Market Power

A Perfect Storm in the Low Skilled Labor Market?

From Ironman at Political Calculations:

In terms of jobs lost, that means that 2,234,383 of the jobs lost in the U.S. economy since 2006 have been jobs that were directly impacted by the series of minimum wage increases that were mandated by the federal government in 2007, 2008 and 2009.

Interestingly, the average number of employed members of the civilian labor force in 2006 was 144,427,000. In 2010, the average number of employed members of the civilian labor force in the U.S. was 5,363,000 less, standing at 139,064,000.

So, in percentage terms of the change in total employment level from 2006 to 2010, jobs affected by the federal minimum wage hikes of 2007, 2008 and 2009 account for41.8% of the total reduction in jobs seen since 2006.

And from a later post from Ironman comes this striking graphic (posted with permission) which shows the trend in teen employment as a proportion of the teen population aged 16-19 since November 2006.  The minimum wage will negatively affect the lowest skilled of the lowest skilled - those with the least experience - i.e. teens.

 

Teen employment began dropping almost a full year before the recession began as businesses saw the writing on the wall that came with the Democratic win in Congress in '06.  The minimum wage was going to go up and when minimum wage jobs came open, many were going to go unfilled.  The recession only made things worse, even through a period of deflation.  The employment proportions have continued a downward trend as the economy moved out of recession, although the deceleration seems to have lessened during the past year.

So a perfect storm hit the low-skilled labor market.  The increase in the minimum wage made it less lucrative for firms to hire low skilled people and the recession piled on.  To what, if any, extent did the minimum wage increase make the recession worse than it would otherwise have been?

Update:  Ironman, always on the job, has an answer to that last question.

 

Ignoring the Elephant in the Room: The Minimum Wage

In an article by Mickey Meece in the NY Times entitled "Job Outlook for Teenagers Worsens", you'll find a lot of worry about the staggeringly high unemployment rate of young people aged 16-24.  But nary a peep is made about the obvious elephant in the room: the minimum wage.

That is a stark contrast to the job market for recent college graduates seeking full-time employment — a market where this is actually a slight increase from this time last year.

There is no simple explanation for the large drop-off in summer jobs this decade, though experts say that more high school students are choosing to volunteer and do internships to burnish their college applications. But the Northeastern researchers said a large number of youths had been left out of the work force and wanted to get back in.

The recession didn't start until late in 2007, but the unemployment rate of 16-24 year olds began to increase in the second quarter of 2007.  The minimum wage was increased at the beginning of the third quarter of 2007 (July, specifically) for the first time in nearly a decade, but the increase was signed into law by then-president Bush on May 25th (the second quarter) of that year.  Employers knew for certain in the second quarter that the minimum wage was going to increase, so they scaled back their hiring of low-skilled workers in that quarter. 

The recession and two subsequent increases in the minimum wage - in July of 2008 and 2009 - have driven the unemployment rate of 16-24 year olds from 10% in the first quarter of 2007 to 18.7% in the first quarter of 2010.*

Either Mr. Meece needs some Econ 101 training or his editors do.  I don't expect a detailed literature review, a complicated regression analysis of the teenage labor market, or anything like that.  But it would be nice if there would at least be a mention that the minimum wage is responsible.  That's all I'm asking for.  Is that asking too much?

*All unemployment rate data are from the Current Population Survey and are seasonally-adjusted.

Update:  Don Boudreaux at Cafe Hayek noted the same thing I noted in this post.

Two on Unpaid Internships

Leslie Hook and Joseph Sternberg discuss their experiences as interns in today's WSJ.

"The Obama administration, or at least part of it, is turning its attention to an unlikely target: unpaid internships. "There aren't going to be many circumstances where you can have an internship [at a for-profit company] and not be paid and still be in compliance with the law," a Labor Department official recently told the New York Times.

"The fear seems to be that dishonest employers will use unpaid interns to do the work that salaried entry-level staffers used to do. Not only does this displace jobless workers in a down economy, it also exploits the college students so desperate for work that they'll do menial jobs for free. That's the theory, anyway.

"The reality is different, as we can both attest. Horror stories do circulate, but our much more ordinary experiences offer a reality check: In general unpaid internships end up being useful experiences—and serve several important functions in the labor market."

