respectively in other metro areas and rural areas, by 2022. The average annual increase over the prior (statewide) minimum wage would be 8.5, 6.6, and 5.0 percent respectively for these three tiers over the 2016-2022 phase-in period. As with the last major reform in 2002, the legislated minimum wages would be adjusted after that time by any increases in the CPI.

To put these events in perspective, Cascade Policy Institute has released a major, new analysis of the history, theory, and empirical impacts of minimum wage regulation. The report focuses on the labor market impacts on youth, aged 16 to 24—the age cohort most likely to be affected as new entrants into the labor force. The study uses data and statistical techniques that, for the first time, allow measurement of how the impact of an increase in the minimum wage evolves over time, not just in the period immediately after the increase. In addition, it allows prediction of the interaction of the minimum wage shock with employment, wages, and labor force participation over time.

The findings have ominous implications for youth labor markets. First, as many studies over the past fifty years have shown, the new study finds that increases in the minimum wage significantly depress youth employment and labor force participation. The share of youth employed falls by 3 percent in just the first six months after a 10 percent increase in the minimum wage, and it falls by 6 percent after a year. Similarly, the share of youth participating in the labor force declines by 4 percent at 6 months and 6 percent at 18 months.

Second, contrary to the claims of minimum wage advocates that higher minimum wages create a cascade of even greater increases, youth wages only rise by the amount of the mandated increase—and then only for those lucky enough to find a minimum wage job. Collectively for all youth, what wage increases occur are more than offset by condemnation of a large share of youth to a zero wage; namely, to unemployment.

Third, the study finds that even a one-time increase in the minimum wage persistently continues to depress the share of youth who are employed. Specifically, statistically significant employment impacts can be expected to cumulate over time for at least five years into the future. Even seemingly innocuous increases in the minimum wage—such as Oregon’s prior 2002 policy of adjusting for the CPI—can significantly depress youth employment. Since the implementation of that adjustment policy fourteen years ago, the previous 56 percent share of youth employed has fallen to just 46 percent, an 18 percent decline. Thus, it appears that inflexible, automatic CPI indexing is inferior to letting markets set youth wage rates.

Oregon’s newest policy of legislating different minimum wage levels among metro and designated rural markets is, ironically, a concession to the reality that unregulated private market forces better balance the supply and demand for youth labor. Since the state imposed higher-than-market levels of wages nonetheless, the new study uses its findings to estimate the impact on the three tiers’ respective youth labor markets.

Although detailed, localized youth employment data for Oregon does not exist, application of the nationally estimated behavior measures can be used to estimate regional tier impacts. This analysis suggests that Portland metro area youth will suffer the most, with the share of employed youth falling by 30 percent by 2022. Youth in the state’s other metro areas will see a 20 percent decline, and youth in designated rural areas of Oregon will see a 15 percent decline.

Even though a three-tiered minimum wage is an attempt to accommodate real economic differences between urban and rural areas, Oregon has made a public policy mistake that predictably will be paid for by many of the state’s youngest current and soon-to-be potential members of the youth labor force.


Randall Pozdena is President of QuantEcon, Inc., an Oregon-based consultancy. He received his BA in Economics from Dartmouth College and his Ph.D. in economics from the University of California, Berkeley. He is the author of Cascade Policy Institute’s new analysis, Minimum Wage: Its Role in the Youth Employment Crisis. Steve Buckstein is Senior Policy Analyst and founder of Cascade Policy Institute, Oregon’s free market public policy research organization.

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Cascade Report Finds Long-Term Negative Impacts on Youth from Oregon’s New Minimum Wage Policy

FOR IMMEDIATE RELEASE

Media Contact:

Steve Buckstein

Senior Policy Analyst

Cascade Policy Institute

(503) 242-0900

steven@cascadepolicy.org

PORTLAND, Ore. – Cascade Policy Institute released a report today that has foreboding implications for young people in our state. The report was commissioned after passage of SB 1532 earlier this year, which phases in large increases in Oregon’s minimum wage. The law mandates minimum wages by 2022 of $14.75 in the Portland metro area, and $13.50 and $12.50 respectively in other metro areas and rural areas. These rates must be adjusted after 2022 by any increases in the Consumer Price Index.

Authored by Oregon economist Randall Pozdena, Ph.D., Minimum Wage: Its Role in the Youth Employment Crisis analyzes the history, theory, and empirical impacts of minimum wage regulation. It focuses on youth aged 16 to 24 because they are most likely to be affected by minimum wage increases as new entrants into the labor force. The report uses data and statistical techniques that, for the first time, allow measurement of how the impact of an increase in the minimum wage evolves over time, not just in the period immediately after the increase. In addition, it allows prediction of the interaction of the minimum wage shock with employment, wages, and labor force participation over time.

