Dropouts and the Minimum Wage

Professor Stephen Bainbridge at UCLA publishes a very popular blog. He writes about law (he is a corporate law professor), economics and politics. In a TechCentral Column today he makes an interesting point about the minimum wage and high school dropouts. California is currently going through a discussion about increasing the minimum wage.

The minimum wage is clearly aimed primarily at young people. Few jobs for employees over 25 get a minimum wage (in this economy few jobs for employees get the minimum wage either - but that is another story). So the decision on changing the level really affects younger workers almost exclusively. I would argue that it really concentrates on employees who could still be in school. The latest Statistical Abstract suggests that only .4% of all workers (about 520,000 nationwide) work in minimum wage jobs. So the discussion here is an interesting one from a policy sense but possibly not large in terms of economic consequences.

Bainbridge reviews the literature and finds that young people fairly consistently make short term choices that fail to recognize their long term effects. For example, they may value the current wage they get over the longer term effects of higher wages that would be produced by staying in school. In essence, the fail to properly value the current foregone income versus the future wages produced by geting more education.

The consequences of dropping out of school are huge. There is a huge literature on the value of completing college (more than $1 million over a lifetime in additional wages). But the other side of the equation is that the real value of employment for workers with less education has actually declined in real terms over the last several decades. So policies which encourage students to stay in school are good for them and good for society in general.

Bainbridge makes two arguments. First, increases in the minimum wage may exacerbate those differences - because of the momentary apparent increase in current wages. Thus, while an increase in the minimum wage might make some jobs more attractive, those changes might marginally increase the number of students who make the wrong choice and drop out of school. Second, he argues that an indexing of the minimum wage would reduce that tendency by reducing the big bumps in apparent income.

There is obviously a third choice - that is to eliminate the minimum wage entirely as an anachronism. That one might be politically unpalatable but it might be the best incentive to encourage potential dropouts to stay in school. The harsh realities of a first job would present a starker choice for those people on the cusp. Employers would probably pay a starting wage in most situations that is pretty close to what the minimum wage is now and we would reduce a lot of the paperwork in the enforcement of wage and hour guidelines. That might a) decrease the dropout rate - to the extent that Bainbridge's arguments are correct and b) increase efficiency in the economy.