Saturday, October 31, 2009

Minimum Wage Laws and Entry Level Jobs

It is interesting to compare Bob Herbert's article in the NY Times yesterday about unemployment among recent college graduates with a Wall Street Journal op-ed from earlier this month about the effect of the recent minimum wage hike.

Here's Herbert from October 30, 2009:

As jobs become increasingly scarce, more and more college graduates are working for free, at internships, which is great for employers but something of a handicap for a young man or woman who has to pay for food or a place to live.

"The whole idea of apprenticeships is coming back into vogue, as it was 100 years ago," said John Noble, director of the Office of Career Counseling at Williams College. "Certain industries, such as the media, TV, radio and so on, have always exploited recent graduates, giving them a chance to get into a very competitive field in exchange for making them work for no — or low — pay. But now this is spreading to many other industries."

Lonnie Dunlap, who heads the career services program at Northwestern University and has been advising young people on careers since the mid-70s, said today’s graduates are experiencing the worst employment market she’s ever seen.


Like Mr. Noble, she mentioned the growing use of interns versus paid employees and said she can see the value of such unpaid work for some recent graduates, "though, of course, not everyone can afford to do that."

Herbert concludes:

If we’re having trouble finding employment for even these kids, then we’re doing something profoundly wrong.

Ahh, but what could we be doing wrong?

From the WSJ article on October 3, 2009, aptly subtitled “The minimum wage hike has driven the wages of teen employees down to $0.00”:

Yesterday's September labor market report was lousy by any measure, with 263,000 lost jobs and the jobless rate climbing to 9.8%. But for one group of Americans it was especially awful: the least skilled, especially young workers. Washington will deny the reality, and the media won't make the connection, but one reason for these job losses is the rising minimum wage.

Earlier this year, economist David Neumark of the University of California, Irvine, wrote on these pages that the 70-cent-an-hour increase in the minimum wage would cost some 300,000 jobs. Sure enough, the mandated increase to $7.25 took effect in July, and right on cue the August and September jobless numbers confirm the rapid disappearance of jobs for teenagers.

The September teen unemployment rate hit 25.9%, the highest rate since World War II and up from 23.8% in July. Some 330,000 teen jobs have vanished in two months. Hardest hit of all: black male teens, whose unemployment rate shot up to a catastrophic 50.4%. It was merely a terrible 39.2% in July.


As the minimum wage has risen, the gap between the overall unemployment rate and the teen rate has widened, as it did again last month. (See nearby chart.) The current Congress has spent billions of dollars—including $1.5 billion in the stimulus bill—on summer youth employment programs and job training. Yet the jobless numbers suggest that the minimum wage destroyed far more jobs than the government programs helped to create.

Now, I don’t want to mislead you; Herbert is writing specifically about college graduates, and the numbers from the WSJ article are for teenagers. However, there is obviously a strong correlation. Recent college graduates are usually unskilled and trying to land their first real jobs, just like teenagers. And employers are not currently willing to pay $7.25/hour (plus the 7.65% employer portion of FICA taxes) for an on-the-job trainee of limited productivity.

The fact that zero wage internships are widely available means that the need for young, unskilled workers is there (after all, taking on interns is not exactly free – interns do require some supervision from paid employees), but that given the choice between paying zero (which is legal) and minimum wage, employers choose zero because the minimum wage does not make economic sense.

It is highly likely that there is some hourly wage between zero and $7.25/hour that could better clear the market for entry level labor and could match hundreds of thousands of additional entry level workers with entry level jobs. But the federal government, in its unbounded wisdom, has made that wage illegal.

I recently remarked to an economist friend of mine that economics must be a depressing field in which to be a researcher. In the hard sciences, new research is often translated into practical applications which benefit society. In economics, however, ideas that were worked out and widely accepted by practitioners centuries ago are not only not implemented, but are contradicted and disparaged by those who wield the most power over our society.

I suppose that we should feel fortunate that lawmakers don't try to repeal the law of gravity, even as they try again and again to repeal the law of supply and demand.

Friday, October 9, 2009

The Nobel Peace Prize and the Cause of World Peace

Although this post does not pertain to economics directly, I think there are general economic principles at work in every aspect of human life. As such, no topic is off-topic for this blog (isn't that convenient?).

Most observers are stunned by the announcement today that President Obama is the winner of the 2009 Nobel Peace Prize. I have to confess (brag really) that it was not so much a surprise to me. Before I was even out of bed this morning my wife turned on her laptop to check the news and immediately gasped and said "Guess who won the Peace Prize." I immediately said "Don't tell me it was Obama."

