Monday, July 13, 2009

Mandating Unemployment - July 13 Wall St. Journal

Here's some economic logic to ponder. The unemployment rate in June for American teenagers was 24%, for black teens it was 38%, and even White House economists are predicting more job losses. So how about raising the cost of that teenage labor?
Sorry to say, but that's precisely what will happen on July 24, when the minimum wage will increase to $7.25 an hour from $6.55. The national wage floor will have increased 41% since the three-step hike was approved by the Democratic Congress in May 2007. Then the economy was humming, with an overall jobless rate of 4.5% and many entry-level jobs paying more than the minimum. That's a hard case to make now, with a 9.5% national jobless rate and thousands of employers facing razor-thin profit margins.
There's been a long and spirited debate among economists about who gets hurt and who benefits when the minimum wage rises. But in a 2006 National Bureau of Economic Research paper, economists David Neumark of the University of California, Irvine, and William Wascher of the Federal Reserve Bank reviewed the voluminous literature over the past 30 years and came to two almost universally acknowledged conclusions.
First, "a sizable majority of the studies give a relatively consistent (though not always statistically significant) indication of negative employment effects." Second, "studies that focus on the least-skilled groups [i.e., teens, and welfare moms] provide relatively overwhelming evidence of stronger disemployment effects."
Proponents argue that millions of workers will benefit from the bigger paychecks. But about two of every three full-time minimum-wage workers get a pay raise anyway within a year on the job. Meanwhile, those who lose their jobs or who never get a job in the first place get a minimum wage of $0.
Mr. Neumark calculates that the 70-cent per-hour minimum wage hike this month would kill "about 300,000 jobs for those between the ages of 16-24." Single working mothers would also be among those most hurt.
Keep in mind the Earned Income Tax Credit already exists to help low-wage workers and has been greatly expanded in recent years. The EITC also spreads the cost of the wage supplement to all Americans, not merely to employers, so it doesn't raise the cost of hiring low-wage workers.
For example, consider a single mom with two kids who earns the current $6.55 minimum at a full-time, year-round job. In 2009 she receives a $5,028 EITC cash payment from Uncle Sam -- or about an extra $2.50 per hour worked. Other federal income supplements, such as the refundable child tax credit, add another $1,900 or so. Thus at a wage of $6.55 an hour, her actual pay becomes $10.02 an hour -- more than a 50% increase from the current minimum. (See nearby table.)
But that single mom can't collect those checks if she doesn't have a job, and the tragedy of a higher minimum wage is that it will prevent thousands of working moms striving to pull their families out of poverty from being hired in the first place.
If Congress were wise and compassionate, it would at least suspend the wage hike for one or two years until the job market recovers. We know this Congress won't do that, but someone has to speak up for the poorest, least skilled Americans.


  1. There is another aspect to this that almost always gets lost in the shuffle of minimum wage elaboration. That aspect is this, every time the minimum wage increases the cost of everything else increases also, cloths, utilities and especially food. With that being the case, who actually gets to benefit from a rate wage hike. This is especially the case when you add bad economic standings into the mix. It seems to me that congress is not making things better, it is doing everything it can to make the economic crisis worse than it was before. Hum, I wonder when our leaders will allow us the knowledge of what grasses we can eat with our seven day old pourage to help fill us up? Or will they pass a law against eating grass as a coudegrah?

    David Huff
    Angry American

  2. The negative affects of a minimum wage increase are irrefutable, but this Congress is more concerned about maintaining power than increasing jobs. They feed off the public’s economic ignorance and even campaign on their votes for a minimum wage increase as a reason for their re-election. And they get the votes. Most voters don’t know any better, and there is no responsible watchdog media to call out the politicians on this fallacy.

    A raise in the minimum wage is a reward to the labor unions that support Democrats for office. A higher minimum wage makes less skilled workers more expensive for employers to hire. This reduces competition for unions in some markets. Plus, there are some union contracts that are indexed to the minimum wage. Therefore a percentage increase in the minimum wages equals more money for union employees and more union fees for union leadership. Lastly, a raise in the minimum wage makes goods and services more expensive overall. This can contribute to a higher consumer price index, which will increase union wages that are indexed to the CPI or rate of inflation. So unions are the big winners. But when unions win, businesses and, ultimately, the public lose. Union contracts are a big contributor to the downfall of our auto industry, which has brought the double-whammy of expensive and wasteful government bailouts burdening the economy. Poor school performance is largely due to oppressive union contracts with the Teacher’s Union. Ironically, these poorly performing schools turn out thousands of future voters each year that will ignorantly vote for higher minimum wages at their own economic peril.

    But the push for a minimum wage by this Democratic Congress at such a tenuous time in our economy is only partly about rewarding unions. The administration that touts “you never want a serious crisis to go to waste” is wasting no time in further weakening our economy. This minimum wage increase is a part of a concerted effort to make people more dependent on government. For Democrats, more government dependency is job security. Look what the Great Depression did for FDR and Congressional Democrats. And they’ve learned from the past. They will never let another Reagan revolution strengthen the economy and reduce their power again. The minimum wage increase is part of a multi-pronged attack to make a majority of voters government dependent - and dependent on Democrat government programs for years to come. This is Obama’s change and his “remaking of America.” Cap and Trade will raise energy costs. Higher taxes will further reduce employment and increase costs. Stimulus spending will increase our deficits and debt leading to inflation. And national healthcare will drive us further into debt with a huge government entitlement program. This is the New Deal on steroids. But people will vote based on what they perceive they are getting while giving little thought to what they are giving up in return. This attitude makes the minimum wage increase a win for politicians and a terrible loss for our country.

  3. Low-skilled workers must compete for employers’ dollars with both skilled workers and capital. For example, if a skilled worker can do a job for $14 per hour that two unskilled workers can do for $6.50 per hour each, then it makes economic sense for the employer to go with the unskilled labor. Increase the minimum wage to $7.25 per hour and the unskilled workers are priced out of their jobs. This dynamic is precisely why labor unions are such big supporters of minimum wage laws. Even though none of their members earns the minimum wage, the law helps protect their members from having to compete with lower-skilled workers.