A Closer Look at the Rising Unemployment Rate

The news that the unemployment rate jumped half a percentage point in May has certainly received plenty of coverage in the news.  A closer look at the data reveals some interesting sub-plots.

As several analysts have pointed out, the rise in the unemployment rate is probably picking up a significant increase in the labor force participation rate resulting from high school and college students going into the labor market with the end of school.  The civilian labor force grew by 577,000, comprising 2/3rds of the 861,000 increase in the number of unemployed (the remainder were those who lost jobs they had). 

But what only one or two people have noted is the two groups where the jump in the unemployment rate was the largest:  teenagers, where the rate went up 3.3 percentage points and blacks, where the rate went up 1.1.  The unemployment rate for adult men is 4.9% and 4.8% for adult women, but for teenagers it is 18.7% and 9.7% for African-Americans.

It is at least possible that in addition to the more general problems in the US economy, last summer's increase in the federal minimum wage as well as the next jump coming in late July are behind the particulars here.  Last July, the federal minimum wage increased to $5.85/hr and it will go up to $6.55 on July 24 of this year.   With a sluggish economy, it certainly seems possible that the higher minimum wage is discouraging employers from hiring lower-skill workers whose productivity cannot justify paying them that wage, particularly if they know they will have to give them a raise come late July.

Economic theory predicts that minimum wage laws will disproportionately harm lower-skill workers such as teenagers and non-whites (not, it is worth noting, because the latter are inherently less-skilled, but because they have not had the same educational opportunities or other ways to increase their human capital as have whites). This effect of the minimum wage is why higher-skill workers have long supported it as a way to shut out cheaper competition (e.g.,  US unions shutting out immigrants and blacks 60 years ago, white South Africans shutting out black natives 100 years ago, etc.).  It would seem that this prediction is born out by some of the facts in the latest US unemployment data.  It might also temper arguments that the May unemployment rate reflects "market" problems as opposed to the undesirable consequences of bad government policies.

And to link this to another discussion here, if one is tempted to minimize the role of self-interest in the political realm, one might wish to read the debates surrounding the creation of the first federal minimum wage law in the US as well as similar laws as part of apartheid in South Africa.  The backers of the US law were not ignorant of its effects;  they knew exactly what it would do (shut out immigrant and black labor), which is precisely why they supported it, and also why a number of politicians voted for it.

For example, in the April Freeman, David Henderson reports the following story:

At a 1957 hearing on increasing the minimum wage, a northern U.S. Senator who favored the increase stated: “Of course, having on the market a rather large source of cheap labor depresses wages outside of that group, too—the wages of the white worker who has to compete. And when an employer can substitute a colored worker at a lower wage—and there are, as you pointed out, these hundreds of thousands looking for decent work—it affects the whole wage structure of an area, doesn’t it?”

Who was the senator? Here’s a hint: just four years later he was the President. His name: John F. Kennedy.

JFK was not ignorant of the economics of the minimum wage and neither were the unions he was responding to.  The unions were looking after their collective self-interest and JFK knew where the votes came from.

Finally, abolishing the minimum wage is also a good example of using free markets to accomplish Rawlsian ends.

Oops, didn't realize I hadn't opened comments!  Go right ahead folks.

 

Comments

[DPrychitko]

Steve wrote:

"A closer look at the data reveals some interesting sub-plots.

As several analysts have pointed out, the rise in the unemployment rate is probably picking up a significant increase in the labor force participation rate resulting from high school and college students going into the labor market with the end of school."

I wonder about these "economists" working for Wachovia etc. Unlike you I do not rely upon their claims and interpretations. And here's one reason why: by "taking a closer look at the data" we find in this latest release that these are *seasonally adjusted* figures, meaning the end-of-school issue has already been accounted for.

So your statement ("As several analysts have pointed out, the rise in the unemployment rate is probably picking up a significant increase in the labor force participation rate resulting from high school and college students going into the labor market with the end of school") is just plain wrong. Something *else* has generated the unemployment increase.

Or so it seems to me.

