Saturday, March 06, 2010

Update: WSJ Editorial on the Minimum Wage; Excess Teen Unemployment Rose w/Min Wage

Teenage Unemployment vs. Minimum Wage

"Excess" Teenage Unemployment vs. Minimum Wage

Yesterday I featured the Wall Street Journal editorial on the minimum wage (WSJ here and CD post here), and it's generated some criticism (see one example here). The top graph above was my version of the WSJ graph that accompanied its article, showing the relationship between teenage unemployment rate and the increases in the minimum wage between 2002 and 2010. It's true that unemployment rates for all groups were rising over that period, and the rising jobless rate for teens might have been because of the general economic slowdown and not necessarily as a result of the minimum wage hikes, and that's a valid criticism.

However, the bottom graph attempts to better isolate the effects of the minimum wage increases between 2007 and 2009 by plotting the difference between the teenage jobless rate and the overall jobless rate, i.e. "excess teen unemployment," and the minimum wage. During the 2002-2007 period when the minimum wage was $5.15 per hour, teenage unemployment exceeded the national jobless rate by about 11% on average. Each of the three minimum wage increases was accompanied by about a 2 percentage point increase in the amount that the teenage jobless rate exceeded the overall rate, from 11 to 13% after the 2007 increase, from 13% to 15% following the second hike and from 15% to 17% following the last increase. The 17.5% "excess teen unemployment" in October 2009 was the highest on record, going back to at least 1972, and was almost 5 percent higher than the peak teen jobless rate gap in the last recession (12.7% in June 2003).

Remember that unskilled minimum wage workers are in direct competition with skilled workers. Especially during an economic downturn, unskilled workers have a potentially powerful weapon and advantage that can give them a competitive edge over skilled workers in a weak labor market - low wages. But between 2007 and 2009, politicians took away the competitive advantage of unskilled workers at the time they need it most, by boosting the minimum wage for unskilled workers by 42%, and essentially pricing them right out of the worst economy and labor market since the early 1980s.

Bottom Line: Economic theory and empirical evidence suggest that the overall effect of a minimum wage increase is always negative, on net, and can never be positive, on net. So the only real disagreement is how negative the effect will be, not whether it's negative on balance.

After all, if minimum wage laws could have positive net effects and politicians can legislate the creation of wealth with artificial price controls, why are they always being so stingy and miserly with such pitifully small increases; why don't they boost the minimum wage for unskilled workers up to something more respectable like $25, $50 or $75 per hour?


At 3/06/2010 10:07 AM, Blogger John B. Chilton said...

Here's a careful analysis on the abolition of youth minimum wage rates on the other side of the globe,

At 3/06/2010 12:40 PM, Blogger spencer said...

Historically the teen unemployment rate has been a multiple of the overall or adult unemployment rate.

If you look at this relationship over this cycle it implies that the rise in the teen unemployment rate over the last few years has been less than the cyclical rise in the adult or overall unemployment rate suggest it should have been.

This implies that the entire rise in the teen unemployment rate this cycle was due to the recession and that the minimum wage played no role.

While I am not going to argue this with you, I would love to see you explain why you are attributing all of the rise to the minimum wage and ignoring the cyclical factors driving up both teen and adult unemployment.

If you can not provide a reasonable argument as to why the cyclical factors played no role in the recent rise in teen unemployment I can only conclude that you are an ideologue pushing a point of view and that you are incapable of doing serious economic analysis.

At 3/06/2010 3:02 PM, Blogger sethstorm said...

Throwing it to arbitrary and absurd levels does not prove anything new.

At 3/06/2010 3:18 PM, Blogger Ironman said...

Part 1....

I'm afraid spencer's analysis isn't supported by real world data.

Let's look at teen employment levels from a slightly different perspective. Let's first look at the percentage representation of teens in the overall U.S. work force from 2005 through 2009:

Age 16-19 Percentage of Total Employed, 2005-2009

Unless some factor specifically affects teen employment levels, we should expect the percentage representation of teens within the entire workforce will be approximately constant over time.

In practice, that's we observe from 2005 through 2006, as the approximate percentage of teens in the entire workforce is stable, with the actual percentage in any given month bouncing around that level due to natural variation.

We can represent this with something like an statistical control chart. Here, we use the standard deviation of the data from 2005 through 2009 to determine upper and lower limits, between which, any data points would be described as behaving normally (as the distribution of data would correlate to a normal distribution.)

If the data falls outside those limits, that would indicate that something has changed. Rather than behaving normally, some specific cause has resulted in disrupting the established equilibrium.

We see that in this data, as teen employment levels dropped below the lower limit in April 2007. Tracking backward, we identify November 2006 as the last peak in the data, and January 2007 as the first point where the data moved below the established equilibrium average of teen representation in the overall U.S. workforce.

Specifically, something rather dramatically affected teen employment levels at that time. So we would need to specific causes for that change at those times.

Keep in mind that this data just threw spencer's analysis into the circular file. (Don't worry - I suspect he'll recycle it!)

Continued in Part 2....

At 3/06/2010 3:19 PM, Blogger Ironman said...

Part 2....

