What about the minimum wage?

Loren Kaye
President of the California Foundation for Commerce and Education

Lots of political and economic notice has recently been taken about the sharp increase in the national unemployment rate, up a half-point to 5.5%, which is a ten percent jump from the previous month’s level of 5%. However, closer inspection of the numbers reveals what might be either an anomaly or – more tantalizing – a policy outcome.

Nobody is claiming that the overall unemployment situation is not deteriorating. But John Silvia, chief economist with Wachovia, said the unemployment rate was distorted by a big jump in teenage unemployment in May, to 18.7% from 15.4%, as the school year ended and teenagers started searching for jobs. The rates for all adult men and women stood at 4.9% and 4.8%, respectively, reflecting much smaller increases.

According to some observers, it is at least possible that in addition to the more general problems in the US economy, last summer’s increase in the federal minimum wage as well as the next jump coming in late July are behind the particulars here. Last July, the federal minimum wage increased to $5.85/hour and will increase to $6.55 next month. With a sluggish economy, it certainly seems possible that the higher minimum wage is discouraging employers from hiring lower-skill workers whose productivity cannot justify paying them that wage, particularly if they know they will have to give them a raise come late July.

California has also increased its minimum wage twice in the past two years – by 75 cents-an-hour in January 2007 and by an additional 50 cents-an-hour at the beginning of 2008. Is it possible that some of the run-up in the California unemployment rate (increasing faster than the US rate) is a result of these cumulative increases in the minimum wage? See the table, below.

Unemployment Rates and CA Minimum Wage

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