[Steve Horwitz]

Perhaps I wasn't clear Dave. Even if the numbers are seasonally adjusted, the rise in the *rate* of unemployment is real. The "something" that is generating the unemployment could still be the reluctance of firms to hire teenagers in the labor force at the prevailing minimum wage. If the seasonal adjustments are in the size of the labor force, the fact that the unemployment rate is notably higher for teenagers must still reflect the fact that a greater percentage of teenagers looking for jobs aren't finding them.

In other words, the adjustment is to the labor force number and the unemployment rate just falls out of that and is called "seasonally adjusted" because the labor force participation number has been adjusted.

If I'm correct about that, and I'm not positive I am, then the higher U *rate* for teenagers still makes the point that more of them are having trouble finding jobs at the prevailing wages.

My original language was probably not correct in its specifics, but I'm not sure it changes my overall point.

[David]

Maybe if you take a doubly closer look you'll see that the real bump for teenagers entering the summer labor force is June and not May like you are suggesting.

[CounterClckWise]

I don't know what economic theory you're pointing to in the paragraph quoted below:

Economic theory predicts that minimum wage laws will disproportionately harm lower-skill workers such as teenagers and non-whites (not, it is worth noting, because the latter are inherently less-skilled, but because they have not had the same educational opportunities or other ways to increase their human capital as have whites).

I suspect that you're noting this in a hurried desire to rush past racial issues without discussing them. Which is fine, but it's a bit sloppy to throw that discussion under the "economic theory" bus.

That said, the seasonal adjustment should cover the graduate influx, but it's likely that the psychological reasons you cited due to a slowing economy are a non-adjusted factor.

Another psychological factor might be that the move towards self-employment is slowing down as workers become risk-adverse. Thus, the underemployed finally begin to show up in the data.

[Steve Horwitz]

The parenthetical material was not intended to be a claim from economic theory if that's your point. Sorry if that wasn't clear - I can understand how it wouldn't have been.

[Robert]

Economic theory does not predict what Steve Horwitz says it does.

[DPrychitko]

Steve:

In our textbook Boettke and I argue that price and wage controls change the costs of using non-price discriminatory criteria. Because the minimum wage generates a surplus of workers, this lowers the employer's cost of discriminating on the basis of non-wage criteria. And that matters at the margin.

If, for example, racism against non-whites exists, then we would predict that non-whites, cet. par., will have a harder time finding jobs compared to whites in a market affected by the minimum wage. Now it might well be that whites as a group have better educational opportunities than blacks, as you claim (which, if true, might actually draw such whites out of the unskilled labor market anyway). But frankly I believe that greater unemployment rates among black teenagers, for example, is more a matter of a decreased cost (to employers) of acting upon their racial prejudices.

[Steve Horwitz]

Both your argument and mine could be true. No reason to think yours isn't in play as well.

[Adam Nobles]

I am not sure if the education gap is really a major force in the market for low-skill (or unskilled if you must) labor. I believe you are right Prof. Horowitz in suggesting both you and Prof. Prychitko's ideas are both in play, but is there data to support the idea that education plays a major role in minimum-wage hiring decisions?

With utmost respect and curiosity,
-Adam Nobles

[James IIa]

Hold on. Didn't Card and Krueger show in 1990 that an increase in the minimum wage leads to an increase in low wage employment? Or to say it more carefully, didn't they show that there may be circumstances in which such an increase increases employment?

[Bill]

Question: why would it much matter if an increase in the minimum wage cost jobs? After all, for the last several years all we've been hearing from the Chamber of Commerce and other business lobbies is that there already aren't any Americans around to do the jobs they've been creating. And even right now we're still hearing about shortages for farm labor, lifeguards, you name it. As the unemployment rate rises just about every industry in the country is still going to the government griping of "labor shortages" so that it can import more workers to reduce their costs.

I have always believed that in a free market a minimum wage is a bad idea. But when at the same time I see businesses importing workers to drive down wages for Americans I no longer much care.

[Joe C.]

"If, for example, racism against non-whites exists, then we would predict that non-whites, cet. par., will have a harder time finding jobs compared to whites in a market affected by the minimum wage."