“This report confirms ominous long-term negative consequences of minimum wage increases, not just for those currently 16 to 24 years old, but for future potential workers coming into this age group,” said Steve Buckstein, Cascade’s founder and Senior Policy Analyst. 

Key findings of the report: 

  • Increases in the minimum wage significantly depress youth employment and labor force participation. The share of youth employed falls by 3 percent in just the first six months after a 10 percent increase in the minimum wage, and it falls by 6 percent after a year. Similarly, the share of youth participating in the labor force declines by 4 percent at 6 months and 6 percent at 18 months.
  • Contrary to the claims of minimum wage advocates that higher minimum wages create a cascade of even greater increases, youth wages only rise by the amount of the mandated increase—and then only for those lucky enough to find a minimum wage job. Collectively for all youth, what wage increases occur are more than offset by condemnation of a large share of youth to a zero wage; namely, to unemployment.
  • Even a one-time increase in the minimum wage persistently continues to depress the share of youth who are employed. Specifically, statistically significant employment impacts can be expected to cumulate over time for at least five years into the future. Even seemingly innocuous increases in the minimum wage—such as Oregon’s prior 2002 policy of adjusting for the CPI—can significantly depress youth employment. Since the implementation of that adjustment policy fourteen years ago, the previous 56 percent share of youth employed has fallen to just 46 percent, an 18 percent decline. Thus, it appears that inflexible, automatic CPI indexing is inferior to letting markets set youth wage rates.
  • Portland metro area youth likely will suffer the most, with the share of employed youth falling by 30 percent by 2022. Youth in the state’s other metro areas will see a 20 percent decline, and youth in designated rural areas of Oregon will see a 15 percent decline.

Buckstein and Pozdena conclude that “even while bowing to the reality of economic differences between urban and rural areas of the state in its latest minimum wage law, Oregon has made a public policy mistake that predictably will be paid for by many of the state’s youngest current and soon-to-be potential members of the youth labor force.”

The report, Minimum Wage: Its Role in the Youth Employment Crisis, is available here.

Founded in 1991, Cascade Policy Institute is a nonprofit, nonpartisan public policy research and educational organization that focuses on state and local issues in Oregon. Cascade’s mission is to develop and promote public policy alternatives that foster individual liberty, personal responsibility, and economic opportunity. For more information, visit cascadepolicy.org.

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Taxpayers Bear the Risk of a Very Rich Oregon Public Employees Retirement System

By Randall Pozdena

The Oregon Public Employees Retirement System (PERS) fund is, once again, in the news because of its weak financial condition. The Oregon Supreme Court recently rejected cost containment changes to PERS plans. Also, asset returns have been weaker than hoped. The Oregonian reported last December 1 that PERS’ unfunded actuarial liability (UAL) was likely to be $20.5 billion by the January 1, 2016—an amount equal to 27 percent of Oregon household income.

The PERS experience illustrates the hazard of legislating defined-benefit (DB) pension plans for public employees. If, as courts have ruled, such legislation creates a contract, the state and other public employers have little ability to manage unanticipated plan risks. The problem is aggravated because DB plans tempt politicians to make overly lavish promises today because risks are only manifest in the future. The complexity of defined-benefit plan actuarial mathematics helps obscure the risks of bad plans.

The origin of the PERS funding problems is 1975 legislation that promised a guarantee against low fund asset returns—specifically, returns below those assumed by the plan itself. In addition, between 1975 and 1999, the PERS board went further, crediting most excess returns to beneficiaries. Set-asides for the inevitable decline in returns grew to be woefully inadequate.

I learned of this crucial feature from the fund’s actuary in 1993—my second year of service on the Oregon Investment Council (OIC). The heads-we-win, tails-employers-lose arrangement was unique among state plans and there was little appreciation of the risks it posed. In fact, however, the crediting process is tantamount to a very risky derivatives strategy—called selling “naked put options”—with employers and taxpayers de facto bearing the risk.

Since the burden of this practice was not known, the OIC requested one of its consultants to make this measurement. An attorney for the unions later characterized this as “pushing buttons [Pozdena and the OIC] had no business pushing.” The dire implications for fund solvency were presented at a PERS board retreat after a year of extraordinarily large asset returns in 1999. The board was urged to not credit that year’s excess return, but did so anyway.

The “winners” in this risky game were Oregon public employees in the plan for the longest time (“Tier 1”). According to PERS data, 2006 Tier 1 retirees with 30 years of experience enjoy average retirement income equal to 100 percent of their final average salary (FAS)—a 100 percent replacement rate. The average replacement rate for all 30-year retirees between 1990 and 2014 is 81 percent. In contrast, a 30-year private DB retiree in our census region enjoyed a replacement rate of just 51 percent in 2010. Moreover, in 2015, only 19 percent of private workers have access to a DB plan, and 54 percent have access to a defined contribution (DC) plan.

