Saturday, September 5, 2009

Does the Minimum Wage increase Unemployment?

Many studies find that minimum wage hikes have small effects on employment. To an extent, this is unsurprising--most people are paid well above the minimum wage. Alternately, employers can respond by cutting hours or benefits rather than employment.

But there's at least one subroup--teenagers--who should be much more affected by changes in the federal minimum wage, which just went up from 6.55 to 7.25 now.

Teenage unemployment? It's jumped to 25.5 percent, from 24 percent. Unemployment for everyone has gone up as well, to 9.7%.

Of course, this risecould be the result of many things--worsening labor markets, etc. But it's highly suggestive.

What we really need are wage subsidies. We have unemployment because wages are inflexible during recessions, as companies would rather fire people than deal with grumpy workers. Providing wage subsidies allows companies to pay less, while letting people take home the same amount of money in wages. Singapore has tried this (France as well) and found that unemployment stayed below 6%, even while GDP dropped somewhere in the double digits.

Doing this, combined with a payroll-tax holiday and mortgage modification plan, would do a whole lot more for struggling families than bridges to nowhere and a higher minimum wage.

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