This is quite a leap since racism is such a minor factor, and most racism is black against white. I just found it a curious example; like claiming, women make 75% of men, then suggesting employers purposely increase their labor costs by 1/3 just to hire equally qualified men.

The minimum wage lowers the employer's cost of discriminating on the basis of non-wage criteria such as skill, education, experience, and reliability, primarily; therefore, someone looking for an entry level job is less likely to be hired if the wage paid cannot justify their output. It also increases the likelihood of paying the equivalent in overtime or raises to existing employees to avoid training costs and benefits for a new employee, especially in light of increased costs due to energy, a weak dollar, a regulation. It also increases the likelihood of more reliance on technology.

As was predicted, an increase in the minimum wage, especially now in a slowing economy with the fear of a complete Democrat takeover of government, has caused the increased unemployment of the most vulnerable, first-time employment seekers. The fact that it is a seasonally-adjusted increase in teens just supports the premise that it is at least minimum-wage related.

[DPrychitko]

"This is quite a leap since racism is such a minor factor, and most racism is black against white."

Hmm... okay... well...

[Ellen]

This does not seem to be a very complicated matter. It is supply and demand, and basic arithmetic.

I do not like the term non-white. I also wonder if teenager was even necessary. However, since teenagers placing themselves in workforce influenced the jump in the unemployment number the use makes sense.

Non-white was an unnecessary distinction. The problem is unskilled labor. The pool of unskilled labor has increased because of immigration. Wages should fall because of increased supply; however, wages cannot fall because of minimum wage laws.

I support minimum wage laws, as an important market regulation. Our society in the past decided it preferred minimum wages to the consequences of an unregulated labor market. Unskilled workers need the protection of government to prevent exploitation.

Why do teenagers increase unemployment? Is it not simply that they merely increase the supply of unskilled labor. They are finding harder to find work, because many places that would have hired them in the past, now hire relatively inexpensive, full-time labor -- low skilled immigrant labor. Think about it the next time you go to McDonalds. Employers are less likely to hirer a teenager who requires training and is likely to quit in 3 months. Teenagers are still competitive in seasonal jobs, such as lifeguards.

The black unemployment rate is high, not because of discrimination, but because many blacks choose to live in distressed communities. If you live in a community with few, jobs and you go out and look for work the math is simple. You increase the number of people seeking work, but there is no increase in the number of jobs, so the unemployment rate goes up. The solution is to move, but if you are a teenager that is not really an option.

[Steve Horwitz]

Ellen writes:

"I support minimum wage laws, as an important market regulation. Our society in the past decided it preferred minimum wages to the consequences of an unregulated labor market. Unskilled workers need the protection of government to prevent exploitation."

How do you reconcile those claims with the evidence in my post and elsewhere that skilled workers supported minimum wage laws not to "protect" unskilled workers (which included a lot more women 100 years ago, of course), but to actually prevent them from competing and "taking" jobs from the skilled?

To me, it sounds like those who SUPPORT minimum wage laws are supporting a form of exploitation because such laws close off employment to the lesser skilled in order to maintain the wages of the more skilled at an above-market wage.

[Ellen]

"How do you reconcile those claims with the evidence in my post and elsewhere that skilled workers supported minimum wage laws not to "protect" unskilled workers (which included a lot more women 100 years ago, of course), but to actually prevent them from competing and "taking" jobs from the skilled?

To me, it sounds like those who SUPPORT minimum wage laws are supporting a form of exploitation because such laws close off employment to the lesser skilled in order to maintain the wages of the more skilled at an above-market wage."

Well first I wrote "Our society," so my comment of course included the views of skilled and unskilled workers.

I'm at a lost to see how "skilled workers supported minimum wage laws not to 'protect' unskilled workers (which included a lot more women 100 years ago, of course), but to actually prevent them from competing and 'taking' jobs from the skilled?"

What skilled job is an unskilled worker taking? At what point does one hirer an unskilled worker, rather than an accountant, plumber, doctor, lawyer, carpenter, etc. Skilled workers can protected their jobs from unskilled workers by erecting barriers to entry.

