Thursday, March 9, 2017

Minimum Wage: The Missing Explanation

David Henderson


In essence, we have seen the rise of a large class of "zero marginal product workers," to coin a term. Their productivity may not be literally zero, but it is lower than the cost of training, employing, and insuring them. That is why labor is hurting but capital is doing fine; dumping these employees is tough for the workers themselves -- and arguably bad for society at large -- but it simply doesn't damage profits much. It's a cold, hard reality, and one that we will have to deal with, one way or another.

This is from Tyler Cowen and Jayme Lemke, "10 Percent Unemployment Forever?" Read the whole thing--it's not long--and you'll notice that they don't even spend a sentence on a highly likely explanation for at least some, and maybe a good portion of, the current high unemployment rate among the least skilled workers.
They write:

Note that unemployment is low for workers with a college degree, only 5 percent compared with 16 percent for less educated workers with no high school degree. This is consistent with the reality that less-productive individuals, who tend to have less education, have been laid off.

They also write:
But it's harder to explain why unemployed workers can't find new jobs for less pay, especially if output is recovering, profits are high, and corporations are sitting on a lot of cash.

So the unemployment rate among relatively unskilled workers is high--16 percent--and it's hard to explain why they can't find jobs "for less pay?" No, it's not, at least for some of them. The missing explanation is the minimum wage. On July 24, 2009, it increased by 70 cents an hour to $7.25 an hour. Given that there was deflation that year, the real increase was about 12 percent.
Economists have estimated that a 10 percent increase in the minimum wage causes a 1 to 3 percent drop in the number of jobs held by youths (defined as people age 16 to 24.) (That does not imply a -0.1 to -0.3 elasticity, as many people think, for the simple reason that most youths in jobs prior to a minimum wage increase are making well above the minimum wage.)
A 10 percent increase in the minimum wage would, therefore, cause a loss in youth jobs (starting from about 16 million employed) of about 160,000 to 480,000. A 12 percent increase would cause a loss of about 190,000 to about 570,000 jobs. And that's due just to the increase in the minimum wage. The minimum wage, itself, therefore, is responsible for more than those 190,000 to 570,000 missing jobs.
This estimate is in the ballpark of that estimated by labor economist and minimum-wage expert David Neumark. In an article in the Wall Street Journal, "Delay the Minimum Wage Hike," June 12, 2009, he wrote:

The best estimates from studies since the early 1990s suggest that the 11% minimum wage increase scheduled for this summer will lead to the loss of an additional 300,000 jobs among teens and young adults

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