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Why A Record Number Of College Grads Are Working Minimum Wage Jobs

Over the past year we have repeatedly demonstrated that the bulk of the job additions has been focused on the lowest-paying occupations. Now, according to a new study by Bank of America, we find that these lowest paying sector have also accounted for the bulk of wage growth in the past year.

As BofA’s Emanuella Enenajor notes, wage growth in low-pay sectors outpacing all others. “If you’ve tuned into CEO earnings calls recently, you’d know that a common theme is wage pressure, especially in low-pay sectors such as restaurants. CEOs cite the need to attract quality hires, a tightening labor market, and the push from higher minimum wages. Last year, companies like McDonalds and Walmart announced higher wages, raising fears of a sudden pick-up in wage pressure, which we argued against in our piece “Fast food, fast wages?” The data confirm a trend of rising wage pressure in low-pay sectors with limited pressure elsewhere: the bottom 20% of industries, by pay, is seeing wages rise at a 3.4% year-on-year pace so far this year, but the remaining 80% of the market is only seeing wage growth of 2.4%.”

A key driver for this increase is that a number of states have raised the minimum wage this year, including California and New York. BofA estimates that this has provided a modest boost to wages, year to date. The BLS does not publish detailed industry-level data by state and earnings buckets. Here is the logic behind the calculation:

We use a back-of-the envelope approach for this calculation. First, we estimate 1) the share of low-pay workers impacted by state-level minimum wage hikes. Ideally, we would look for the percentage of low-pay workers earning less than $9.38/hr, as states raising the minimum wage in 2016 have, on average, a minimum wage of $9.38/hr this year. Since this level of granularity is not available, we assume the share is somewhere between 30% (the share of low pay workers making less than $8.99/hr) and 50% (the share of low pay workers making less than $9.99). We assume the mid-point of 40% as our baseline. Then we calculate 2) the percentage of US employees that were located in states seeing a minimum wage increase in 2016 (about 30%). We assume the national distribution mirrors the distribution for low-pay workers.

 

We multiply 1) by 2) to estimate the share of low-pay workers affected by state-level minimum wage increases. This simplified exercise suggests that of the 3.4% yoy increase in low-pay wages so far this year (equivalent to 46 cents), roughly 8 cents (0.6 ppts) is due to the minimum wage increase. This explains about half of the outperformance of low-pay wages versus high-pay wages. Table 2 shows sensitivity around this estimate. Given the assumptions we have had to make, our baseline estimate and the sensitivities are merely illustrative.1 We can conclude that minimum wage gains have had some part in raising low-pay wages, but are not likely the full story.

Another likely reason why wages for low-pay workers are picking up is because firms have to offer a higher wage to attract workers. The supply of less-educated workers is dwindling, as seen by a shrinking labor force of 16-24 year olds and workers aged 25+ with a high school diploma or less (no college) (Chart 2).

One explanation for this is that increasinly more young Americans opt to take advantage of generous student loans (now at a record $1.3 trillion), instead of entering the work force, where the best they can hope for are jobs paying far lower wages relative to expectations. As BofA confirms, this cohort has been declining since the start of this recovery, probably reflecting the continued push towards higher education, as well as demographics which has reduced the number of younger workers willing to flip burgers for a few years while they save for college.

This trend contrasts sharply with the labor supply of workers with at least some college/bachelor’s degree. Here, supply has been growing, possibly in response to a strengthening recovery as graduates opt to enter the labor force rather than study more.

One very adverse side effect of this trend is that increasingly more low wage employees are those with a college education, in the form of a Bachelor’s Degree or higher, as they are unable to leverage their diploma credentials to get a better paying job, while the only ones hiring are those seeking minimum-paid workers.

As firms in sectors with low pay levels struggle to attract workers, they attract more educated/skilled workers with higher wages, but certainly not high enough. Today,  23% of workers in low pay sectors have a bachelor’s degree or higher, up from 18% 15 years ago (Chart 3).  

This means that the share of college grads working minimum wage jobs is now an all time high; jobs which barely cover the cost of living, let along covering interest expense on student loans.

A second adverse consequence is that there is little risk that accelerating wages in low pay sectors will spill over to faster overall wage growth in a meaningful way, according to BofA.

First, low-pay wage growth does not tend to lead wage trends in higher paid sectors, based on a Granger causality test. If we look at production and non-supervisory workers (Chart 4) for which there is a longer time series, we can see that low-page wage growth tends to peak and bottom out at about the same time as top 80% wage growth, although low-pay wages tend to exhibit more volatility. This greater “flexibility” in low-pay wage inflation contradicts findings of San Francisco Fed researcher Mary Daly, which shows evidence of pent-up wage deflation for workers with lower educational attainment.

BofA then asks the logical question: what will trigger a more meaningful increase in wages outside of the low-pay sectors? It answers that any upward pressure on the national minimum wage could have a modest impact on overall wages, but again, much of this  would be driven by gains in low-pay wages. In our view, wage growth outside of low pay sectors is likely to gradually increase as the overall labor market tightens. However, the trend will be slow, and will likely remain below that of low pay sectors, as the labor force of workers with higher educational attainment (who would presumably be competing for higher-paid work) has been expanding, pointing to a tempering force on wages.

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The third, and final, adverse consequence from all of this governmental intermediation in wage allocation is something else we have covered extensively, most recently overnight in “Minimum Wage Claims Its Latest Victims – Ashley Furniture Slashes 840 Jobs In California“, and more extensively in “Something “Unexpected” Happened When Seattle Raised The Minimum Wage” where we said the following:

Despite our efforts to [convince progressives that raising minimum wages to artificially elevated levels is a bad idea] might be, we thought we would, yet again, report the latest empirical evidence proving that minimum wage results in permanent jobs losses for the same low-skilled workers they’re intended to help.  The latest research comes from the University of Washington which researched the impact of Seattle’s recent minimum wage hike on employment in that city (as background, Seattle recently passed legislation that increased it’s minimum wage to $11 per hour on April 1, 2015, $13 on January 1, 2016 and $15 on January 1, 2017).  “Shockingly”, the University of Washington found that Seattle’s higher minimum wages “lowered employment rates of low-wage workers” (the report is attached in its entirety at the end of this post). 

In other words, the higher minimum wages are raised, the faster the corporate response of laying off a proportional number of workers will kick in, or as in the case of Starbucks, simply cutting the overall number of work hours across all employees, the net result of which is the same, if not lower, overall compensation.

Sadly, with long-term US productivity continuing its descent to all time lows…

… this trend will not change, and we expect even more government meddling, even greater wage gains for low-paid workers leading to less wage gains for the rest of the labor force, more layoffs and so on, until the US economy finally slides into a contraction which not even the NBER will be able to “seasonally-adjust” away.