SB 177: Youth Minimum Wage More Costly Than Training Wage

And Bonus: SB 177 Means Fewer Kids Get Jobs!

I’ve mentioned the training wage, known as the “opportunity wage” in South Dakota, in a couple of blog posts (see January 4 and April 5) as one of the reason’s Senator David Novstrup’s youth minimum wage law is unnecessary and should be overturned by a public vote. Permit me to develop that critique further, on politically and economically conservative principles.

First, let’s recall the details of the training wage. The training wage is one of several minimum wage exemptions provided by federal law. The federal government actually calls this exemption its own “youth minimum wage.” South Dakota embraces this exemption in SDCL 60-11-4.1. Under the training wage, employers may pay workers under the age of 20 may be paid as little as $4.25 an hour for the first 90 calendar days (not workdays) of their employment. From Day 91 on, if those young trainees prove themselves and get to keep the job, employers must pay them the standard minimum wage.

Conservative political principles dictate that we should not clutter the law books with unnecessary laws. Existing federal law and state law already provide employers with the opportunity to pay a youth minimum wage. 90 days should be long enough for any attentive employer to determine whether a young rookie can perform the basics of a job, add value to the company, and earn her keep. The training wage provides that trial period and the cost savings that Senator Novstrup uses to stiltedly justify his youth minimum wage law. Since existing law already contains a training wage that serves as a youth minimum wage (and actually covers more young workers, everyone 19 and under, than Novstrup’s law, which applies only to workers 17 and under), there is no need for Novstrup’s additional youth minimum wage law.

Economically, conservative businesspeople like to save money. Undeniably, following Novstrup’s new law and paying workers under the age of 18 $7.50 an hour is cheaper than paying them South Dakota’s standard minimum wage of $8.50 an hour. But taking advantage of current law—training wage of $4.25 for the first 90 days, then standard minimum wage of $8.50—saves employers even more through an entire year of employment. Consider the following chart, which shows how much young workers averaging 14 hours a week (2 hours a day) would make under three scenarios:

1. Training Wage + Minimum: First 90 days @ $4.25/hour, subsequent days @ $8.50/hour.
2. Youth Minimum: Every day @ $7.50/hour.
3. Minimum: Every day @ $8.50/hour.

Try the same scenarios at an average of 21 hours a week (3 hours a day):

Over a full year of employment, an employer could save money by paying the training wage for 90 days, then paying the full $8.50 minimum wage for the rest of the year, instead of paying Novstrup’s youth minimum wage all year long. Plus, the employer can pay that training/standard minimum combo to more of her workers, from age 19 on down, whereas Novstrup offers cost savings only for workers age 17 down.

The breakeven point on Novstrup’s youth minimum wage compared to the training wage doesn’t come until day 383 of continuous employment. But how many young part-timers stick around for over a year in South Dakota’a tight, opportunity-rich job market? And if those young part=timers do stick around for over a year, haven’t they probably demonstrated the kind of skills and loyalty that call for a raise above minimum?

The obvious omission from my calculations is the scenario in which we pay the training wage, then pay the younger workers Novstrup’s minimum $7.50 an hour. That combo would clearly be the cost winner… if it were legal… which it won’t be if Novstrup’s law takes effect on July 1. Let’s read the training wage statute:

Any employee who is under twenty years of age may be paid an opportunity wage as defined in section 6 of the Fair Labor Standards Amendments of 1996 as of October 1, 1996 [SDCL 60-11-4.1].

…and the relevant clause from Section 2 of Novstrup’s youth minimum wage law:

An employer shall pay an employee under the age of eighteen at least seven dollars and fifty cents an hour… [Senate Bill 177, Section 2, sentence 1].

The training wage says may. Novstrup’s youth minimum wage says shall. Federal law says any state provision for a higher minimum wage takes precedence over federal provision that set lower minima.

Therefore, Senate Bill 177 trumps both the state and federal training wage provisions. Senate Bill 177 means you can’t pay our youngest workers, age 18 and under, the training wage. You must pay them $7.50 an hour from Day 1 of employment. Interestingly, you’ll still be able to pay 18- and 19-year-olds the $4.25/hour training wage.

So actually, thanks to Senate Bill 177, employers will be able to save money by hiring 18- and 19-year-olds instead of workers under 18.

Conservative principles say you don’t write unnecessary laws, because extra laws can have unintended consequences. Senate Bill 177 has the unintended consequence of discouraging financial conservatives from hiring our youngest workers, which is exactly the opposite of what Senator Novstrup said his bill would do.

Funny how if Republicans would remember to act like conservatives, they’d avoid a lot of problems. Even funnier that a liberal like me has to remind them of how to be conservative… and clean up their messes with a referendum.