Read the whole thing, as they say.

Warren Meyer has a similar take, and includes this comment from another blog.

Maggie Hanson:

I have an unemployed friend trying to land work in a new field where she has no experience. She’s up against experienced applicants. I suggested she offer her services for free as an intern for 3 months in exchange for learning on the job and a letter of recommendation. She told me she didn’t think that was legal. I’m appalled to learn she is right! Yet how else is she going to get experience? She can’t afford school. Internships are a free education.

The Economic Impact of the Increased Minimum Wage?

From Reuters:

Teenagers have found it significantly harder to get a job since the recession began in late 2007, with black youths and young people from low-income families faring the worst, wrote Andrew Sum of Northeastern University in Boston, a employment researcher commissioned by the Chicago Urban League and the Alternative Schools Network.

"Low-income and minority youth, who depended on part-time jobs as a significant stepping stone to future employment, have been forced out of the job market and economically marginalized," Herman Brewer of the Chicago Urban League said in a statement.

...Among the proposals the report supported were government-funded jobs programs directed at the young, additional funding to help re-enroll school dropouts, and government-funded expansions of work internships.

I've got a more radical proposal - one that decreases the scope of government and one that doesn't increase it's size:  lower or eliminate the minimum wage.  Even if someone is willing and able to accept a job for, say, $5.00 an hour, the law says that he can't.  Why should that be illegal?

HT Glenn Reynolds

Update:  Keep in mind that this has been going since before the recession hit.

The "Teen Job Scene"

Like the rest of the labor force, times have been awfully rough for teens.  Almost 28% of the teen labor force is unemployed which puts a serious dent in not only their current prospects but their long term prospects.  Ironman discusses recent statistics on this part of the labor force.

NBER Study: The Minimum Wage and the Body Mass Index

From David Meltzer and Zhuo Chen (HT Greg Mankiw):

Growing consumption of increasingly less expensive food, and especially “fast food”, has been cited as a potential cause of increasing rate of obesity in the United States over the past several decades. Because the real minimum wage in the United States has declined by as much as half over 1968-2007 and because minimum wage labor is a major contributor to the cost of food away from home we hypothesized that changes in the minimum wage would be associated with changes in bodyweight over this period. To examine this, we use data from the Behavioral Risk Factor Surveillance System from 1984-2006 to test whether variation in the real minimum wage was associated with changes in body mass index (BMI). We also examine whether this association varied by gender, education and income, and used quantile regression to test whether the association varied over the BMI distribution. We also estimate the fraction of the increase in BMI since 1970 attributable to minimum wage declines. We find that a $1 decrease in the real minimum wage was associated with a 0.06 increase in BMI. This relationship was significant across gender and income groups and largest among the highest percentiles of the BMI distribution. Real minimum wage decreases can explain 10% of the change in BMI since 1970. We conclude that the declining real minimum wage rates has contributed to the increasing rate of overweight and obesity in the United States. Studies to clarify the mechanism by which minimum wages may affect obesity might help determine appropriate policy responses.

So a decrease in minimum wage, which decreases unemployment when it's an effective price floor, leads to a higher BMI.  This has to be a coincidence.  It's hard to see the theoretical rationale for this.  A change in the minimum wage really represents nothing more than a transfer of money from one group to another. 

For instance, short run studies of the elasticity of low skilled labor suggest that its demand is inelastic.  That means an increase in the minimum wage, even though it will reduce the level of employment of low skilled workers, will increase the income of low skilled workers taken as a group.  But where does that money come from?  It doesn't grow on trees.  It comes from business profits and from consumer pocketbooks (through price increases).   So some groups realize an increase in their money flow while others see a decrease.  But they find a negative relationship. 

Moreover, the authors find that the effect is significant across income groups.  I would expect there to be no effect in the highest income groups.  It is most likely a coincidence and what they've found is a simple correlation.

Is The Minimum Wage Stimulating?

According to Keynesian economic theory, an injection of funds into an economy will generate a multiple increase in overall economic activity.  My colleague, Dick Schiming, was quoted a month ago by the local television station:

Schiming says he's on the side that thinks raising the minumum wage is a good idea.Dick Schiming says, "It's going to stimulate more spending which will create more jobs in the long run."