Jumping ahead in the story, this next chart shows how certain events correlate with these major changes, picking up from the earliest point we identified of interest:

Percentage of Number Employed for Age 16-19, Age 20+ and Total U.S. Workforce from Levels Recorded in November 2006

Starting from November 2006, we see that the changes we observe in teen employment levels directly coincide with certain events tied to increasing the federal minimum wage. We see that occur even as GDP growth was positive throughout each quarter of 2006. We see that occur even as all other workers see their employment levels increase.

And then we see the recession begin following November 2007. We should note that teen employment levels dropped more steeply in the months preceding and following later increases in the federal minimum wage.

Finally, we see teen employment levels stabilize in late 2009. After the last increase in the federal minimum wage, as we might expect, since there are no further increases planned for the federal minimum wage at this time.

Why were teens so affected? Teens represent approximately 25% of all those who earn the federal minimum wage in the U.S. They're also the most marginal of workers, in that they can most painlessly exit the workforce (financially supported by others, able to attend school full-time, etc.)

The best part is that no other explanation works to explain what we see in the national data for teen employment. Although the deflation phase U.S. housing bubble was beginning in 2006, thanks to a combination of child labor laws and high insurance premiums, the number of teens in the entire U.S. working in the housing industry would only number in the hundreds (out of 4.6 million employed teens in November 2006).

Likewise, teens lacked the educational requirements to work in the mortgage lending and financial industries, which were the other most affected types of business at the time.

So we see that spencer's cyclical factors affecting teen employment levels were completely absent in 2006, and do not correlate well with changes in teen employment levels that we have observed since the recession began.

Strike three, spencer!

At 3/06/2010 4:48 PM, Blogger PeakTrader said...

Economic theory does show an increase in the minimum wage can have a positive effect on teenage employment.

If a teenager's reservation wage is $6 and the minimum wage is $5, that teenager will not take a minimum wage job.

Also, empirical data show in the early '80s, the teenage unemployment rate was roughly 24%, while the non-teenage unemployment rate was about 10%, although the minimum wage didn't rise.

In the early '90s, the teenage unemployment rate was roughly 23%, while the non-teenage unemployment rate was 7%, although the minimum wage was flat.

However, today, the teenage unemployment rate is 25%, while the non-teenage unemployment rate is about 9% after the minimum wage increased from $5.15 to $7.25.

An initial review of the data suggest the teenage unemployment rate should be much higher if increases in the minimum wage has a negative effect on teenage employment, ceteris paribus.

At 3/06/2010 8:10 PM, Blogger PeakTrader said...

Anyway, I think overpaid federal government workers is a bigger problem than overpaid minimum wage workers:

Federal pay ahead of private industry
March 5, 2010

Federal workers earned an average salary of $67,691 in 2008 for occupations that exist both in government and the private sector, according to Bureau of Labor Statistics data. The average pay for the same mix of jobs in the private sector was $60,046 in 2008, the most recent data available.

These salary figures do not include the value of health, pension and other benefits, which averaged $40,785 per federal employee in 2008 vs. $9,882 per private worker, according to the Bureau of Economic Analysis.

But National Treasury Employees Union President Colleen Kelley says the comparison is faulty because it "compares apples and oranges." Federal accountants, for example, perform work that has more complexity and requires more skill than accounting work in the private sector, she says.

Office of Personnel Management spokeswoman Sedelta Verble, says higher pay also reflects the longevity and older age of federal workers.

At 3/07/2010 12:32 AM, Blogger bobble said...

ironman, there are many things wrong with your analysis.

what would be helpful is if you would do the same analysis for other recessions, especially where minimum wage increases were not a factor.

At 3/08/2010 6:52 AM, Blogger juandos said...

"ironman, there are many things wrong with your analysis"...

Name a few of those alledged 'wrong' things bobble...

At 4/20/2010 1:38 AM, Anonymous george said...

HAHAHahahaaaaaaaa wow, i cant believe you are saying low wages is a leverage tool for a job that only pays 7.25 an hour to start.. i mean if the job was 100 grand a year and i can do it for 80 grand a year ok..
but lets not get ridiculous.. I cant believe you want teenagers to get raped and taken advantage of more than they already do.. they already treat these workers like crap cause they know they can get another one off the street tomorrow. So you actually wanna give corporations even MORE power to abuse workers?? are you from china?? i worked for 5.15 it was sad. i work for 7.25 and its equally sad.. and people wonder why there is crime.. why should someone waste 40 hours of there life when they can make as much in a 2 min. robbery?
min. wage increased to try and help with the increase in living cost. such as gas being .74 in the late 80's to 3.00 a gallon now.
so technically shouldn't it go up 300% !!! not only 49% like you say to keep pace??? i seriously think you have never had to live on min. wage, or have any kids. I'm sorry america isn't being destroyed quick enough for you. trust me those people dont need any help from a no body like you. heres an idea go raise your teenagers in china if you want them to have low wages as an advantage. where they can work for 2 dollars a day for 16 hours chained to a radiator to make sure they dont sneak off to the bathroom. enjoy :0)
I see you have comment approval on so you prob. wont post this but if you have any respect for yourself or your career you will.
later - george


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