Saturday, March 14, 2009

The rising unemployment rate can't be entirely cyclical

Guess what happened between the start of the recession, December 2007, and now? The federal minimum wage jumped $0.70 to $6.55. And guess what is going to happen between now and August 2009? The federal minimum wage will rise another $0.70 to $7.25 (hat tip, reader Milton R.). This probably has implications for the natural of the unemployment rate.

The chart illustrates the federal minimum wage and the unemployment rate.The federal minimum wage had gone unchanged at $5.15/hour since 1997. In Q3 (third quarter) of 2007, the minimum wage started to climb. By July 2009, the minimum wage will have increased $2.10/hour in just two years.

States have their own minimum wage laws, which are often higher than the federal minimum wage. But as you can see here, there are plenty of states that set the minimum wage either at the federal wage, below the federal wage, or have no minimum wage at all. In the latter two cases, the state rate would default to the federal minimum wage.

This is important. The surge in the minimum wage rate implies that some (I don't know exactly how much) of the 3.2% surge in the unemployment rate since December 2007 is probably structural, where the long-run level of unemployment might be higher, rather than cyclical, or due to the recession.

Rebecca Wilder


  1. Sort of along the lines of one of Mish's blogs- he ran a bunch of stories of hundreds or even thousands of people applying for one or two open positions, for example a $14/hour janitor's position.

    When the labor market is generally above the price floor, it doesn't get this ridiculous. But we're headed below it currently. Think of how many extra jobs could be created and how much extra productivity would be added if price floors, especially the government service payscale was modified.

    Given the choice of 1 guy earning $14 an hour, or 2 able to get a job at $7 an hour, which is going to be best for the aggregate economy? Especially since that one guy unable to find work is going to be collecting unemployment and acting as a net drain on the system.

    I'd rather eat a pay cut than lose my job in this environment. Concerns about being able to support a family on a low salary are misguided in this environment- better to have wider employment and people cutting way back to subsistence salaries than to have the social safety net overwhelmed which is in the process of happening right now.

  2. If you look at the US post WWII data what you find after an increase in the minimum wage is easy to determine. If the economy is in an expansion an increase in the minimum wage appears to have no impact on teenage employment. If the economy is in a recession the teenage unemployment ate rises.

    This leads to the conclusion that the combo of a recession and a higher minimum wage has a negative impact, but a minimum wage hike alone has no impact.

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