And later in the story.

"The idea of economic stimulus is giving people more money to spend by putting money in the pocket of low income workers. They'll spend it. So in essence it can be viewed as a stimulus package."

So if you take the basic identity GDP = C+I+G+NX (spending on economic output is the sum of consumption, investment, government spending, and net exports), Dick is arguing the minimum wage will increase C. 

And it's not just Dr. Schiming making this argument (see here).  So, I ask them this:  why not set the minimum wage at $100 per hour?

A common finding in minimum wage studies is that the elasticity of demand for minimum wage workers is somewhere around -0.1 in the short run.  That is, a 10% increase in the minimum wage causes a 1% decrease in employment.  When demand is inelastic and the minimum wage increases, minimum wage workers as a group will realize higher incomes in the short run although some members of the group will have lower incomes. 

The problem with Dick's argument is that increased wage payments from businesses do not represent an injection of funds into an economy.  Think of it this way.  If I take the money out of my left pocket and put it in my right pocket, do I have more money in my pockets?  No.  I haven't changed the stock of cash in my pockets, only its distribution.  Likewise, the minimum wage workers will have more money, but business owners will have less money. 

So while that part of C driven by minimum wage workers is likely to increase, it will be offset by a likely decrease in that part of C driven by business owners and a decrease in business investment, I.

For a policy to be truly stimulating, it needs to encourage more voluntary trades.  Increases in the minimum wage causes unemployment.  That is, it discourages voluntary trades in the low skilled labor market.  Moreover, to the extent that an increase in the minimum wage increase prices of goods/services produced by minimum wage workers, it discourages voluntary trades of consumables. 

What's Wrong with the Stimulating View of the Minimum Wage Hike?

From NPR:

But liberal economists say this summer is the perfect time for a wage hike: It will put more money into the pockets of people who need it most. Fatter paychecks will stimulate spending and help the economy, they say. Kai Filion, a policy analyst for the Economic Policy Institute, a left-leaning research group, says this wage hike will generate $5.5 billion in consumer spending over the next 12 months.

It is my understanding that studies show that a 10% increase in the minimum wage, all else held equal, leads to about a 1% decrease in employment.  This gives us an elasticity of unskilled labor demand of -0.1, making unskilled labor a good with inelastic demand. 

Economic theory tells us that when demand for something is inelastic and its price rises, the incomes of the good's providers increases, even though though quantity demanded falls.  In the unskilled labor market, the "good" is unskilled labor, the "price" is the wage, and "providers" responds to the workers themselves.

Keynesian economic theory tells us that when a given amount of money is injected into the economy, overall spending in the economy will increase by a multiple of the original amount injected. 

So what's the problem?  Unskilled workers will have more money and that should lead to a multiple increase in overall spending, right? 

Wrong.  It's because the marginal income received by minimum wage workers lucky enough to still have jobs does not represent an injection of money into the economy.  It represents a redistribution of income and nothing more.  The added income of unskilled workers will come from the incomes of business owners who employ minimum wage workers and from the people who buy goods produced with unskilled workers through higher prices.  While unskilled workers may spend more overall, that will be offset by decreased spending in other areas of the economy.

Too bad NPR missed that point.

Jeff Jacoby on the Minimum Wage

Column here.  HT Mark Perry via Kip.  Excerpt:

AS IF the recession hasn’t been rough enough on those near the bottom of the economic food chain, fresh bad news is on the way. Beginning July 24, the federal government will be making it more difficult for employers to hire low-skilled and unskilled American workers. Thanks to an ill-advised law enacted with bipartisan support in 2007, the cost of providing an entry-level job to individuals with few skills or minimal experience will be going up by more than 10 percent. Those who cannot find a job paying at least $7.25 an hour will not be permitted to work.

People who would be willing and able to work for less than the minimum wage cannot find jobs because employers are prohibited from hiring people at less than the minimum wage.  In other words, it creates ceteris paribus unemployment, especially of teenagers, the lowest skilled of the lowest skilled.

In addition, many teenagers who can't find work because of the minimum wage will be hamstrung over time because they won't get the valuable experience that comes from holding a job.  This experience is an investment that pays a return over a lifetime.