johnnymk

http://www.bloomberg.com/apps/news?p...d=arSR3XZfY52o

July 15 (Bloomberg) -- There is never a good time to raise the minimum wage. Just ask the people working in low-skilled jobs that are laid off as a result.

Now is a particularly bad time. Yet the federal minimum wage is scheduled to rise to $7.25 on July 24, the third step of a $2.10 increase enacted in 2007. In more than half the states, the minimum wage already exceeds the current national minimum of $6.55 an hour.

While President Barack Obama and his economics team have been mum on the issue, I’ve got to think they are worrying, at least among themselves, about the impact given the current state of the labor market.

A total of 14.7 million people were unemployed in June. About half of them joined the ranks of the unemployed since the start of the recession in December 2007. The U.S. unemployment rate stands at 9.5 percent, almost 4 percentage points higher than it was a year ago.

And these statistics understate the toll the recession has taken on those at the bottom rung of the job ladder. The unemployment rate for people without a high-school diploma is 15.5 percent. Teenagers and minorities have been hit even harder. These are the folks most likely to be working in low- skilled, minimum-wage type jobs. And yes, these are the same folks a minimum-wage increase purports to help.

Unintended Consequences

Noble as intentions may be to give low-skilled workers an advantage and make life easier for the poor, the increase will have unintended consequences. That’s because the demand for labor, like that for any good or service, isn’t fixed. It depends on the price.

You don’t have to be a sophisticated student of economics to understand that for most goods and services, a lower price leads to a higher quantity demanded. If you liked that designer frock at $5,499, you’ll love it at the 40 percent markdown price.

The labor market is no different from any other product market. There is a price at which the number of workers willing to supply their labor is equal to employers’ demand. This is called the equilibrium price. Free markets somehow manage to find equilibrium without any government interference.

When the government intervenes to establish a cap or a floor on prices, the results are predictable. Set the price (the minimum wage for labor) too high, and it creates a surplus (unemployment). Set the price too low, and the result is a shortage (gas lines in the 1970s).

Irrefutable Law

Every time the subject of the minimum wage comes up, some labor economist from Princeton or Harvard produces a controversial study showing that, in one case, New Jersey raised its minimum wage and employment in the state’s fast-food industry actually increased.

I’m not going to take issue with the methodology of such studies (some economists have) or the interpretation of the results. Any economist who claims that an increase in the minimum wage has no effect on employment is essentially saying he’s found the secret to circumventing the law of supply and demand. There are very few concepts in economics as firmly fixed and rooted in reality, not theory, as this one.

Just as a higher mandated wage reduces the demand for labor, so does it increase the supply, or the number of folks willing to forgo leisure to enter the labor force.

“Although minimum wage laws can set wages, they cannot guarantee jobs,” according to the Concise Encyclopedia of Economics.

Bad Social Policy

That’s about as concise a description as one could ask for.

Even if increasing the minimum wage reduces employment among the groups it aims to help, perhaps it makes for good social policy, raising the incomes of the poor.

Federal Reserve economists Mark Schweitzer and William Wascher, and David Neumark of the University of California, Irvine, have studied the effect of minimum wage increases on poor families and reported the results in a 2004 Cleveland Fed working paper and elsewhere.

“If anything, raising the minimum wage tends to increase the proportions of families that are poor and near-poor,” they find. That’s because, in part, the effect of employment losses outweighs the increased income of those who keep their jobs.

Some 2.2 million U.S. workers, or 3 percent of hourly workers in the U.S., earn the minimum wage or less, according to the Bureau of Labor Statistics. Not all of these proverbial hamburger flippers will lose their jobs when the minimum wage goes up later this month. Many companies already pay a base rate above the federal minimum.

Advise and Consent

Businesses have options, too. They aren’t going to pay an employee more than his marginal revenue product, or the additional revenue earned from his output. They may reduce hours or cut other perks.

The 1994 study claiming employment in New Jersey’s fast- food industry rose after the minimum wage went up was written by Princeton’s Alan Krueger and David Card. (Card is now at the University of California, Berkeley.) The economists subsequently revised their findings, claiming the minimum wage increase had little or no effect on employment.

Krueger is now assistant Treasury secretary for economic affairs. If he’s advising Obama on economic policy, no wonder we haven’t heard a peep out of the president on the minimum wage increase.

zippyjuan

As of 2007, about two percent of the labor force was paid the Federal Minimum Wage. How many jobs will be lost by giving two percent of the people a 70 cent an hour (about ten percent) increase in pay? Those people will likely spend their share after taxes which will have a small effect on either increasing employment or reducing layoffs/ cutbacks. I think the effect on the economy overall will be minimal.
Bureau of Labor Statistics reports that the labor force totaled 140 million as of June 2009 so two percent of that would be 2.8 million people getting 70 cents an hour. http://www.dlt.state.ri.us/lmi/laus/us/usadj.htm

AIG is issuing more in bonuses than the entire wage increase will cost. In March, they issued $165 million in bonuses (of which about $50 million was returned back) and now are going to issue more. http://www.washingtonpost.com/wp-dyn...T2009071001290

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VTGreg

For starters, it isn't just those that make the minimum wage that will receive increases, it also all of those that make below the new minimum wage. Probably not a huge increase in the amount of labor this impacts but there would be an impact. Second, with many companies operating very tightly right now, any impact will be felt. $0.70 an hour multiplied by 5 employees at 40 hours a week totals $140. This would equate to just over 21 hours of pay for these employees at the previous rate of $6.55. Even if it doesn't force companies to lay people off, it may force them to scale back hours to keep expenses in check. The overall effect on the economy may be minimal but it could have a significant effect on those that make the minimum wage, which is who is supposed to be helped by the increase.

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