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Our 7.3 percent overall unemployment rate is painfully high. But for younger Americans — particularly young minorities — things are much worse. More than one in seven between age 16 and 24 can’t find any job, full or part-time. For African Americans in that age group, it’s more than one in four. These bleak statistics actually understate the tragedy, since they don’t count those who simply stopped looking for work.
All of them deserve an opportunity to pursue their dreams and become contributing members of our society. But they are being denied by public policies that discourage young people from pursuing jobs and employers from creating them.
If Washington is serious about helping this vulnerable population, it should focus on increasing workers’ take home pay and lowering the business employment costs. Conventional wisdom preaches increasing minimum wages. But a far more effective policy would be to simply exempt younger workers and their employers from paying taxes related to their employment.
People in the workforce typically get their start when they are young – beginning with some entry level job where they learn basic job skills, develop effective work habits, and earn a modest wage. This important first step gives them a chance at earning wages and achieving a level of success that facilitates advance up the economic ladder. Work habits and skills are generally learned early in life or unfortunately for too many, not learned at all.
The long term damage caused by this lack of employment is very large. Income mobility has declined. The sad fact is the probability of people at the bottom moving up the income ladder is lower than it was 20 and 30 years ago. Many studies have demonstrated that three factors determine most of the difference between those who start in poverty and stay there and those who don’t – finishing high school; avoiding becoming a teenage parent, and getting a full-time job. Those who do all three have only a 2 percent chance of living in poverty and a 75 percent chance of joining the middle class.
Many economists and social scientists have suggested both demand and supply reasons why youth unemployment is so high. On the demand side, the national safety net – Food Stamps, Earned Income Tax, welfare and subsidy programs of all kinds – substantially reduce the relative benefit of working. In other words, the wage premium for working versus taking advantage of benefit programs on an after-tax basis is simply too small to encourage many people to work.
If a young person enters the work force at the minimum wage, he grosses $7.25 per hour. From this, in a place like Los Angeles, he pays federal and state income taxes and Medicare and Social Security payroll taxes which total $1.11. So, out of the $7.25 earned, he keeps just over $6. If he is single and without children, he won’t qualify for the Earned Income Tax Credit (EITC) or food stamps.
On the supply side, the cost of employing young people is high relative to their economic contribution to potential employers. An entry-level employee costs his employer much more than $7.25. In addition to his wages, the employer also pays Social Security and Medicare taxes, plus unemployment insurance, that add on an average of 92 cents. So today, the new employee costs the business $8.13 per hour, of which the young employee keeps only three-quarters.
This cost will increase further when the Affordable Care Act kicks in. Beginning in 2015, if the employer has more than 50 employees, he will have to provide health insurance for full-time workers or pay a $2,000 fine – which comes to $.96 per hour. That will make an abysmal employment situation even worse.
Overall, public policy ought to be aimed at encouraging businesses to create entry level jobs. Perversely, attempts to increase the minimum wage and institute so-called living wages would do the exact opposite. If government wanted to help create a permanent economic underclass, it would implement exactly the policies that are in place. All of us who want people to enjoy earned success ought to be outraged at these government policies.
Fortunately, there are relatively simple policy steps that could encourage employers to create more jobs and young people to take those jobs. It is one problem that can be dealt with – perhaps not solved – but substantially improved with a proactive federal policy – even amid this awful economic recovery.
For youngsters under the age of 21 or in college or training programs, the federal government should pass a law exempting those people and their employers from paying any of the taxes or insurance cited above. Further, we should exempt them from all provisions of the Affordable Care Act and all requirements to provide any other non-wage benefits, like retirement or healthcare programs.
These simple steps would increase take home pay for young workers substantially, while reducing burdens on employers, thus increasing both the incentive to work and the incentive to hire. There is no sensible public policy reason not to act.
Mr. Golub, a former Chairman and CEO of American Express, currently serves on the Board of Trustees of the American Enterprise Institute.
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