Iconic left wing policy leads to predictable rise in US unemployment

The recent sharp jump in the unemployment rate in the US was taken as a sign that its economy, hamstrung by rising oil prices and the impact of the sub-prime fiasco, is in clear decline. Doom and gloomers predict a coming recession. No surprises there; even a broken clock is right twice a day.

As Jerry Bowyer points out, the rise in unemployment does not correlate with corporate layoffs. How can that be?

Ironically, it's an iconic left wing policy that is the cause of the problem.

It wasn’t Bush, it wasn’t greedy corporations, or free trade, or history’s most over-predicted recession. It was not the oil companies, income inequality, or the excesses of cowboy capitalism. None of these things caused the unemployment rate to jump a half a percentage point in one month.

Ask yourself a few questions: Why did unemployment surge at a time when unemployment compensation claims are historically low? More to the point, how could unemployment spike this much without a coinciding spike in corporate lay-offs?

The answer to all of these questions is same: because very few people lost jobs last month. This huge jump in the size of the unemployed comes from new entrants to the economy – hundreds of thousands of them. In short, well over 600,000 people who were not job seekers in April became job seekers in May. And who starts looking for work at the end of Spring? That’s right – students. Hundreds of thousands of students are looking for work right now, and they’re not finding it.

Congress is to blame. Last year Congressional Democrats (along with some Stockholm-Syndromed Republicans) passed the Fair Minimum Wage Act of 2007, which started a phased hike of the minimum wage from $5.15 an hour to $7.25. Free market economists warned them that this would increase unemployment – that rapid increases in unemployment compensation hit teens and minorities the hardest. But the class-warriors are running the people’s house now, and they would hear none of that, so they took to the floor, let loose the dogs of demagoguery, and saddled America’s pizza parlors, municipal swimming pools, house painting businesses and lawn mowing services with a huge cost increase.

Now, we see the perfectly logical outcome of wage controls – rising unemployment among the most economically vulnerable. The chart above tells the story: Friday’s unemployment spike occurred overwhelmingly among teenagers, and secondarily among African Americans. Just like we said it would. A kid who is at entry level of job skills may be a good deal at 5 bucks an hour, but not at 7. Our anointed leaders gets to glory in their generosity (with other people’s money) and just so long as very few people in the media know that a demand curve slopes downward (a good bet, there), no one calls them on it.

This summer the left will make political lemonade out of a tough student job market. Heck, it may provide a small army of angry unemployed youth to man the campaign, hungry for hope and (loose) change, never once realizing that they’re working to entrench the leftie war on business which left them jobless this summer in the first place.

The minimum wage is an extremely misunderstood concept. Here's Milton Friedman in 1975 being interviewed by Richard Hefner on Open Mind:

FRIEDMAN: Let me give you a very simple example. Take the minimum wage law. Its well-meaning sponsors -- there are always in these cases two groups of sponsors. There are the well-meaning sponsors and there are the special interests who are using the well-meaning sponsors as front men. You almost always when you have bad programs have an unholy coalition of the do-gooders on the one hand and the special interests on the other. The minimum wage law is as clear a case as you could want. The special interests are, of course, the trade unions, the monopolistic craft trade unions in particular. The do-gooders believe that by passing a law saying that nobody shall get less than $2 an hour or $2.50 an hour, or whatever the minimum wage is, you are helping poor people who need the money. You are doing nothing of the kind. What you are doing is to assure that people whose skills are not sufficient to justify that kind of a wage will be unemployed. It is no accident that the teenage unemployment rate -- the unemployment rate among teenagers in this country -- is over twice as high as the overall unemployment rate. It's no accident that that was not always the case until the 1950's when the minimum wage rate was raised very drastically, very quickly. Teenage unemployment was higher than ordinary unemployment because, of course, teenagers are the ones who are just coming into the labor market -- they're searching and finding jobs, and it's understandable that on the average they would be unemployed more. But it was nothing like the extraordinary level it has now reached -- it's close to 20%.

HEFFNER: Why?

FRIEDMAN: Because the minimum wage law is most properly described as a law saying employers must discriminate against people who have low skills. That's what the law says. The law says here's a man who would -- has a skill which would justify a wage rate of $1.50, $2.00 an hour. You can't, you may not employ him. It's illegal. Because if you employ him you have to pay him $2.50. Well, what's the result? To employ him at $2.50 is to engage in charity. Now there's nothing wrong with charity. But most employers are not in a position where they can engage in that kind of charity. Thus the consequences of minimum wage rates have been almost wholly bad, to increase unemployment and to increase poverty. Moreover, the effects have been concentrated on the groups that the do-gooders would most like to help. The people who have been hurt most by minimum wage laws are the blacks. I've often said that the most anti-Negro law on the books of this land is the minimum wage rate. And so I think the real answer to your question is that you must not judge a bottle solely by its label. You have to look at what's inside and see what the law or the measure produces.

HEFFNER: If one looked at the label, though, and perhaps one of those government regulations that you would look askance at, is that we look at labels. If one looked at the label and identified the objective of minimum wages, are there no positive, legitimate objectives achieved by minimum wage?

FRIEDMAN: None whatsoever. In my opinion, there's absolutely no positive objective achieved by minimum wages. It's real purpose is to reduce competition for the trade unions and make it easier for them to maintain wages of their privileged members higher than the others...

All inputs into any product, including labour, have a market clearing rate. If the application of a minimum wage law prices labour at a higher rate than the market can bear then guess what? Unemployment rises.

The idea of a minimum wage is sold on the basis that it helps 'the poor'. What the vast majority of people do not know is that around three-quarters of those people earning the minimum wage are the tertiary earner in a household (i.e. a teenage child of two working parents) and that ninety percent of them will have increased their earnings above the minimum wage rate within a year as they obtain skills through work. The minimum wage has the insidious effect of denying low-skilled people - primarily young school leavers - the opportunity to obtain employment and gain skills.

Friedman touched briefly on the impact on young blacks and one of his disciples, the great Thomas Sowell, expands on the history of black youth unemployment:

Let us go back a few generations in the United States. We need not speculate about racial discrimination because it was openly spelled out in laws in the Southern states, where most blacks lived, and was not unknown in the North.

Yet in the late 1940s, the unemployment rate among young black men was not only far lower than it is today but was not very different from unemployment rates among young whites the same ages. Every census from 1890 through 1930 showed labor force participation rates for blacks to be as high as, or higher than, labor force participation rates among whites.

Why are things so different today in the United States -- and so different among Muslim young men in France? That is where economics comes in.

People who are less in demand -- whether because of inexperience, lower skills, or race -- are just as employable at lower pay rates as people who are in high demand are at higher pay rates. That is why blacks were just as able to find jobs as whites were, prior to the decade of the 1930s and why a serious gap in unemployment between black teenagers and white teenagers opened up only after 1950.

Prior to the decade of the 1930s, the wages of inexperienced and unskilled labor were determined by supply and demand. There was no federal minimum wage law and labor unions did not usually organize inexperienced and unskilled workers. That is why such workers were able to find jobs, just like everyone else, even when these were black workers in an era of open discrimination.

The first federal minimum wage law, the Davis-Bacon Act of 1931, was passed in part explicitly to prevent black construction workers from "taking jobs" from white construction workers by working for lower wages. It was not meant to protect black workers from "exploitation" but to protect white workers from competition.

The union movement really does have an ugly history on matters of race. How many people know that it was the union movement in South Africa that led to what became known internally as the policy of Separate Development and externally as Apartheid?

Not many, I bet.

(Nothing Follows)