Is The Evidence In On Minimum Wage?

Unemployment line When the most recent unemployment numbers were released, the media bleated about the highest percentage increase in the jobless rate since 1986. For example, The New York Times lamented:

The unemployment rate surged to 5.5 percent in May from 5 percent, the largest monthly spike in more than two decades, as the economy shed 49,000 jobs for a fifth month of decline, the Labor Department reported on Friday.

Economists construed the weak monthly jobs report as an indication of the pain assailing tens of millions of Americans amid an economic downturn that most experts assume is a recession.

The labor market is continuing to deteriorate, eroding the size of paychecks, just as gasoline and food prices surge, and as the declining value of real estate erodes the wealth and credit of many households.

Ed Morrissey was quick to point out why the numbers don’t support what the media narrative claims:

Up to now, employment had held steady through a rocky economy barely staying out of recession. In May, that changed for the worse, as unemployment rose to its highest level since October 2004. However, only 49,000 workers lost their jobs, which doesn’t nearly account for the four-tenths rise … The real story here is unemployment among entry-level workers to the employment system. In summer, teenagers and college students enter the marketplace looking for seasonal and part-time work. This accounts for the significant rise in job-seekers and the 0.4% increase in unemployment. Otherwise, an overall job loss of 49,000 jobs would account for a 0.04% increase in a market of 138 million workers.

fast food worker

King Banaian also took a look at the May numbers (in comparison with April), and while he disagrees somewhat with Ed’s account for the number of new entrants to the job market, he finds validity with respect to the rise in the unemployment rate:

[W]hat he [Ed Morrissey] is proposing is that the higher minimum wage is inducing a large increase in the supply of labor. Setting aside the timing issue (did really all the teenagers wait until May to decide “hey, let’s get a job”?), we still have a 12% increase this summer, which is to have led to a 3.7% increase in labor supplied by teens two months prior to the change in wages. And most of these teens will give those jobs up by Labor Day. I don’t have a very good feel for teen labor supply elasticities, but Ed’s suggesting that the short run elasticity here is above 0.3, which feels high to me. In the long run, it would certainly be higher than that.

In terms of teen unemployment rates, though — which involves both supply and demand — the jump is quite large but not necessarily unbelievable if you think demand shifted down due to recession and then moved along the new, lower demand to reflect the minimum wage increase.

In other words, where Ed lays the jump in the unemployment rate squarely at the feet of Congress’s enactment of a minimum wage increase (thus reducing the number of available summer jobs for teens and college students), Banaian suggests that a general economic slowdown also contributed significantly to the number.

So had we had the same behavior of people entering the labor force as we had for April (which was the same as for the entire first quarter), the unemployment rate would have come in at 5.2% rather than 5.5%. So the employment-population ratio, which many have used in the past to account for what’s happened in the labor market when the unemployment rate didn’t provide them the gloom and doom they wanted, only dropped by 0.1 to 62.6%, virtually unchanged since February.

200,000 new teens are in the labor force in May 2008 vs May 2007 (table A-2, with a nod to Paul who spotted it while I was writing this.) That’s one source of the new workers into the workplace, but not all of them, as the number of people not in the labor force fell by 369,000.

That last number is the surprise, the reason we will end up talking about the unemployment rate all weekend long. The rest of the data should have come as no surprise. The job market is weak but not in free fall; an oil shock and a housing contraction should do what we’re seeing here, but so far the loss of jobs in the first five months 2008 has been 324,000, not much different than the first five months of 2001. That’s about what we grow in two good months.

So how does this add to the long and ongoing debate regarding whether legislating a minimum wage helps or hurts low-wage workers? I’m not sure it does, although that won’t stop anyone from claiming otherwise.

On the doom and gloom side, the unemployment figures will be cast as nothing more than a function of the poor economy, and as yet another indicator of the malfeasance of the Bush Administration such as this paragraph thrown into the middle of the NYT story:

The spike in the jobless rate also ratcheted up the policy debate in Washington, where the White House has pledged to veto a supplementary Iraq war financing bill that includes an expansion of unemployment benefits. The White House has opposed the bill for imposing deadlines on the withdrawal of troops.

This comes amidst myriad other tropes in the NYT piece, generally framing the US economy as entirely unsound, and even claiming that “most experts” have concluded we are already in a recession. Accordingly, the large jump in the unemployment rate couldn’t possibly have anything to do with Congress passing a seventy cent increase in the minimum hourly wage last year, which wage is set to go up another seventy cents in July, because that doesn’t fit the narrative. Instead, it is the unhealthy ways of the war in Iraq, the Federal Reserve, Big Oil, Wall Street, and every other nominally capitalist bogeyman regularly employed in the service of media moralizing.

Even where the news is delivered fairly straight, such as this story by Bloomberg news, the rise in teen unemployment is attributed entirely to the growing faults in the economy (my emphasis):

American teenagers looking for summer jobs are facing the worst prospects in five years as retailers and restaurants trim payrolls in response to a slowing economy.