The Peace Prize, as well as the Literature Prize, are quite different from the science Nobel Prizes in that they are essentially political in nature. Although there are sometimes controversies about how important Nobel Prize winning scientific research is or whether the particular people who were awarded the prize actually deserved it more than others, there is rarely controversy about the work itself. The prize winning work is almost always already accepted as correct and already considered a significant contribution to human knowledge (although there was at least one prize given for erroneous research). Not so for the Peace and Literature Prizes.

I note in passing only that a Peace Prize, but not a scientific prize, has been awarded for global warming research.

The Peace Prize is unique in that the prize committee sees it as a vehicle for promoting world peace, rather than just recognizing important and completed work. And the committee clearly believes that it can promote world peace by enhancing the stature of the recipient and encouraging him to keep doing what he's doing.

Choosing Obama is logical in the sense that the committee wishes to encourage his recent overtures to the world, his professed commitment to peaceful diplomacy, and his apparent desire to reduce the military capacity of the United States. I think the timing in particular proved irresistible to the committee because the award could possibly influence Obama's pending decisions on escalating the war in Afghanistan and taking more aggressive measures against Iran.

But the choice is overtly political because it is not at all clear that Obama's professed peace-making strategy is correct. There are reasonable people (and I count myself as one of them) who believe that the current strategy is one of appeasement which actually does great harm to the cause of world peace.

The simple truth is that there are a lot of evil people in the world, and many of them accumulate vast powers through the apparatus of a state. I've seen references to medical studies which estimate that roughly 1% of humans are literally psychopaths. Probably a reasonable percentage of psychopaths are clever enough that they can play by society's rules in order to survive into adulthood unscathed and unjailed.

It is probably also true that a much larger percentage of people are capable of being trained to become psychopaths in practice. That is, they have moral consciences but can be indoctrinated to suppress them in order to achieve a greater good for their people, their cause, their country, or their religion.

Many of these psychopaths end up in control of states. In fact, in undemocratic states, there is probably a selection bias in favor of leaders who are violent psychopaths (whereas in democratic states there appears to be a selection bias in favor of narcissists).

Whatever the root cause, history is replete with examples of countries that start wars for no good reason except to accumulate power and wealth and to subjugate other people.

George Bush was widely derided for his Manichean world view -- which is that there are good people and bad people, and that the good people have to stand up to the bad people. But Winston Churchill had the same view, and he is generally recognized as an inspiring and brilliant leader. The main difference is that Winston Churchill was a lot better at speaking off the cuff (and was much more of a warmonger).

I'm beating around the bush (no pun intended), but my central point is one that Winston Churchill believed in and one that Ronald Reagan made into a campaign slogan -- that peace comes through military strength.

The US spends more than 4% of its GDP on defense. It is roughly equal to the total military spending of the rest of the world combined. Is this necessary? Is it overkill? I'm not sure of what the right number is, but the size and strength of the US military should be above the level at which other countries don't even think about challenging us.

You don't want a potential adversary to get even a glimmer of an idea that it is possible to initimidate the US militarily. Because if an adversary doesn't even think to try, we will have real and stable peace.

In financial terms, one might describe this idea thusly: the convenience yield of having a huge military capacity is equal to the potential cost of the devastating wars that such a capacity allows us to avoid. Given the shockingly high cost of war between modern countries in terms of human suffering and economic loss, that convenience yield may well be far in excess of 4% of GDP.

Now that might not be so comforting to a left-wing politician in Oslo who thinks that the United States is just as susceptible to being taken over by a psychopath as any other (especially since, in his view, it was ruled by a psychopath for the last eight years).

But the truth is the system of government we have in the US makes immoral military aggression extremely difficult and unlikely. Bush-haters hyperventiliate a lot about Iraq, but whether you think the Iraq war was smart or dumb, farsighted or rash, justified or not, it is necessary to ignore completely the prior 15 years of Iraq's history to judge the motivations for the Iraq war as immoral. According to any reasonable moral calculus, the 10 years of economic sanctions which preceded the Iraq war were far less moral than the war itself.

And given the surprising, suicidal hatred shown by some of our enemies on 9/11, it was not unreasonable to use our power to preempt a latent, albeit uncertain, threat. That this threat was hyped as more short-term than it really was (although perhaps not more than it was genuinely perceived to be) doesn't change the fact that it was a rational decision and not a psychopathic one.

Anyway, I think that what has kept the reasonably stable peace during the two decades since the end of the Cold War has been the United States' dominant military power, and the willingness to use it to maintain the peace on land and on the high seas.

The Nobel Peace Prize Committee disagrees and wishes to use the selection of Obama to promote its idea that global peace is attained by holding hands and singing kumbaya around campfires. Ten thousand years of human history says that the committee is wrong. Let's hope that Obama will come to see that before real damage is done.