The Purpose of This Bl;og

By and large, liberals are very decent, kind, and compassionate people who genuinely want what is best. This should be kept in mind as we explore the Law of Unintended Negative Consequences near invariably resulting from Leftist big-hearted solutions to societal problems.

Thursday, January 9, 2014

Minimum Wage - Unemployment

The economic woes over the last half decade or more have heightened the critical importance of getting Americans back to work. President Obama has indicated: "Jobs must be our number-one focus" (see HERE and HERE), and  "I will not be satisfied until everyone who wants a good job, are offered some security, has a good job." (ibid)

Who can argue with this?

Yet, even though under Obama's watch unemployment recently dropped to 6.7% for December of 2013 (see HERE), and is just below the highest level of unemployment reached during the Bush administration (ibid), the workforce participation rate (the proportion of the population older than 16 who are actively working or looking for work--see HERE) has dropped to 62.8% (see HERE), which is the lowest point since 1979 (see HERE and HERE).

Said another way, even though unemployment has declined in the last 3 years, there are still more than 2 million less people who have jobs and are looking for work today than when Obama first took office. (See HERE and HERE) This is disturbing.

What relevance does this have to the issue of minimum wage?

First, whatever arguments or emotional appeals may be made in favor of increasing the minimum wage, it really is of no value to people who haven't a job. The minimum wage could be set to where everyone makes as much money as Bill Gates and Warren Buffet, but it would be meaningless when the wages for the unfortunate who are out of work, remains at zero. Minimum wage laws do not help the unemployed poor.

Second, in spite of the disagreement among economist and pundits, the overwhelming majority agree that raising the minimum wage will result in increased unemployment. (See  HERE and HERE and HERE and HERE and HERE and HERE.and HERE)

This makes sense in basic economic terms because, generally speaking, increased costs result in decreased demand. (See HERE)

Also, increased human resource costs may cause a shift in demand to less costly substitutes. "It sounds compassionate to alleviate poverty by mandating that employers raise wages, but employers often replace low-skill workers with machines. Think self-checkout machines in supermarkets, or computerized call centers....The minimum wage of $7.25 an hour, plus the mandatory employer's share of Social Security, unemployment insurance, and workers' compensation taxes, brings the hourly employer cost to $8, even without benefits." (See HERE)

The significance of these points, and the Leftist LUNC here. is that under conditions of the worst economy since the Great Depression (see HERE and HERE and HERE), and alarmingly high unemployment and low workforce participation (see HERE), liberals are currently posturing to raise the minimum wage yet again, which will likely increase unemployment further and move even more people out of the workforce.

This is unprecedented in modern times, if not completely mind-boggling. "Congress has not voted to raise the minimum wage when unemployment stood above 7.5 percent since the Great Depression ended." (See HERE)

If jobs are supposedly the number one focus of the Obama administration, then what sense does it make to enact minimum wage laws that will cause the loss of more jobs? 

Worse yet, the sector where unemployment tends to increase most when the minimum wage is increased, is the very sector that the increase is intended to help. And, unemployment rates among minimum wage earners is already between 10.3% to 29.8%, as compared with 7.8% for the general population. (See HERE)

With friends like the liberals, who needs enemies?

The question, then, isn't so much whether raising the minimum wage will cause unemployment, but the degree to which it will cause unemployment--the trade-off being a function of elasticity of demand. (See HERE  HERE)

Supporters for raising the minimum wage will often point to Australia where the minimum wage is relatively high, but over-all unemployment is relatively low. (See HERE and HERE and HERE)

Whereas, opponents may point to the heart-wrenching example in the U.S. territory of American Samoa, where in 2007 the minimum wage was incrementally raised to the national level of $7.25 hr., and the result was "overall employment in American Samoa fell 14 percent and inflation-adjusted wages fell 11 percent. Employment in the tuna canning industry [the territory's primary industry] fell 55 percent. The GAO attributed much of these economic losses to the minimum wage hike." (See HERE)

Factoring out the extremes, credible economists have calculated the trade-off in the U.S. to be around 3% to 5% job loss for every 10% increase in minimum wage (see HERE and HERE). This means that if the liberals are successful in enacting the 38% increase in minimum wage currently under consideration, from $7.25 hr to $10 hr, it would cause between 11% to 19% of minimum wage earners to lose their jobs, thus increasing unemployment for that group from around 18% to as much as 37%. (See the numbers above) Not good!

However, some liberals may assert that the trade-off is worth it, and argue that the sacrifice of a few is outweighed by the benefit to the many. In a way, this is correct. Using the figures above, the trade-off is a net positive of $2.72 billion annually ($7.13 billion gained in increased wages minus $4.41 billion in loss of wages).

As nice as it may seem for 1.3 million workers who will make $2.75 more an hour, it is small comfort to the 304,000 who may lose $7.25 hr because they are no longer working.

The trade-off becomes all the less attractive when considering that it is more likely that the disabled segment of the minimum wage population will be the ones to lose their jobs and the middle-class teens will be the ones having their wages increased. (See HERE and HERE and HERE)  In other words, the minimum wage segment that would be hurt the most is the segment that needs the wages most, and the segment that will be hurt the least is the segment that needs the wages the least.

[Update 08/03/2016: Raising Minimum Starting Wages to $15 per Hour Would Eliminate Sevn Million Jobs]

[Update 01/03/2016: New(est) Evidence on the Minimum Wage]

[Update 09/07/2015: Wage Increase in S.F. Causes Job Loss Through Shift to Technology and Walmart Store Closures , and S.F Restaurant Installs Ipads, and Seattle Raises Minimum Wage, Workers Demand FEWER HOURS to Keep Their Welfare.Benefits, and McJobless in Seattle]

[Update 04/05/2013 Sharbucks Raises Minimum Wage Causing Huge Labor Cuts]

For an explanation as to why these Leftist LUNCs may occur, please see: Gov: Wrong Tool for the Right Job - Introduction and Cold Nanny as well as The Politics of Compassion, Emotions, Ignorance, Denial, Blame-Shifting, and Victimization

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