A $4 minimum wage can get people back to work

Reuters

President Obama speaks before signing an executive order to raise the minimum wage for federal contract workers to $10.10 an hour starting next year, during an event at the White House in Washington February 12, 2014.

Article Highlights

  • The fate of the long-term unemployed is arguably the most immediate social and economic challenge facing the U.S. today.

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  • Before 2008, the average monthly long-term unemployment rate was about 0.8 percent -- three times lower than today’s rate.

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  • And a step forward would be to let companies pay the long-term unemployed less by lowering the minimum wage for them.

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The fate of the long-term unemployed is arguably the most immediate social and economic challenge facing the U.S. today. How have our leaders in Washington responded to it? 

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 Barack 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 -- with a few notable exceptions -- offering its usual menu of tax cuts, less federal spending and less regulation.

Society owes these workers better -- creative public policies to help increase their chance of staying in the labor force. They want to work; they want to earn their own successes, to help the economy grow, and to support themselves and their families. But they can’t, in large part because they happen to be alive and working 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 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 -- three times lower than today’s rate.

Economics has long known that the long-term unemployed are less likely to find a job than workers who have been unemployed for only a few weeks or months. And careful studies conducted in recent years indicate that being out of a job for such a long time is a serious obstacle to re-employment in and of itself. 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.

A suggestion for paying for it: Take some money the federal government spends on the highest-earning households and divert it to this program. For example, the government spent $70 billion on the mortgage-interest deduction in fiscal year 2013, the Congressional Budget Office estimates. This spending overwhelmingly benefited households in the top quintile by income. A better use for some of that money would be to help the long-term unemployed make a transition into jobs.

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.

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