A good friend forwards me one of the economic newsletter he gets, and this comment jumped out at me”
The unemployment rate of college grads in January was 4.2%, while for those with less than a high school diploma it was 14.2%. This is creating a major social problem of the haves and have-nots. By the way, do you think the increases in the minimum wage might have something to do with the elevated jobless rates of those with low skills, and their labor force drop-out rates? This is scandalous! Economics malpractice.
This doesn’t ring true to me. I think the columnist is falling for the statistical noise. Correlation is not causation, as they say. If you look at unemployment trends in the Baby Boomer era and the minimum wage adjusted for inflation, the overwhelming data do not support his thesis.
For example, the minimum wage was raised in 1978, 1979, 1980 and 1981. The unemployment rate dropped in 1979, rose in 1980, 1981, 1982 and 1983. This is the basis, I believe, for the current thinking.
In the 1990s, the minimum wage was raised three times: 1990, 1991 and 1996. Unemployment rose in 1991 and 1992, but fell to record lows in 1997-1999 — below 4%, in fact, a level few economists thought was possible.
But here’s the rub: Adjusted for inflation and using 2007 (the last available year) as the starting point, the minimum wage is actually 11% less than in 1997, 3.5% less than 1987, 26% less than 1977 and a whopping 35% less than 1967. Businesses are paying their lower-end workers less, and in many cases, much less that they did decades ago. In fact, adjusted for inflation, the minimum wage in 2007 was $4.41; in 1955, it was $4.39.
Federal Minimum Wage Rates, 1955–2009
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Elsewhere in the newsletter, the same economist nails what I think is the answer: that productivity (in the form of GDP) is at an all-time high despite 9% unemployment. The more educated one is, the easier it is to add multiples to the GDP. In other words, from what I have observed, if it comes down to employing a technician with a high school diploma or an engineer with a college degree, manufacturers are choosing that engineer because he can develop the processes, run the machines AND do the maintenance. The sense I get is companies are afraid of a double dip (and I don’t blame them for being worried; I am too) and that’s the biggest reason for hoarding cash.
Anyway, it’s still interesting stuff, especially for a Monday morning.