Minimum wage hikes are the poster children for the law of unintended consequences. Mandated wage hikes crowd young and low-skilled workers out of the labor force and reduce the availability of entry-level jobs critical to advancement up the job ladder. New York, apparently, wasn’t satisfied with these well-documented distortions and has added an entire new category to disrupt the labor market. The state has hiked the minimum wage, but also established a refundable tax credit to cover the higher wage costs, but only for workers 16-19 making exactly the new minimum wage.
Under the new law, the minimum wage will rise from $7.25 an hour to $8 an hour next year. In future years, the minimum wage will be adjusted higher, reaching $9 an hour in 2016. Employers, however, can get a refundable tax credit to cover the increased labor costs between the old and the new wage. In other words, the state taxpayers will cover the labor costs for the new higher wage, but only for those workers aged 16-19.
If you’re an employer, giving a job to an 18-year-old will cause the state to subsidize part of your labor costs. If you hire a 20-year-old, however, there is no subsidy. What possible incentive do you have to hire a 20-year-old if someone 18 or 19 is available? In addition, what incentive do you have to continue to employ a 19-year-old after her 20th birthday?
Adults currently make up around 90% of the minimum wage workforce in New York state. What will that number look like next year, when employers can get a refundable tax credit on some portion of the wages paid to those under 20?
It isn’t a total win for teenagers, though. The subsidy only applies to those workers making exactly the minimum wage. If a teen is making $8.10 an hour, for example, the employer can’t file for the subsidy. Roughly 65,000 teens currently make between $8 and $10 an hour. It is likely some of these teens will have their wages cut to allow their employer to access the taxpayer subsidy.
New York’s actions at least acknowledge that mandated wage hikes have a disproportionate effect on teen workers. Trying to address this, however, has created a system biased against adult, low-skilled workers. The more government tries to rectify the unintended consequences of its mandates, the more distortions it creates.
Far better to let the market sort this out.
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