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July 2012 Policy Study, Number 12-7

   

Teen Unemployment in Iowa

   

The Minimum Wage in Iowa

   

 

In 2007 the Iowa Legislature and then-Governor Chet Culver adopted legislation to increase the state’s minimum wage in two steps. In April 2007 the state’s minimum wage increased by $1.05, from $5.15 an hour to $6.20 an hour. Then on January 1, 2008, the minimum wage was increased by another $1.05, going from $6.20 to $7.25 an hour.[10]

 

The federal government also increased the federal minimum wage around that same time. The federal minimum wage was raised to $5.85 an hour in July 2007, it increased again to $6.55 an hour in July 2008, and finally in July 2009 it was increased to $7.25 an hour, matching the Iowa minimum wage at that time.[11] Both the Iowa and the federal minimum wages stand at $7.25 an hour today.

 

As can be seen in the tables in this POLICY STUDY, unemployment rates for teens age 16-19 were at the lowest rate in a decade in 2006, at 10.3 percent. Likewise, high school graduates age 18-20, with an unemployment rate in 2006 at 10.4 percent, had the second lowest rate of the decade for that category of workers.[12]

 

The increase in teen unemployment rates was impacted by the increase in the minimum wage. “Teenagers are five times more likely to earn the minimum wage than adults.”[13] Thus the impact of an increase in the minimum wage would be felt dramatically by that segment of the workforce. One small business owner in Iowa, Tom Shockley of Tom’s Market & Meats, said “the biggest local impact will be to young workers 14 to 16 years old.” He went on to say:

 

I think (the new minimum wage) is going to have an effect on the whole retail community on how we deal with the part-time people,’ Shockley said. ‘There used to be a big advantage when you take a 14- or 15-year-old on at $5.15 an hour and train them. ... I think we’ll definitely take a different look at hiring workers in that age range.[14]

 

From 2008 to 2009 the teen unemployment rates took a dramatic increase, going from 11.8 percent to 16.3 percent for teens age 16-19, and from 11.3 percent to 15.6 percent for high school graduates age 18-20. This increase signaled the impact of the recession in Iowa, which lagged behind the impact felt in many states due to the (good) Iowa agriculture economy. However, as The Wall Street Journal wrote of the rising teen unemployment rates, “the biggest explanation is of course the bad economy. But it’s precisely when the economy is down and businesses are slashing costs that raising the minimum wage is so destructive to job creation.”[15]

 

Studies have shown the detrimental effects of the minimum wage on teen employment:

 

Economist David Neumark of the University of California, Irvine…and William Wascher, a Federal Reserve economist, reviewed more than 100 academic studies on the impact of the minimum wage. They found ‘overwhelming’ evidence that the least skilled and the young suffer a loss of employment when the minimum wage is increased.[16]

 

In his economics textbook, Harvard University Economist Greg Mankiw also notes the impact of the minimum wage on teen employment:

 

The minimum wage has its greatest impact on the market for teenage labor. The equilibrium wages of teenagers are low because teenagers are among the least skilled and least experienced members of the labor force. In addition, teenagers are often willing to accept a lower wage in exchange for on-the-job training. . . . As a result, the minimum wage is more often binding for teenagers than for other members of the labor force.[17]

 

A study by Economists William E. Even of Miami University and David A. Macpherson of Trinity University looked at the impact of the minimum wage on jobs available to teens. In an update of their findings, the increase in minimum wage above the 2005 level of $5.15 per hour resulted in the loss of 3,856 jobs for 16 to 19 year olds in Iowa.[18]


   

 

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