Tuesday, August 12, 2008

The Great Teenage Depression: Minimum Wage Scheduled to Increase By 41% in Two Years

Teenage unemployment (16-19 years old, seasonally adjusted) for July (20.3%) was at the highest level in more than 15 years (see chart above, data here). It seems like that would be pretty newsworthy, but it received almost no media attention.

A Google News search for "teenage unemployment 20.3" resulted in only 11 news reports, and only a few of those stories linked the historic level of teen joblessness to one of the most obvious factors: the 41% percent increase in the federal minimum wage, from $5.15 to $7.25 per hour, scheduled to take place in three steps between July 2007 and July 2009 (the second increase, to $6.55 per hour, just took effect in July 2008).

For example, the Minneapolis StarTribune had two reports on the July 20.3% jobless rate for teens (here and here), but blamed it on the country's "economic malaise" and "economic downturn," without a single mention of the increase in minimum wage.

The only newspaper report that linked the 20.3% teen unemployment rate to the increase in minimum wage was a story in the
LA Times, which quoted David Resler, economist at Nomura Securities:

"The July jump in the federal minimum wage rate appears to have had the predicted impact on teen employment: The higher required rate enticed more teens into the job market to search for a smaller number of jobs on offer."

In the blogosphere, there was notably more discussion linking the 20.3% teen jobless rate to the minimum wage increase, see
Political Calculations, American Thinker, Market Power, and EclectEcon.

Bottom Line: Demand curves slope downward, whether it's the demand for gasoline, the demand for cigarettes, or the demand for unskilled workers. We can argue about price sensitivity, elastic demand vs. inelastic demand, availability of substitutes, etc., but higher prices or wages result in a reduction in the quantity demanded. That is, we can argue about the slope, but the slope of the demand curve is always negative.

Higher wages for unskilled workers = fewer jobs for unskilled workers = higher unemployment rates for unskilled workers. Period.

Update: Thanks to Ironman for the new post title.


At 8/12/2008 8:19 AM, Blogger John B. Chilton said...

It's Eclectecon, not Electecon.

Enjoy your blog. One of my daily reads.

At 8/12/2008 8:29 AM, Blogger Mark J. Perry said...

Sorry, John, it's fixed now!

At 8/12/2008 11:14 AM, Anonymous Anonymous said...

It’s easy to stand back and see the big picture when it is at the aggregate level, but at the individual level, the picture is much different. To those who are employed, higher wages are good regardless of whether or not it causes unemployment for others. Does anyone think that someone would be happy or even willing to give up a 50 cents-per-hour raise so that his or her neighbor could have a job? You can talk all you want about demand curves sloping downward, and I know it is true, but it will be a hard-sell to the general public who will just say "I gave at the office."

At 8/12/2008 11:58 AM, Anonymous Anonymous said...

"Does anyone think that someone would be happy or even willing to give up a 50 cents-per-hour raise so that his or her neighbor could have a job?"

Does anyone think that someone would be happy or even willing to give up HIS JOB so that his or her neighbor could have A 50 CENTS-PER-HOUR RAISE?

At 8/12/2008 2:21 PM, Blogger Ironman said...

This comment has been removed by the author.

At 8/12/2008 2:23 PM, Blogger Ironman said...

This comment has been removed by the author.

At 8/12/2008 2:25 PM, Blogger Ironman said...

Oh, there's more....

The effect of minimum wage increase upon teen employment was more dramatic than you might realize - total employment for teens (Age 16-19) plunged immediately following the minimum wage increase of 24 July 2007.

What's more, GDP for the quarter running from July 2007-September 2007 ran at 4.8% as teen unemployment rates spiked upward. Seems awfully odd that so many jobs for teenagers would disappear in August 2007 when the economy was humming right along!

Needless to say, the data since shows that the number of teens in the workforce has declined as the teen unemployment rate has simultaneously increased. One might say that we're in the midst of the Great Teen Depression! (As if dealing with depressed teens wasn't enough!...)

At 8/13/2008 12:49 PM, Blogger bobble said...

jeez, here we go again.

i agree that the demand curve slopes downward. but the minimum wage applies to so few workers these days, that rasisng it has little effect on employment.

i'm not going to go back and re-retrieve the numbers from the last time this was discussed, but i recall it was something like 2% of workers are at minimum wage.

here is a chart (borrowed from spencer) that shows teen unemployment vs minimum wage.

you'll note that sometimes teen unemployment goes up when min wage goes up (the early 90's and the mid 70's).

but sometimes the min wage goes up and teen unemployment goes down (the mid 90's, most of the 60's and the late 70's).

its the business cycle that better corresponds to teen unemployment. in fact, a pretty good correlation exists between total unemployment and teen unemployment. see here

At 8/13/2008 2:40 PM, Anonymous Anonymous said...

Why shouldn't the minimum wage be linked to purchasing power or CPI?

Oh wait, the argument is going to go that there should be no minimum wage, because the invisible hand of the market will handle human decency. Sure...

At 8/27/2008 3:46 PM, Anonymous Anonymous said...

What about the fact that a lot of teens can't read, write or add a level deemed necessary by employers paying minimum wage. The dependability factor, as well as one once making a dollar fourty an hour more is now at the minimum, with another seventy cent raise next July. As an employer myself, you better be a damn good worker to move up like that. Don't forget that associated costs such as unemployment insurance, matching social security etc. rise as wella


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