Minimum Wage: Its impact on education and the job market

minimum wage

By Troy Camplin – Contributor –

One of the well-established results of the minimum wage is that it prices out of the labor market those with the fewest job skills. This creates a catch-22 in that you cannot get job skills without getting a job, and when there is a minimum wage, you cannot get a job to get job skills. This inevitably hits teens and recent high school graduates the most, and is one of the main causes of high teen unemployment in those countries with minimum wages.

So how, then, are you able to signal to businesses that you are worth hiring for wages above what your complete lack of work experience and job skills indicates you ought to get?

Two ways have arisen to solve this problem. One is the “unpaid intern.” You may not be able to work for a buck-fifty, but you can work for free. The other is much more universal, higher education.

A university education was once reserved for those who wanted to become doctors, lawyers, scientists, or scholars. This meant that only a relatively small number of people went to college, and those who went were those who deeply loved learning. But that is no longer the case. University education has become a way to signal to employers that you have the qualities they are looking for in an employee: the ability to stick with something for a long time, a set of skills, the ability to show up regularly and on time, etc.

Since universities now primarily act as a signal that you are someone worth hiring (regardless of what – if anything – you may learn), more and more people are now going to college. But of course not everyone can afford college, and there aren’t enough grants and scholarships to go around for the massive upsurge in students, so most students are left getting student loans.

Student loans in effect act as “cheap money” for universities. Students typically get artificially low interest rates on the loans – most are subsidized by government – and, more, most students are very young and inexperienced when it comes to finance. They tend to discount the future – including future payments – and do not think too much about those future payments. And those who do are convinced that the money they will make with a college degree will more than make up for the money owned on the loans.

This results in several problems. One, how often does one’s university education-created boost in income end up getting eaten up by the student loan payments? And two, cheap money acts as a positive feedback on prices, driving them up. If you want to understand why university costs are so high, you can look directly to the existence of student loans.

Any time you have cheap money – whether it be the central bank printing money or interest rates being kept artificially low – you will get an increase in prices. Of course, the money doesn’t go into the economy evenly; rather it enters it through particular areas in the economy. If it is mortgage rates that are low, we get a housing bubble. If it is student loan rates that are low, we get an education bubble. And that is what we are seeing. The reason college and university costs have been rising so much more rapidly than are prices in the rest of the economy is because so much money is being pumped directly into our colleges and universities.

And where is that money going? Sadly, not to more full time instructors. Rather than hiring full time instructors, universities are hiring more and more adjuncts, who are cheaper (and, because of the low wages, desperate). No, the money is going to bureaucracy; the number of administrators and other bureaucrats has gone up drastically over the past several decades, as have administrators’ wages. Ironically, many of those bureaucrats are necessary, precisely because there are more student loans to deal with.

On the surface, a higher minimum wage providing workers more money and more people going to college are good things. But these are the seen, short-term effects. Economics helps us to understand the unseen, long-term consequences of policies and actions. One of the consequences of the minimum wage is the higher cost of a college education – but only if you understand economics can you see and understand that connection.

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