I have calculated that, to enjoy a 50 percent replacement rate after 30 years using a DC plan, workers have to invest 18 percent of their income yearly. To achieve 81 percent or 100 percent, like some PERS beneficiaries, they would have to put aside 30 percent or 40 percent of each year’s salary, respectively.

There is an axiom in finance that “risk does not go away; it can only be put on someone else.” There are only three ways to manage risk in this case. One is to achieve better asset returns. But the OIC and the Treasury have limited ability to do so without incurring further risk to plan solvency. The second way is to reform, after the fact, historical crediting excesses. This option is foreclosed by Oregon Supreme Court rulings. The court considers legislated pension plans to be de facto contracts with inviolate features. The state can, and has, created less risk-prone plans for future employees, but this cannot extinguish existing risk. The third way to shift risk is through increased taxation of private incomes and/or termination of public employees and loss of their services. Taxing private incomes is tantamount to making the private sector bear its own plus PERS risks. It also poses macroeconomic risks. Professor Alexander Volokh of Emory Law School has suggested outsourcing or privatization of public services as a means of lowering pension costs that limits economic and service losses.

Randall Pozdena, Ph.D. and CFA, is a consulting economist and former professor and research vice president of the Federal Reserve Bank of San Francisco. He is also a former member and chair of the Oregon Investment Council and a Cascade Policy Institute Academic Advisor.

A version of this commentary was originally published in The Oregonian on December 10, 2015 as “Why PERS is under water yet again.”

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New Report: The Right to Work Is Right for Oregon

The Right to Work Is Right for Oregon: A Comprehensive Analysis of the Economic Benefits from Enacting a Right-to-Work Law

By Randall Pozdena, Ph.D. and Eric Fruits, Ph.D.
Cascade Policy Institute • February 2012
Click here to read the full report.

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Raising Oregon’s Corporate Income Tax RateWill Cost 43,000 Oregon Jobs

Randall PozdenaCascade Commentary

Raising tax rates of any kind risks impairing the private sector’s motivation to invest in activities that support job and income growth. However, the taxation of corporate income is particularly injurious to growth. (more…)

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An Economist's Perspective on HB 3405 and HB 2649By Randall J. Pozdena, PhDPresident, QuantEcon Inc.June 9, 2009

Randall PozdenaThe opinions expressed herein are those of the author and
should not be attributed to any other individual or to any other organization
with which the author is affiliated.

Introduction
The State of Oregon faces State budget deficits due to the sharp decline in employment and economic activity in the state. In an attempt to fend off this fiscal problem, the Oregon House just passed, and the Oregon Senate will decide shortly, on two major tax measures:

HB 3405 would increase tax rates on corporate profits, from 6.6 to 7.9 percent for two years, dropping to 7.6 percent thereafter.
HB 2649 would increase, for three years, personal income and capital gains tax rates from the current 9 percent to 10.8 percent and 11 percent for those earning more than $125,000 and $250,000, respectively. A 9.9 percent rate would be imposed thereafter. (more…)

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Obama’s Stimulus Plan: A Plan Without Stimulus

Cascade Commentary

At the cost of $819 billion, the current House version of the Obama Stimulus Plan is more than twice as costly as the much-reviled Iraq War to date. Passage of a stimulus plan, according to President Obama, is an urgently needed and critical step to a rapid recovery. In fact, as I argue here, the Plan is simply a standard-issue spending program masquerading as stabilization policy, and unlikely to provide useful stimulus. 

Why Fiscal Policy Doesn’t Work

If Nobel-laureate economist Milton Friedman were still alive today, he would be shaking his head in dismay at the current version of Stimulus Plan. Dr. Friedman, whom I had the pleasure of knowing, was a strong skeptic of the usefulness of fiscal policy as an economic stabilization tool. Fiscal policy (the use of changes in government spending or tax revenue collection to influence the economy) has both fatal theoretical flaws and weak empirical justification. (more…)

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Oregon Greenhouse Gas Reduction Policies: The Economic and Fiscal Impact Challenges

Many policymakers in Oregon have concluded that global warming is a crisis, that human use of fossil fuels is the primary cause of climate change, and that state policies must be enacted to stabilize the global climate. Because of this, policy initiatives to regulate greenhouse gas emissions are fast becoming a dominant feature of statewide public policy. Oregon has adopted one of the most ambitious greenhouse gas reduction goals in the world. (more…)

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Can Pay-for-Performance Work in the Classroom?

Cascade Commentary

Summary

Absent serious structural reforms such as school-level competition, paying for performance in the classroom may be the best way to stimulate higher academic achievement among our K-12 public school students. (more…)

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Paying for Performance to Improve K-12 Student Achievement

Introduction and Executive Summary

This report examines the potential for using performance incentives to improve the K-12 classroom education experience. It uses principles derived from economic theory to identify what type of incentives might work and what form those incentives should take. The limited literature on performance incentive applications in K-12 education is then examined to see if the evidence is consistent with the economic prescriptions. (more…)

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