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Wednesday, June 11, 2008

Unemployment and the Minimum Wage

Economics 101 and practically every economic study done on the topic show that a higher minimum wage reduces economic opportunity for young, low-skilled workers.

Makes sense – government artificially jacks up the price of unskilled workers, and in response, there are going to be fewer jobs around for those workers.

On his blog, Dr. Mark J. Perry, professor of economics and finance at the University of Michigan, highlights the possible link between the recent jump in unemployment among young workers between 16 and 24 years old, and the looming jump in the minimum wage.

Perry writes:

Accoding to BLS data on unemployment rates by age, it looks like almost all of the .50% increase in May unemployment to 5.5% from 5% in April was due to increases in the jobless rates for young workers in the 16-24 year age group, especially the 16-19 year group…

Although it apparently hasn't received much media attention, perhaps there is a link between the rising unemployment rate for teenagers and the pending 12% increase in the minimum wage next month. Since we have evidence that consumers respond to higher gas prices by driving less, wouldn't it also be the case that employers of unskilled workers would respond to 12% increases in wages for unskilled workers by hiring fewer unskilled workers? In nominal dollars, there will be a 41% increase in the minimum wage, from $5.15 per hour in 2007, to $7.25 per hour in 2009. In real, inflation-adjusted dolars, it will be a 25.5% increase, and will be the largest 2-year increase in the real minimum wage in at least 50 years (see chart below). And this HAS to have an adverse effect on employment of teenage workers.

Good point.

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