Unemployment and the Minimum Wage

Unemployment spiked up .5% to 5.5% for May. However, unemployment compensation claims are still near historical lows. So if people aren't losing their jobs, how does unemployment spike? The answer is that people who weren't looking for jobs in April but began looking in May are having a hard time finding a job. That would be high school seniors, dropouts, and college kids looking for summer work, in other words, low skilled workers.

As you might recall, our benevolent Democratic legislature increased the minimum wage from $5.15/hr. to $7.25, legislation that went into effect this year. However, not all businesses can afford to take on new workers at the higher wage. Higher wages mean higher prices, which drives down demand for products and services, and as a result, the demand for labor. Some people make more, but many others get no job at all. Despite their good intentions, the Democrats have actually screwed over low-skilled workers. Common sense should tell us minimum wage increases are certain to hurt employment. Otherwise, why stop at $7.25? Why not a minimum wage of $50 an hour? Wouldn't that help low-skilled workers?

Free market economists have warned for years that increasing the minimum wage causes higher unemployment among low skilled workers. Consider Milton Friedman's arguments from his classic book Capitalism and Freedom:

Minimum wage laws are about as clear a case as one can find of a measure the effects of which are precisely the opposite of those intended by the men of good will who support it. Many proponents of minimum wage laws quite properly deplore extremely low rates; they regard them as a sign of poverty; and they hope, by outlawing wage rates below some specified level, to reduce poverty. In fact, insofar as minimum wage laws have any effect at all, their effect is clearly to increase poverty. The state can legislate a minimum wage rate. It can hardly require employers to hire at that minimum all who were formerly employed at wages below the minimum. It is clearly not in the interest of employers to do so. The effect of the minimum wage is therefore to make unemployment higher than it otherwise would be. Insofar as the low wage rates are a sign of poverty, the people who are rendered unemployed are precisely those who can least afford to give up the income they had been recieving, small as it may appear to the people voting for the minimum wage.

The people who are helped are visible... The people who are hurt are anonymous and their problem is not clearly connected to its cause.

The Big Stimulus

Sadly, I will be getting a check from the government as part of the bipartisan stimulus package (assuming the Senate passes the bill). Unfortunately, I don't make enough to be excluded, but I'll gladly take the money. I'm conflicted on this whole idea. I will never complain about the government letting us keep more of our own money. However, that's not exactly what is happening and that's certainly not the motivation for this package (at least from the Democrats).

The first problem is that this legislation gives two false impressions: that our economy is in the tank and that the government can fix it. We are not in a recession. A recession is two consecutive quarters of declining GDP. We haven't even had one quarter. However, there are real fears that 1st quarter '08 will show a shrinking economy and people in Congress like to get reelected. A stimulus package worth billions is a band-aid to a multi-trillion dollar economy. The market has to correct from time to time.

The second problem is that people making too little to pay taxes are receiving this "tax rebate." Those with adjusted gross incomes above $75k ($150k for a couple) get nothing. So the government is effectively taking money from those who pay the vast majority of income taxes and distributing it to the middle and lower class (the top 25% of earners pay 83% of all income taxes, the bottom 50% pays only 4%). Not only have the lower class done nothing to earn this money, but they are more likely to use it to pay down debt instead of stimulating the economy by spending it. Noble Laureate economist Milton Friedman (pictured) argued that consumers will increase spending in response to permanent tax cuts, but would save most of any temporary tax cut.

I'll never argue against a tax cut, but making the Bush tax cuts permanent would have been a much better idea.