Why Is Unemployment So High?
I offer some thoughts yesterday at Mises.org. I tried to start from scratch, if you will, and discuss unemployment from a slightly different angle. Some excerpts:
Before offering some explanations for this disturbing situation, we should first clarify what unemployment is. There are different ways of defining the condition, but we can capture the typical understanding by classifying a worker as unemployed when he or she (a) is willing to work at the going wage or salary for some categories of jobs, but (b) can’t find any employer willing to extend the same offer to this particular worker, even though (c) the employer views the worker as interchangeable with other workers already on the payroll.
This last point (c) is important, even though introductory textbooks often omit it. To see why it’s necessary, consider the market for NBA point guards. I would certainly be willing to take the job for the average player’s salary; heck I’d even do it for 10 percent less. But no economist would consider me part of the “supply curve of labor” in this specialized market, because the team owners wouldn’t view me as equivalent to other workers on the payroll. My inability to get a job starting at point guard for the Chicago Bulls is not an example of unemployment.
and
Because of the long-term nature of the employment contract, employers and workers typically spend a great deal of time researching their various options before closing a deal. Depending on the job, employers conduct a multilayered interview process, and workers may apply for dozens or even hundreds of openings.
In light of these considerations, it’s helpful to think of the labor market as analogous to the housing market, as opposed to (say) the market for apples or gasoline. At any given time, the market price doesn’t “clear” the housing market, because there are always some sellers with their houses still “on the market” waiting to find the right buyer.
In that last paragraph, I’m driving at the fact that our standard Supply and Demand models of the labor market are actually misleading. Even in “equilibrium,” there are workers looking for jobs and employers looking for workers. (And yes I know this is the “natural rate” of unemployment; I didn’t discover the concept.)
Huh, and I thought you and Calvin Murphy were the same guy, You mean you didn’t give up the NBA for economics?
The Bald Truth.
Is there a league minimum in the NBA? You could always blame that for holding you back.
Good article, though it would have been interesting if you had tried to quantify about how much of the above normal unemployment was due to each of the factors you cite (I realize that doing all this in a single Mises article would have been impractical). For example, the minimum wage, while a bad idea, applies to such a small percentage of workers that it probably does not have an appreciable effect on the overall unemployment rate. The effect of UI is probably bigger, but even the high estimates I’ve seen are that it can account for a percentage point or two of overall unemployment.
[i]the minimum wage, while a bad idea, applies to such a small percentage of workers that it probably does not have an appreciable effect on the overall unemployment rate.[/i]
I don’t think your conclusion follows from your premise.
Just because a small percentage of salaried workers earn the minimum wage, that does not mean it has only a negligible effect. Based on the number of illegal immigrants working here I would suspect it has a rather significant effect.
Eli,
I’m not following your logic. How does the existence of illegal immigration show that the minimum wage is causing lots of unemployment?
If you look at teenage black males employment numbers then you will find some pretty big impact on unemployment caused by the minimum wage.
Dan,
Certainly. The minimum wage does increase unemployment, particularly among certain subgroups. But it’s affect on the overall unemployment rate is minimal (because it applies to so few workers), and thus can’t explain the elevated unemployment rates we’ve been seeing.
I agree but it does contribute to it.
It shows that many employers are willing to hire workers for below minimum wage and that workers are willing to work for below minimum wage (I assume many illegals are paid below the minimum?). Of course this in itself doesn’t prove anything, but my hunch is that the minimum wage plays a significant role in unemployment.
Regardless of my hunch on that, I think it is a non-sequitur to conclude that because a small percentage of workers are paid minimum wage, it therefore does not have a large effect on unemployment.
The fact that only 3% of workers earn the legal minimum means that 3% of workers have a marginal product roughly equal to the minimum wage. It doesn’t tell you anything about how many unemployed people have a marginal product less than that amount and would be willing to work for it.
*that last “it” referring to their MP, not minimum wage.
It shows that many employers are willing to hire workers for below minimum wage and that workers are willing to work for below minimum wage (I assume many illegals are paid below the minimum?).
Most illegal immigrants make more than the minimum wage. Further, the number of illegal immigrants has been decreasing over the last few years (due to the bad economy and increased enforcement) even as the unemployment rate has been going up.
Of course this in itself doesn’t prove anything, but my hunch is that the minimum wage plays a significant role in unemployment.
