Saturday, June 07, 2008

Is Min. Wage Behind the .50% Jobless Rate Jump?

Accoding to BLS data on unemployment rates by age, it looks like almost all of the .50% increase in May unemployment to 5.5% from 5% in April was due to increases in the jobless rates for young workers in the 16-24 year age group, especially the 16-19 year group (see chart above). For workers 25 years and over, the jobless rate has remained pretty stable at around 4%, compared to large increases from April for 16-19 year workers (+3.3% to 18.7%, the highest rate since 1993) and 20-24 year olds (+1.5%).

From the Patterico's Pontifications blog: Who does this age group represent? How about high school and college students coming into the job market for the summer.

And what do many such job seekers get paid? Minimum wage –which Congress increased last year from $5.15 to $5.85, and which will increase again next month to $6.55, and then again next year to $7.25 (see chart below).

Although it apparently hasn't received much media attention, perhaps there is a link between the rising unemployment rate for teenagers and the pending 12% increase in the minimum wage next month. Since we have evidence that consumers respond to higher gas prices by driving less, wouldn't it also be the case that employers of unskilled workers would respond to 12% increases in wages for unskilled workers by hiring fewer unskilled workers?

In nominal dollars, there will be a 41% increase in the minimum wage, from $5.15 per hour in 2007, to $7.25 per hour in 2009. In real, inflation-adjusted dolars, it will be a 25.5% increase, and will be the largest 2-year increase in the real minimum wage in at least 50 years (see chart below). And this HAS to have an adverse effect on employment of teenage workers.


At 6/07/2008 11:43 AM, Blogger Ironman said...

The short answer is yes, the minimum wage increase is primarily responsible for the increase in unemployment for those Age 16-19 and Age 20-24.

For those who would like to pretend they run a small business, here's a tool where you can see what the effect of raising the minimum wage will have on your bottom line.

On the other hand, if you have presidential pretensions or ambitions, here's a tool where you can find out the impact to the national economy.

And for what it's worth, I would anticipate that the rate of unemployment will peak in roughly October or November this year - that's how it's been scheduled!

At 6/07/2008 12:16 PM, Blogger juandos said...

O.K. ironman, you bring up some good points but there seems to be a big, black hole in your employee cost calculations...

I work for an airline right now (let's see how long that lasts with today's oil prices) and the info I get from a gal who works in payroll it costs the airline double what they pay me to keep me employed... 50% my pay, 50% cost in paper administration, taxes, and government oversight costs...

I would guess that some varient of this cost would be present even if one were self-employed let alone working for a small business outfit, right?

Consider perusing Dr. Walter Williams' commentary: Minimum wage, maximum folly

Also consider the following from Dr. Burton W. Folsom: Sixty years ago on June 25, 1938, President Franklin Roosevelt signed into law America’s first minimum wage: 25 cents an hour, rising to 40 cents an hour over the next seven years, which is equivalent to almost $5.00 in 1998 dollars. Today, many increases later, Senator Ted Kennedy of Massachusetts is pushing for yet another hike in the minimum wage. Now is a good time to reexamine the origins of this important law and its impact on the job market

At 6/07/2008 12:21 PM, Anonymous Anonymous said...

A lot of these young people work in industries that are sensitive to the price of gasoline (tourism, lodging, food/beverage, etc.)

This won't help. Shura member calls for Saudi Arabia to limit Production.

At 6/07/2008 2:03 PM, Blogger bobble said...

there is no consistent relationship between minimum wage and teenage employment.

what appears to drive teenage unemployment is the business cycle.

teenage unmeployment is up right now because the economy sucks right now.

Spencer at Angry Bear has done your homework for you:


At 6/07/2008 2:05 PM, Blogger juandos said...

Obviously poor, ole Spencer should've sat in on some of Dr. Walter Williams' classes...

At 6/07/2008 2:12 PM, Blogger bobble said...

This comment has been removed by the author.

At 6/07/2008 2:37 PM, Blogger bobble said...

juandos:"Obviously poor, ole Spencer should've sat in on some of Dr. Walter Williams' classes..."

well, i read the article by
Dr Willams that you linked.

it gives a nice analyis of how many people receive minimum wage. then asserts that unemployment (not teenage unemployment) must increase when minimum wage increases. this is not backed up by any data other than that most economists agree with him (lol there's proof for ya!).

this kind of argument apparently works well with listeners to kudlow and rush, but i'd prefer some hard data.

At 6/07/2008 2:58 PM, Anonymous Anonymous said...

Barry Ritholtz has a post that explains why the teenage demographic is NOT the reason for the spike. Read it.

At 6/07/2008 4:25 PM, Anonymous Anonymous said...

What can we do to lower unemployment, help the construction industry, lower energy prices, stimulate the economy, help the auto industry, and increase tax revenues?

