A $4 minimum wage (supplemented, of course) could ease long-term joblessness

  • Article by: MICHAEL R. STRAIN
  • Updated: February 13, 2014 - 6:35 PM

How? By reducing the perceived risk of hiring such workers.

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The fate of the long-term unemployed is arguably the most immediate challenge facing the United States today. How have our leaders in Washington responded?

The left wants to extend the maximum duration of unemployment benefits for the long-term unemployed. This is helpful, but not nearly sufficient. And President Obama recently held a meeting with chief executives urging them not to discriminate against this group — maybe a little helpful, maybe not.

If anything, the right has been worse, offering its usual menu of tax cuts, less federal spending and less regulation.

Society owes these workers better — creative public policies to increase their chance of staying in the labor force. They want to work, to support themselves and their families. But they happen to be alive during a once-in-a-generation economic downturn.

At the moment, 2.3 percent of the labor force consists of long-term-unemployed workers, meaning that 3.6 million workers have been out of work and looking for a job for 27 weeks or longer. That is a three-decade high and an extreme abnormality. Before 2008, the average monthly long-term unemployment rate was about 0.8 percent.

Economics has long known that the long-term unemployed are less likely to find a job than are workers who have been unemployed for only a few weeks or months. It’s the length of their unemployment spell, not other factors, holding them back.

These workers can’t stay long-term-unemployed forever. Some will make the transition to jobs as the economy makes a real recovery. But many will simply leave the labor force entirely. There’s a limit to how long anyone can tolerate continually applying for jobs with no success.

What can the federal government do to help these workers today? One goal should be to make it easier for companies to hire the long-term unemployed. And a step forward would be to let companies pay the long-term unemployed less by lowering the minimum wage for them.

About one in five long-term-unemployed workers has less than a high school diploma, and about one in five is younger than 26. Many of these workers are likely applying for minimum-wage jobs.

We know that despite Obama’s plea, many companies will look at their job applications with skepticism given their long unemployment spells. An employer may be concerned that workers’ long periods of joblessness will negatively affect their future job performance. Will a worker be able to tool up, learn the job and be productive in a reasonable time? Perhaps he has personal problems? Perhaps she has been unemployed for so long because she keeps blowing her job interviews? With about three unemployed workers for every job opening, companies can afford to be choosy.

Fundamentally, we are talking about risk. Because of the federal minimum wage, the company knows that it has to take at least a $7.25-an-hour chance on a worker. If we knocked the minimum wage down to, say, $4 an hour, we would significantly mitigate employers’ risk from hiring a long-term-unemployed worker. Allowing employers to pay this group of people 45 percent less than other minimum-wage workers provides a strong incentive for businesses to give the long-term unemployed a shot.

 

{* Of course, we can’t just lower the minimum wage for the long-term unemployed to $4 an hour and leave it at that. Society must have as a goal that no one who works full time and heads a household lives in poverty. This policy would have to be paired with an expanded earned-income tax credit, or with more straightforward wage subsidies — federal transfer programs that supplement a worker’s labor market earnings with tax dollars.}

 

How much will this cost? Let’s say that the government decided to give a minimum wage worker an additional $4 for every hour he worked. This wage subsidy effectively increases the financial rewards from an hour of work above what is required under current law, and will induce some workers to take jobs they wouldn’t otherwise take. Let’s assume that 20 percent of the long-term unemployed take a $4-an-hour job, and that each of them works full time for a year. Under this plan, the annual cost of the wage subsidy would be about $6 billion. Even given this (probably extreme) overestimate, the program would be relatively cheap.

Many on the left will cringe at the thought of lowering the minimum wage. Many on the right won’t like a new government program of wage subsidies. But this policy makes it significantly easier for companies to hire the long-term unemployed and works to make sure that no one who has a full-time job and heads a household lives in poverty. Given the scope and urgency of the problem, any policy that advances both those goals deserves serious consideration.

 

Michael R. Strain is a resident scholar at the American Enterprise Institute. He wrote this article for Bloomberg News.

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