Minimum Wage Increase and Increasing Unemployment

A real life example why increasing the minimum wage is a bad idea in some cases. [Link]

Bad news out today on the unemployment front — a big jump from 5.1 to 5.5%.

However, within the numbers are some interesting details.

First, the number didn’t spike due to a big loss of payroll jobs — those declined only by 49,000 in April. That would be only .0004% in an economy of about 138 million workers.

Instead, the number jumped because of a surge of new people who came into the job market looking for, but not finding work. The overall unemployment number is about 8.5 million, and the increase last month represented about 860,000 new job seekers — only 49,000 of whom had lost a job elsewhere.

Further, the unemployment rate for the 16-24 age group was up dramatically compared to other groups. Unemployment in that group rose 2.4%, compared to increasing by only .4% in the group of workers 25 and older.

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Who does this age group represent? How about high school and college students coming into the job market for the summer.

And what do many such job seekers get paid? Minimum wage –which Congress increased last year from $5.15 to $5.85, and which will increase again next month to $6.55, and then again next year to $7.25.

Here’s a personal case study in how that works to squeeze workers out of the minimum wage job market:

My parents own an ice cream shop, and rely heavily in its operation on eight 16-20 year olds working part-time schedules of 16-24 hours a week, along with one full-time manager who is assisted by my parents in their free time. Over the course of a 7 day work week, they typically employ the part-time workers for a total of about 340 hours a week.

Raising the minimum wage by .70 increased their straight wage expense by $240 a week, or about $1000 a month. But it had collateral consequences as well, as their worker’s comp. and unemployment insurance costs rose in relation to their payroll, as did their payroll tax contributions. The combination of wage increase and the various increases that spin off that wage increase was about $1500 a month. This is against a total wage expense for the part-timers of about $8000 a month.

Now, the ice cream parlor business is somewhat inelastic from a price stand point — people won’t continue to pay higher and higher prices for an ice cream cone when the alternative is simply to do without. So, that increase in operating expense could not, in total, be passed on to the customers. Instead, my parents worked a few more hours themselves and trimmed back on the hours they had the part-timers working. When one of the part-timers quit, they didn’t hire a replacement for her.

There is quite often, a demand to the government that "something must be done!" and many people think that this will help the poor to make a living wage. Perhaps, but not if this makes small businesses reduce payrolls or close entirely because they can't afford to stay open.

The invisible hand of the market isn't always fair, but when you try to push it, it pushes back somewhere else.