The answer is ....... begin drilling for oil.

Having worked in the steel mills, I know how drill pipe can stimulate steel production. Oil companies need heavy machinery and trucks that also require steel.

Transportation will be needed to move supplies, not to mention the supplies themselves will be needed and stimulate other producers of wire, chains, I-beams, etc. Cain link fences.

Construction of oil derricks will require additional workers and metals. They will need geologists, engineers, metallurgists, inspectors, testers, etc.

They will need road builders and deep sea divers and barges and ships and pipes. Ship captains, service crews.

Lumber will be needed for houses and offices and various storage sheds, temporary structures and scaffolding. Sheetrock. Wiring. Light bulbs.

Furniture, fixtures, plumbing fixtures, copper pipe, plastic pipe,

They will need generators, engines, turbines, furnaces, etc, especially if drilling in the arctic.

Of course, workers need clothes, coats, heavy winter wear, socks, etc.
And of course food and water, doctors, medical care.

But the Congress of the Unites States says no. That's bad for the People.*

At 6/07/2008 9:44 PM, Blogger juandos said...

"this kind of argument apparently works well with listeners to kudlow and rush, but i'd prefer some hard data"...

Hmmm, it always seems you like your data to fit your preconceived notions...

The fact is that you apparently don't want to recognize is the fact that the minimum wage is a tax and an attempt by socialists to tell people how to run their businesses...

Minimum wage is a yoke on both business and society in general...

"What can we do to lower unemployment, help the construction industry, lower energy prices, stimulate the economy, help the auto industry, and increase tax revenues?

The answer is ....... begin drilling for oil.

Exactly sir! Hit the nail on the head...

At 6/07/2008 10:27 PM, Anonymous Anonymous said...

The fact is that the minimum wage in America is nowhere near as important as libertarians try to make it out to be. The real minimum wage is at such a low level that the recent increase is unlikely to have much of an impact. Look at Card and Krueger's research. Sure there are dissenting studies, but it's nowhere near an open and shut case as is implied.

It may have been more important in the sixties, where the real minimum wage was much higher, and consequently had an effect on employment and welfare, but that's simply not the case now.

In any case, the effects of a minimum wage depends on how much market power the employers have versus how much market power the employees have. The more monopolistic employers are as a whole, the more likely the scenario arises where a minimum wage actually INCREASES welfare. Not that I necessarily think this is the case, but for whatever reason the default model being used to assert the negative effects of a minimum wage seems always to be the perfectly competitive model, with supply and demand of equal and opposite elasticity, and that's not always the case in the real world.

At 6/07/2008 11:39 PM, Anonymous Anonymous said...

Does anyone know how this will effect servers in restaurants? Right now I believe the policy in most establishments (including where I have my summer job) is to pay the servers the federal minimum wage hourly, then they have to at least claim enough income from tips to bring them up to the state minimum wage (Connecticut's in this case). So if the policy still holds it looks like servers will be better off.

At 6/08/2008 10:31 AM, Blogger Ironman said...


Interesting point, and fortunately for me, already addressed here for the case of a typical minimum wage worker in a typical small business.

But, you don't need to use my assumptions or take my word for it. Here's a tool where you can incorporate your own particular information, or just a hypothetical case you might be interested in, to get a really good idea of what an employee's total recurring cost is to their employer.

The tool is generic and only incorporates some government oversight costs - the ones that are universal for employers (reporting employment status, filing tax related documents, etc.). Other factors like taxes and basic administrative costs associated with simply employing a person are also covered.

I do appreciate that specific business may have requirements above and beyond that. For working in the airline industry, it's also likely that they're including the cost of government mandated training and security-driven costs (background checks, clearances in some cases, etc.) in that figure as well.

That said, your HR contact is sharply overstating how much of your total employment cost is due to administrative expenses, taxes and government oversight expenses.

Having previously worked in the industry, and having some knowledge of what employment costs are at all levels of it, it's much more likely that they've also added in the cost of your health insurance and other benefits to the mix.

Hope this helps!

At 6/09/2008 5:29 AM, Blogger OBloodyHell said...

> Spencer at Angry Bear has done your homework for you

No he didn't. As noted by a more recent entry in the blog, he didn't even do his own homework.

Spencer brilliantly noticed that (GASP!!!!) The chief driver of teen unemployment is the business cycle!!!

("Oh. My. God. Such BRILLIANCE!!. Madge! Ask him for his autograph!!")

Since the chief driver of all employment is... the business cycle, this is hardly a Deep Thought in any but the Jack Handey sense.

What spencer shows is correlation -- not causation, which is another thing, entirely.

He doesn't do much of anything to relate to connecting the minimum wage together with unemployment, behaviorally, much less disprove the fact that there is a noticeable causal link.

