Sunday, June 7, 2009

Unemployment and the "Fair" Wage Act

In 2006 the Democrats retook Congress. Here in Missouri and two other states, ballot actions to raise unemployment the "minimum wage" passed with 50+ point margins. I expected the ballot measures to pass, but I thought it would be closer.

Most people don't make the connection between employment and "minimum wage" laws. Think of it this way: do you buy more gas when it costs $1.99 or when it costs $2.39? Prices matter. And the price of labor, wage rates, are no different. When the price of labor goes up, demand for labor goes down, and the market is left with unemployed workers. This is supply and demand 101.

Laws that raise the price of a good or service above it's market clearing level create a surplus of that good or service. "Minimum wage" laws artificially raise the price of labor above its market clearing level creating a surplus of labor, aka: unemployment.

So, the 2007 "Fair" Minimum Wage Act, passed with overwhelming Democrat support in Congress and signed by Republican President George W. Bush, has contributed to the rising unemployment levels. To be sure, the financial meltdown and the collapse of two of the big three auto makers are also driving unemployment up, but there's little that can be done to stem that tide.

On July 24th of this year, as graphed above, the "minimum wage" will rise to $7.25. That represents a 40% increase over the $5.15 rate that existed before the 2007 "Fair" Minimum Wage Act. We gotta get folks back to work and a quick way to do that is for Congress and the President to cancel the planned bump on July 24th.

Right now the President's economic team has egg on their faces because of the high unemployment numbers. This is illustrated in the graph below from MichaelsComments. Gateway Pundit has noticed the egg, too. The promise of Obama's economic team was that more spending was needed to contain unemployment. We've gotten both more spending and more unemployment.
Glenn Reynolds, the Instapundit, noted a blog post at Reuters:
Remember the stress tests? The baseline scenario had unemployment in 2009 at 8.4%, rising to 8.9% under the more adverse scenario. Well, we’re only up to May, and already it’s at 9.4%.
So we know that the banks have not been tested for solvency at this level of unemployment. That should add some urgency to getting people back to work.

Over at the Corner, Andy McCarthy takes a shot at one of Obama's economic advisers (emphasis in original):
Goolsbee didn't resort to the administrations's blather about "saving or creating jobs," but he did repeat its fustian about how last month's loss of 345,000 jobs (resulting in a half percentage point jump in the jobless rate) is somehow good news because it beat predictions (I don't recall him saying whose) of even more dire loss numbers. It made me wonder why, if those predictions either existed or were serious, the Obama administration would have previously predicted that unemployment would top out at 8%?
McCarthy's post is a very good takedown of Goolsbee's spin. Read the whole thing. My concern is that the better-than-expected results are being spun as "good news" when the reality is that employers are accelerating their purchases of labor prior to the July 24th "minimum wage" bump and plan to let workers go in August. In other words, unemployment now looks better because unemployment in August and September is going to look wretched.

I've suggested canceling the pending "minimum wage" hike. I know how politically untenable that is, so make it conditional on economic indicators. For instance, require three consecutive months of GDP and job growth before raising the "minimum wage". That would be a good policy in both lean and prosperous times.

Note: The minimum wage has always been, is now, and forever will be $0, that is why I put "minimum wage" in scare quotes.

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