Hunches are fine, but the minimum wage is an area where we can do better than hunches. The evidence is than the minimum wage does increase unemployment, but that it’s effect on the overall unemployment rate is not large.
The fact that only 3% of workers earn the legal minimum means that 3% of workers have a marginal product roughly equal to the minimum wage. It doesn’t tell you anything about how many unemployed people have a marginal product less than that amount and would be willing to work for it.
The minimum wage was $5.15 an hour, and is now $7.25. Even back when it was $5.15, only a smaller percentage of workers were making less than $7.25 an hour. Even if we assume that every single one of those workers became unemployed when the increase went into effect (which is not the case), this could not explain the bulk of the above normal unemployment we are seeing.
The connection between the minimum wage and illegal immigrant workers is obvious.
Namely the amount of people actually working below minimum wage is much higher than it is reported to be, because most of those people working under minimum wage (illegals) aren’t reported!
So yeah you’re saying something like “oh man look increasing the minimum wage doesn’t seem to unemploy too many productive, well skilled and educated american citizens” but if the minimum wage were to apply to california’s orange picking population as well you’d suddenly see a lot less of them with a job.
At the root of this conversation seems to be a hidden assumption that if the minimum wage doesn’t have a powerful effect on unemployment its nothing to worry about. Thats horseshit. If it unemploys one person or a thousand people its still terrible. Its like saying well your fingers were cut off thats not so bad it could have been your head.
At the root of this conversation seems to be a hidden assumption that if the minimum wage doesn’t have a powerful effect on unemployment its nothing to worry about
Wrong. The conversation is about what is responsible for the above normal unemployment rate in the U.S. If I say that the minimum wage is not a major factor this does not mean it is nothing to worry about, any more than saying I don’t think the minimum wage is a major factor in causing cancer that means it is nothing to worry about. I am very much against the minimum wage for exactly the reason you give.
The connection between the minimum wage and illegal immigrant workers is obvious.
Namely the amount of people actually working below minimum wage is much higher than it is reported to be, because most of those people working under minimum wage (illegals) aren’t reported!
Most illegal immigrants make more than the minimum wage as is, and in any event if the minimum wage disemploys illegal immigrants this, while tragic, can’t explain elevated unemployment rates because illegal immigrants aren’t counted in calculating the unemployment rate.
…illegal immigrants aren’t counted in calculating the unemployment rate.
Thanks….I was wondering about that when reading your exchange.
My point was that it does *not* disemploy them, because the minimum wage doesn’t apply to them (there is no documentation for them, and hence no need for compliance to workplace regulations).
What followed was my second point that if, say this morning all illegals suddenly became legals, a lot of them are going to be out of the job because now the minimum wage law applies for them as well.
More succinctly: there is a large demographic immune to the minimum wage law, that if it were not so, would be strongly affected by it.
Blackadder,
Here is some recent research on the impact of minimum wage: Minimum Wage and Job Loss From 2006. He concludes that total job loss due to minimum wage has been around 41%. It’s probably a bit lower, but it goes to show that the impact of minimum wage has actually been rather large.
Blackadder,
The link you posted:
http://www.house.gov/jec/cost-gov/regs/minimum/50years.htm
does not indicate a consensus among the studies cited. They vary quite a bit in their estimation of the effects of minimum wage.
For instance, one study in the list finds that “the minimum wage causes unskilled wages to be 15.7% higher than they otherwise would be, and that this causes employment to be 11.2% lower than it otherwise would be.” Another finds that “the increase in the minimum wage from 75 cents to $1.00 in 1956 did lead to an increase in pay for many workers, but at the cost of jobs. Long-term employment losses by industry ranged from 3.2% to 15%.”
Of course there are no controlled experiments in macroeconomics so we can’t know for sure, but it does seem quite significant.
I’m also skeptical of your claim that most illegals are paid above minimum wage. As someone already mentioned, illegal immigrant employers probably aren’t going to report that they’re paying them below minimum wage. In fact, one of the studies from your link finds that “the minimum wage increases the employment demand for illegal aliens, who are less likely than legal residents to report violations of the labor laws.”
Isn’t the primary reason employers hire illegals because they don’t need to pay them as much? Otherwise they could just hire Americans to do the same jobs.
The minimum wage was $5.15 an hour, and is now $7.25. Even back when it was $5.15, only a smaller percentage of workers were making less than $7.25 an hour. Even if we assume that every single one of those workers became unemployed when the increase went into effect (which is not the case),
Is there data available on this?