Bennett Hypothesis: Financial Aid Increases Tuition

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Data comes directly from my econ course.  

Work experience is like a credit report.  If you have a long and proven credit history, the lender will view as low risk and offer you better terms.  On the other hand, if you have nothing on your credit report, the lender looks at you as high risk, and the terms are less advantageous.  Much like the person with limited credit history, the employer looks at a worker with no work experience as high risk and employers do not want to give high-risk employees premium rates due to the potential loss they may incur on their investment.  So, because that candidate is high-risk, they negotiate a salary of $7 an hour with the opportunity to earn more after they have improved their work skills and shown a track record.  When the government comes in and raises those wages to $15, which is above and beyond the free market rate, the employer considers that wage too risky and will bypass the person with limited work history and will keep the position open for someone with a more reliable history. The secondary effects are that the younger person will have to wait longer to develop a proven track record which means an opportunity lost and more time in mommy's basement.  

Let's look at babysitting. You need a babysitter for 4 hours:

Candidate A is 16 years old but has no history of babysitting, but has watched her siblings before, she’s pleasant and you want to give a good young person a job.
Candidate B is 35 years old and has a 10-year history raising children and working in early childhood education with a Ph.D. in Awesome, and also is a delightful person.

By law, you have to pay whoever you hire at least $15 an hour, and both find that wage attractive.  Who do you employ? The law requires you to pay either candidate $15. Logic says choose B, the more qualified candidate who poses a lower risk of burning your house down.

Would you consider hiring candidate A if there wasn’t a $15 minimum wage? Does candidate A become more attractive if they are willing to do this job at $5 an hour?  You want to give candidate A a chance, but you can’t justify paying someone without experience that much money when someone else at the same rate is more qualified.   The minimum wage law has priced candidate A out of a job, although candidate A is willing to take less, the government won’t allow it.  

That is precisely why we see high youth unemployment in Europe.  Europe has high minimum wage laws, and nobody wants to waste their time and money on someone who may turn out to be a lousy candidate. The risk to reward is too high, but it does open up opportunities for $0 an hour internships.

Candidate A might also be priced out by cheap illegal labor, this happens a lot in California.