Even some woman's jobs have had barriers to entry here's two blast from the past. Clerk typist -- most type 25 words a minute, or, here is another shorthand required.

[Ellen]

I wrote that I support minimum wage laws. Of course, I think they should be very low. I do not support the living wage.

Most workers should increase their wages by acquiring skills. The minimum wage is an entry wage that increases the natural unemployment rate.

Businesses should view the minimum wage the same way they view the price of electricity or rent. It is a fixed cost. If you have small business, you realize how much money you most make before you can expand.

Of course, you are free to exploit yourself, your spouse and your own children. :o)

[Scott Erb]

Interesting discussion. In Germany when they instituted lower pay options for young people or certain jobs there was a huge union outcry, arguing that this would theaten full time workers. That issue was front and center of the debate (with the argument that the youth would benefit from those protections later in life), so I agree this is as much about trying to prevent competition for current workers. Coming from a poli-sci perspective, I think Ellen is right that very low minimum wage laws could protect people from crude exploitation without having the negative effects that high minimum wages have. It also seems that hiring illegal aliens was an attempt by business around high minimum wages, another unintended consequence of the law.

But what is the 'proper' unemployment rate? How much of the current increase is due less to minimum wage and more to the oil price shock and its ripple effect through the economy?

[Ellen]

Steven writes: "How do you reconcile those claims with the evidence in my post and elsewhere that skilled workers supported minimum wage laws not to "protect" unskilled workers (which included a lot more women 100 years ago, of course), but to actually prevent them from competing and "taking" jobs from the skilled?

I have to admit I found the comment odd. I went ahead and looked at The Pursuit of Happiness ~ How Free Markets Break Down Discrimination By David R. Henderson.

I was trying to see how unskilled workers competed with skilled workers. By looking at the article I see it is not really about skilled vs. unskilled labor, it about unionize vs. non-unionized labor.

Is this really a website that argues in favor of labor unions, but against the minimum wage? Labor unions that drive up the unemployment rate and business cost by restricting the supply of labor. Unions, which say of course you are a skilled plumber but you, cannot work here without a card. Alternatively, impose work rules that cause comments like "sure I could move that box, but union rules say ____ must move the box."

My mistake I just wander in here from a link posted by Jonah Goldberg at The Corner on The National Review Online.

[Steve Horwitz]

Who is arguing in favor of labor unions? They are part of the problem here, to the degree they are behind driving up the minimum wage.

[Bill]

*** "To me, it sounds like those who SUPPORT minimum wage laws are supporting a form of exploitation because such laws close off employment to the lesser skilled in order to maintain the wages of the more skilled at an above-market wage." ***

But what if you support higher minimum wages as a way to choke off job growth? That sounds counterintuitive until you consider that many of the jobs created over the last 6-7 years have been going to non-Americans, anyway. Employers are creating jobs they say there are no Americans to fill. If you believe that mass immigration harms the nation in other ways you may find reduced job creation (and reduced demand for immigrants) a desireable outcome.

Most Americans don't look at a higher minimum wage in this manner. They're more inclined to look at it in terms of income disparity. But since mass immigration is what leads to the disparity then it's much the same thing.

*** "But frankly I believe that greater unemployment rates among black teenagers, for example, is more a matter of a decreased cost (to employers) of acting upon their racial prejudices." ***

Black workers are more likely to have criminal records and less likely to have high school diplomas. These differences exist even before they hit the job market, and are valid reasons that you would have a different unemployment rate (unless you think there's no legitimate reason not to want a convicted criminal working in your business).

[Ellen]

Steve writes: "Who is arguing in favor of labor unions? They are part of the problem here, to the degree they are behind driving up the minimum wage."

Well I guess no one is.

Do you favor a low minimum wage, or Do you favor no minimum wage?

[Ellen]

Bill writes: "Black workers are more likely to have criminal records and less likely to have high school diplomas. These differences exist even before they hit the job market, and are valid reasons that you would have a different unemployment rate (unless you think there's no legitimate reason not to want a convicted criminal working in your business)."

