Welfare, Minimum Wages, and Unemployment

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Ludwig von Mises Institute :

Welfare, Minimum Wages, and Unemployment

 

Mises Daily: Thursday, January 16, 2014 by Greg Morin

 

Of the various flavors of government interventionism in our lives, the minimum wage is perhaps the most welcomed. It appeals not only to our innate sense of “fairness” but also to our self-interest. Its allure may erroneously lead us to the conclusion that because “it is popular,” ergo “it is right.”

 

The more astute proponents of the minimum wage, however, immediately point to the obvious; namely, that an extreme minimum wage ($1,000 per hour) would be unequivocally detrimental. However, the proponents quickly turn to dismissing this fear by asserting that, empirically, no such job loss occurs when the minimum wage is slowly raised. This is akin to arguing that although fire can boil water, a small fire won’t heat it up. The support for this assertion is the oft-cited 1994 study by Card and Krueger[1] showing a positive correlation between an increased minimum wage and employment in New Jersey. Many others have thoroughly debunked this study and it is significant that the original authors eventually retracted their claims.

 

However, empirical economic data is not entirely useless. Such data is more suited to qualitative rather than quantitative predictions (who is affected rather than how much they are affected). For example, basic economics predicts that a minimum wage will necessarily increase unemployment among those with the least experience. Indeed, if we look at the empirical evidence we see exactly that. Looking at the data from the Bureau of Labor Statistics we find that the unemployment rate (June 2013) among 16-19 year olds is 24 percent and among 20-24 year olds it is 14 percent.[3] These values far exceed the unemployment rate (6 percent) of those workers with sufficient experience and skills to make them largely immune to minimum wage pay scales, namely 25-54 year olds. People whose productive value is less than the minimum wage are de facto unemployable. They are denied the opportunity to gain experience and skills, and their exclusion from the job market is a net loss to society.

[Valin]

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On A Related Note.....

The Underemployed Generation
1/15/14
It’s a bad time to be young. According to a new report by the Federal Reserve Bank of New York (h/t Andy Quinn), around 44 percent of recent college graduates (ages 22–27) were underemployed in 2012—meaning they had jobs that didn’t require a college degree. The most interesting finding in the report is that this outrageously high number isn’t just a temporary aberration caused by the most recent recession, though that likely make it worse. Some of the trends here began as early as 2001, if not earlier. The authors note that historically there were well-paying jobs that didn’t require college degrees, but those kinds of jobs have been disappearing:

 

(Snip)

 

There are plenty of complex causes for these trends, but the inability of politicians, many of whom represent the Boomer generation, to develop any pro-millennial agenda except “let them smoke pot” is a scandalous failure. That being said, the graph above shows that underemployment is a worse problem for some majors than others. We fully support the liberal arts, but now more than ever it’s important for students to diversify their skills, taking classes outside their core majors and making themselves as marketable as possible. That’s not anywhere near a full solution, of course, and it doesn’t absolve the Boomers of their self-serving politics. But millennials left out in the cold may have no other choice but to start in small ways, like signing up for a coding class.

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The unintended consequences of raising the minimum wage

2:04 PM 01/17/2014

When the topic of raising the minimum wage comes up, I have often deployed this (admittedly simplistic) example to explain my opposition: If a small business owner can afford to spend a total of $15 an hour on staff, then he can either hire two people at $7.25 an hour — or just one person at the rate of $10.10 an hour. (What is more, at some point, raising the minimum wage could also incentivize replacing employees altogether with new technologies; robots don’t ask for more money every few years.)

Based on these assumptions, raising the minimum wage could actually contribute to higher unemployment and income inequality — two things liberals ostensibly oppose.

Of course, not everyone agrees. As AEI’s Michael Strain recently noted: ”The University of Chicago Booth School of Business polled some top academic economists in February and asked them whether ‘raising the federal minimum wage to $9 per hour would make it noticeably harder for low-skill workers to find employment.’ Thirty-four percent agreed, 32 percent disagreed, and 24 percent were uncertain http://dailycaller.com/2014/01/17/the-unintended-consequences-of-raising-the-minimum-wage