He generates a pretty graph or two (note also how he doesn't identify his sources at all, unlike Dr. Perry), but there's nothing of value there:

"Oh, look! This curve rises over the course of decades! And that one doesn't! They must not be related!"

Since one is a cyclical number and the other is a generally increasing one, that would be a really, really DUMB way to argue correlation, much less causation -- for or against. One might as well graph the price of oranges in China (in Malagasy 'ariary's) against the average women's shoe size in France over the course of the last fifty years.

The biggest problem with the electronic spreadsheet is how easy it is to throw information and numbers into it and make something that looks relevant but which has no validity of any kind.

As Wolfgang Pauli once said about a paper from a Physicist colleague:
This isn't right. This isn't even wrong.

At 6/09/2008 5:38 AM, Blogger OBloodyHell said...

> this kind of argument apparently works well with listeners to kudlow and rush, but i'd prefer some hard data.

Well, bobbie, by all means, let us know when spencer actually provides some.

a) Walter Williams is a former department chair of the economics dept at George Mason. Not to make an argument by authority, but it does suggest that he's particularly knowledgable about the subject of economics.

b) The column is a newspaper-type column, and may actually BE syndicated -- I've seen columns by him in papers, though I don't know if these ever are. You don't generally find sources cited in such. It's an editorial piece, not a blog entry.

c) If you asked, I'd suspect someone around here could point you to some numbers and/or cite you some.


Anonymous said:
> But the Congress of the Unites States says no. That's bad for the People.

No, the Greens, through their wholly zombified idiots, the Democrats of Congress, have said "That's bad for the environment... screw the people".

Ya gotta get these things right if you want to fix the problems.

At 6/15/2008 1:04 PM, Blogger Mark said...

Maybe. In many places, including low cost of living regions, typical entry jobs were paying more than the minimum wage. So I would say if the uptick was primarily in places where entry-level, unskilled wages were low, then yes.
My personal guess is the increase is primarily due to a contraction in the retail economy, caused in large part by a reduction in disposable income due to higher energy and food prices, and a reduction in residential construction, caused by the current housing market meltdown.
Regarding the latter, I wonder what the illegal immigration trends are.

At 6/15/2008 6:45 PM, Blogger Richard Jennings said...

All the stats say unemployment is high but everyone I know makes a good living and look at all these 100K jobs posted...

Seems like good times!

At 9/05/2008 11:06 PM, Anonymous Anonymous said...

I realize I'm late to the party, but now that the 2008 increase has arrived in California, I'm weighing in. I own and operate a restaurant in a approx. 20,000 pop. rural area that is also a seasonal tourist destination and popular retirement spot in CA. There is no "tip substitution" here. In the first three months of 2008, (Jan 1st. MW went up to $8) 5 restaurants went out of business. Restaurants often fail, but these are places that have been in business for long periods (2@15 yrs, 1@12yrs, 2@1-3yrs). And from my own standpoint, although I did not downsize in the number of employees (20), ALL except 2 have had to absorb significant cuts in their hours. Of course, energy prices have also contributed, but these things could have been weathered had there not been such an increase in payroll.

I hate to sound like a conspiracy nut, but to anyone with common sense the minimum wage is dangerous in two ways.

1. Warm fuzzy feeling for the working poor- "Golly, I'm poor and look at what the Democrats are doing for me! They must really be concerned!" Except that the economy resets itself in short order and they end up being in worse shape in the long run.

2. Creating the new poor from the middle class. If MW employee "A" who is mildly competent receives a compelled, arbitrary, raise, there is less chance that employee "B" who is a stellar performer will receive any more than the same. Also, employee "C" who makes a couple of dollars more will also need to get a raise, but because there is only so much money to go around, will get a much smaller raise, percentage wise, and so will fall closer to the minimum. And then, because everybody's hours are cut and less overtime hours are allowed, there is less money at the end of the pay period. All because some politicians want to seem "magnanimous" while using other peoples' money.

Then, the impact of all these lower waged employees getting compelled,arbitrary increases causes prices to rise and everybody else wants a raise leading to inflation, strikes, and a general contraction of disposable spending and the whole economy suffers. The middle class slides closer to the poverty level because the bottom is artificially raised toward them.

The US spent the last hundred years fighting against the failed governmental systems of communism and socialism, yet the predictions of Nikita Kruschev (?) and Ho Chi Minh, that we would be defeated without a shot in the streets and schools, are now coming to fruition. The Democratic model is SOCIALISM, and as it progresses, our lack of individual control of our wages will be what robs us of our freedom.

Vote for McCain-Palin. at least they will talk about reducing Gov. and it's related spending of our money.

Also, call your representatives and DEMAND the FAIRTAX.

Let's rein in government, control our own destiny, get rid of the underground economy that costs the rest of us so much. NOW before we start having to stand in line for toilet paper.


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