Black workers are more likely than whom? Are unskilled Black American workers really more likely then other unskilled laborers to lack a high school diploma, or to have a criminal record?

Black workers refer to millions of people that are as diverse as any other group. It would be nice if people were grouped in ways that made sense, rather than in how much of a particular hormone they possess.

Are black teenagers less likely to have high school diploma than non-black teenagers?

[Steve Horwitz]

No minimum wage Ellen.

And for Bill: even if a group has a number of characteristics that make its members less productive (e.g. lower high school graduation rates), there's no reason they can't be employed at *some* wage just less than the value of their marginal product.

Absent a minimum wage, employers would still hire people they didn't think were exceptionally productive because they could pay them a wage that would still make hiring them profitable. (And that goes for criminal records - you can view that as a subtraction from their productivity otherwise calculated and as long as the employer still thinks that (D)VMP is above zero, there's some wage at which they are profitably employable.)

Any of the grad students who haven't read W. H. Hutt's work on labor markets, esp. *The Theory of Idle Resources*, should go get a copy post-haste. ;)

[Bill]

*** "Are unskilled Black American workers really more likely then other unskilled laborers to lack a high school diploma, or to have a criminal record?" ***

Yes.

But I don't know where the data is that's broken out unemployment figures for unskilled whites from whites as a whole. All I've seen are overall white unemployment rates vs. overall black unemployment rates.

*** "Are black teenagers less likely to have high school diploma than non-black teenagers?" ***

Yes, if you count the 18-19 year olds - typical post high school years - as teenagers. And they are more likely to have criminal records. This point is not even in doubt.

My G-d, are we still having this debate? Is the evidence even in doubt?

Back to my original question: why should we care about declining job growth in the unskilled labor market when industry was filling those jobs with non-Americans, anyway?

[Roger Koppl]

In 1994 New York City released the Mollen Commission Report (“Commission Report” of the “Commission to Investigate Allegations of Police Corruption and the Anti-Corruption Procedures of the Police Department.”)
Page 43 says: “Police brutality seemed to occur, in varying degrees, wherever we uncovered corruption, particularly in crime-ridden, drug-infested precincts, often with large minority populations.”
Page 48 records the following exchange from one of their hearings:
Q: Did you beat people up who you arrested?
A: No. We’d just beat people in general. If they’re on the street, hanging around drug locations. It was a show of force.
Q: Why were these beatings done?
A: To show who was in charge. We were in charge, the police.

These findings make me wonder what to infer from statistics about higher dropout and crime rates among black Americans.
I think we should remember this sort of thing we read government statistics.

[Ellen]

*** "Are unskilled Black American workers really more likely then other unskilled laborers to lack a high school diploma, or to have a criminal record?" ***

Yes.

But I don't know where the data is that's broken out unemployment figures for unskilled whites from whites as a whole. All I've seen are overall white unemployment rates vs. overall black unemployment rates.

+++ So how to you get to write yes when you do not have the data. +++

*** "Are black teenagers less likely to have high school diploma than non-black teenagers?" ***
Yes, if you count the 18-19 year olds - typical post high school years - as teenagers. And they are more likely to have criminal records. This point is not even in doubt.

My G-d, are we still having this debate? Is the evidence even in doubt?

Are we still having this debate? I wish we were not. I see no point in bringing up Black criminal records or high drop out rates. Black unemployment went up 1.1 percent. It certainly did not rise 1.1 percent because all of a change in Black criminal records or high drop out rates. Dr. Thomas Sowell has shown very little difference in out come when you compare like groups. A well-educated Black can expect to earn the same income as well-educated non-Black. Absent any data, I would to assume that unskilled workers are a like population, and therefore see no need to discuss their criminal or graduation rates.

If the change in the unemployment rate is due to the increase in the minimum wage, I am left with two questions.

1. Is the percentage of Black unskilled workers large enough, to increase the Black unemployment rate by 1.1 percent?

2. Why was there no change in Hispanic or Latino ethnicity unemployment rate?