Note: this is a guest post submitted by Greg Degeyter.
With the debate last night starting off with discussion of the protest for a $15.00 minimum wage the candidates missed an opportunity to discuss one of the hidden dangers of the increased minimum wage. Looking at the labor force participation rate by age and reason shows the near retirement age workers are working longer, and the 18-24 age range is where the drop has occurred. (This was noted by the candidates.)
Older workers staying in the work force longer reduces the opportunity for younger workers to enter the work force as upward mobility is stymied by lack of retirement, leading to fewer entry level jobs available. Students are staying in school longer and obtaining advanced degrees since they are having difficulties finding employment. The extra schooling has lead to an increase in student loan debt. According to the Wall Street Journal, the average student loan debt for graduating students is now slightly over $35,000. Plug this number into the Department of Education student loan repayment calculator and a calculated repayment rate of $368 per month ($4,416 a year) is given. The Social Security Administration calculates that the average yearly net compensation in 2014 was $44,569. This means that student loan debt payments are roughly ten per cent of worker compensation. The threat to the economy is that the $368 a month comes out of disposable income.
With the debt burden coming out of disposable income, and most of the new workers having lower end wages since older workers are not retiring, the available amount of disposable income in the economy drops. Mandating a $15.00 minimum wage will preclude high school and new college students from being able to get part time jobs to help save for and pay for college. This requires more student loans to pay for college and only exacerbates the student loan debt problem. The lack of disposable income on the bottom age of the workforce creates a giant anchor for the economy. In the short term, new workers don’t have disposable income to spend now so economic activity slows. In the long term economic harm arises from the difficulty with wealth creation, such as qualifying for a mortgage, since the debt to income ratio is becoming prohibitively high.