The teenage jobless rate soared to 18.7 percent in May, the highest since June 2003, from 15.4 percent the month before, the Labor Department said yesterday. The increase was the biggest since the department began keeping the statistics in 1948. Overall, the unemployment rate rose half a point to 5.5 percent.

Bookseller Borders Group Inc., clothing store Talbots Inc. and movie-rental chain Blockbuster Inc. are among the companies trimming payrolls as consumers rein in spending. The tough job market for teens is another sign of the widening effects of the economic downturn that began with a slump in housing and spread to the financial industry.

Notice that, again, there is no mention at all of the looming increase in minimum wage, and that “the economic downturn” is given full credit despite the fact that the latest numbers available still evidenced a growing economy (albeit anemically).

On the other side of the coin, however, are those who think that the minimum wage increase is entirely to blame for fact that teens are not getting hired, and therefore why the numbers jumped so dramatically in May. From Jerry Bower, chief economist of the BenchMark Financial Network:

Ask yourself a few questions: Why did unemployment surge at a time when unemployment compensation claims are historically low? More to the point, how could unemployment spike this much without a coinciding spike in corporate lay-offs?

The answer to all of these questions is same: because very few people lost jobs last month. This huge jump in the size of the unemployed comes from new entrants to the economy – hundreds of thousands of them. In short, well over 600,000 people who were not job seekers in April became job seekers in May. And who starts looking for work at the end of Spring? That’s right – students. Hundreds of thousands of students are looking for work right now, and they’re not finding it.

That’s his explanation for the dramatic May jump. Who’s to blame?

Congress is to blame. Last year Congressional Democrats (along with some Stockholm-Syndromed Republicans) passed the Fair Minimum Wage Act of 2007, which started a phased hike of the minimum wage from $5.15 an hour to $7.25. Free market economists warned them that this would increase unemployment – that rapid increases in unemployment compensation hit teens and minorities the hardest. But the class-warriors are running the people’s house now, and they would hear none of that, so they took to the floor, let loose the dogs of demagoguery, and saddled America’s pizza parlors, municipal swimming pools, house painting businesses and lawn mowing services with a huge cost increase.

Now, we see the perfectly logical outcome of wage controls – rising unemployment among the most economically vulnerable. The chart above tells the story: Friday’s unemployment spike occurred overwhelmingly among teenagers, and secondarily among African Americans. Just like we said it would. A kid who is at entry level of job skills may be a good deal at 5 bucks an hour, but not at 7. Our anointed leaders gets to glory in their generosity (with other people’s money) and just so long as very few people in the media know that a demand curve slopes downward (a good bet, there), no one calls them on it.

So, for Bowers, an economy that is clearly weakening (e.g. having shed jobs every month for the last five months) has nothing to do with the unemployment rate, it’s simply a predictable function of increasing minimum wage. For those familiar with my writing, it comes as no shock that I am extremely sympathetic to this point of view. I really, really, really want it to be true. I’ll even provide a little bit more evidence to bolster Bower’s point:

A 2007 U.S. Chamber of Commerce survey confirmed that assumption [that small businesses bear more of the burden of a minimum-wage increase]. The chamber found that nearly 60 percent of small-business owners said they would not be able to offset the cost of the minimum-wage increase, which would lead to smaller profits. Nearly 30 percent of small-business owners said that they might have to raise prices in order to cover the increase, while more than 20 percent said that they would not be increasing their staffs as planned.

If small businesses were declaring last year that minimum wage increases would curtail their hiring plans, then some increase in the unemployment rate should have been anticipated at the onset of the summer months when a large number of minimum wage workers are typically hired. In fact, the Labor Department uses seasonal adjustments to account for the influx of new job seekers in the summer, a calculation that the White House suggests was performed incorrectly this year:

The White House and some economists questioned the validity of the spike in unemployment, noting that most of results from a surge in people entering the labor force. Some suggested that this meant that the Labor Department may have miscalculated its seasonal adjustments for graduating college students entering the market, inflating the numbers of those seeking work.

“I think this move is exaggerated,” Mr. Darda said, who noted that new unemployment claims, while recently crossing above 370,000 a week, are still not consistent with such a dramatic surge in joblessness. “This is strange.”

However, it’s hard to fault the Labor Department calculations when the number of new entrants to the labor force was far higher than anyone anticipated. And despite the apparent direct connection between at least some businesses’ hiring practices and the rising minimum wage, one cannot reasonably discount the sagging economy:

“With the market softening, the pace of job creation may be moderated, but it’s hard to separate out the effects of higher minimum wages, rising energy costs and other factors that may compress profit margins,” [Roger] Tetterow [professor of economics at the Atlanta campus of Mercer University] said … “The minimum-wage increase could be ill-timed, given today’s economy,” [Don] Sabbarese [director of the Econometric Center] said. “We are in uncharted territory, with energy prices being what they are and other market factors affecting businesses. Some companies can raise prices, and others can’t. It would be difficult for a company to raise prices on goods if it is already losing business.”

So, even though I truly want the evidence presented to finally, once and for all, prove that increasing the minimum wage* leads directly to higher employment, I just don’t think this does it. I’m sure there is some connection between the unexpectedly large increase in May’s unemployment rate and the past and looming wage increases. But with so much other economic noise (rising oil/gas/fuel prices, decreasing housing prices, weak consumer sales, etc.), I just can’t see how one can plausibly argue that the minimum wage is the sole or even primary cause of the unemployment number.

Given that, Ed Morrissey tries to split the baby:

Some commenters from Friday put the blame on the sharp increases in oil prices, but that primarily affects prices, not wages or jobs. It does have a secondary effect of reducing buying power through inflation throughout the consumer market, which means that retailers can’t afford to raise the price of goods now to help offset the increased labor costs that Congress imposed. If they can’t raise prices, then they have to cut costs instead, and that means hiring fewer workers in entry-level positions.

Where does that leave us? I’m of the mind that we are slowly sliding into a recession that’s mainly driven by rising fuel costs and low consumer outlook. I also think the job numbers put out by the Labor Department are problematic at best (e.g. payroll survey vs. household survey), so much so that seeing a large monthly change in one unscientific calculation shouldn’t be either cause for alarm or joy. Throwing a significant increase in the minimum wage into the mix makes for some headlines, and it indubitably hurts at least some wage-earners and small businesses, but I doubt it does much to the overall structure of the economy on any sort of mid or long term basis. Putting those thoughts together, it doesn’t surprise me that the May unemployment rate jumped for the reasons stated by the NYT’s nameless “experts” as well as those stated by Jerry Bowers, et al. And despite my most fervent wish that it were so, I don’t think that these numbers prove anything one way or the other about the effects of minimum wage on unemployment.

You can pull my libertarian card now.
* Above a certain level that is higher than the market-clearing wage for unskilled labor. Raising minimum wage to some level below what an unskilled worker can earn absent the minimum, or perhaps even slightly above it, probably has little to no effect whatsoever, except as to how that minimum level is used to set other wages, such as those earned pursuant to certain union contracts.

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6 Responses to “Is The Evidence In On Minimum Wage?”

  1. on 11 Jun 2008 at 5:08 pm Don

    Minimum wage is like price controls (except they work in the opposite direction), and both are economically stupid ideas.

    The only people who support wage laws are those who are ingnorant of economics, and pandering politicians.

  2. on 13 Jun 2008 at 10:05 am Lance

    Good round up. I see all of these factors interacting. Inflation, economic pressures and the promise of a higher minimum wage are all stimulating labor supply, especially amongst those not presently working (which includes large numbers of students and teenagers.)

    Meanwhile, the economy is weakening at the same time as low value wage rates are rising (due to the minimum wage) which makes hiring at the low end even more problematic.

    My best guess, the NBER will ultimately rule we entered recession a good while ago, probably December, and the numbers will get significantly worse by year end. Unemployment is a lagging indicator typically. The recession will not be particularly deep (though the “fat tail risks” are much higher in this downturn than most) but the economy will be weak for much longer than the last two recessions.

    And yes, the minimum wage raise will ultimately be a large factor in making it worse at the low end of the wage scale than it should be.

  3. on 25 Nov 2008 at 1:21 am starting lawn mowing business

    I just hope there will be better days ahead for everyone now that the election is over and this is what we’ve been praying for when he begins to assume presidency next year in January ( you know who…)

  4. on 25 Nov 2008 at 8:04 am Gino

    ‘and the numbers will get significantly worse by year end’…So just where do you keep that crystal ball Lance???

  5. on 26 Nov 2008 at 10:42 pm Lance


    Unfortunately my thought that this was likely to be a long shallow recession was optimistic. I mentioned the “fat tail” risks to the downside, and definitely we are seeing those manifest themselves.

    As for my crystal ball, I wish I had one, but to the extent I have any insight, most of my economic and investment thoughts and discussion of the kinds of things to do to protect oneself that are not here can be found at Risk and Return. I started there in January, and it has unfortunately not been pleasant. One long bearish slog of me saying things were worse than people thought, that the market would lose at least 35%, that the housing bubble and credit crisis were a huge disaster and my only concern was that I was probably too optimistic.

    I do try and lighten it up with black humor though!

    So, if you can stand that kind of thing feel free to drop me a note on your thoughts about it.

  6. on 01 Dec 2008 at 2:18 pm Gino

       I heard that once we find the bottom of the housing market, things will plane-out for a while…Then with the speed of a funeral dirge, prices will ascend, the stock market will react positively and all will be well in ‘mudville’.  The problem is, the bottom will only be revealed after it has been there for quite some time.  So the entire process will be as slow and painful as a baroque sarabande.  So take comfort and remember the words of @#!%*&$^*^%$^, who said, “The true measure of a person is not how well one does when things are going well; But how well one does when things are going to hell.”  So needless to say there will be a lot of oppertunity for us all to be measured in the coming months.  Check that…years…

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