How does an increase in minimum wage affect employment figures?

Economics professor Mark J. Perry explains a discrepancy seen in the debate on how increasing minimum wage affects existing employment figures.

… Most of the minimum wage debate centers on the issue of whether minimum wage increases have any effects on employment levels. Specifically, does the empirical evidence point to any significantly negative effects on employment levels following minimum wage hikes, as clearly predicted by economy theory? Some empirical evidence like the much-cited 1994 study by Card and Krueger found “no indication that the rise in the minimum wage reduced employment” at fast-food restaurants in New Jersey following a minimum wage increase to $5.05 per hour compared to nearby fast-food restaurants in Pennsylvania where the minimum wage remained constant at $4.25.

While then number of workers may not decline, the “number of unskilled work hours demanded by employers” does decrease.

Bottom Line: It’s more accurate to say that the Law of Demand predicts: a) a negative relationship between higher wages and the number of hours of unskilled work demanded by employers, rather than b) a negative relationship between higher wages and the number of unskilled workers employed. Therefore, it’s possible that a minimum wage hike won’t always negatively affect employment levels for entry-level unskilled workers, but will affect the number of hours demanded by employers for unskilled labor. That’s how we can reconcile the apparent inconsistency between economic theory and some of the empirical evidence…..

Other considerations factor into what actually happens when the minimum wage is increased, so results cannot be accurately predicted.  More details can be found by reading a section of Chapter 10 in Microeconomics: Theory Through Applications, v. 1.0 by Russell Cooper and A. Andrew John.

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Mark J. Perry, “The Law of Demand and the minimum wage: It applies to number of hours worked, not the level of employment”, Carpe Diem, September 14, 2014.

The jobless recovery in one chart

An illustration of our jobless recovery from economics professor Mark J. Perry

 

Bottom Line: The US has been producing new record-high levels of GDP in almost every quarter since Q3 2011, and we are now producing 7.65% (and $1.14 trillion) more real GDP today than in late 2007. But we are producing that record-setting level of real output with a quarter-million fewer workers than in 2007. One explanation for America’s record-high output with 227,000 fewer workers is that the Great Recession facilitated what might be one of the greatest expansions of worker productivity in US history. The fact that we’ve been able to greatly expand national output with fewer inputs (workers) represents a huge increase in economic efficiency, but has also left us with a lingering “jobless recovery” and an economy that is struggling to create new, post-recession employment opportunities for millions of Americans.

Labor force participation remains low.

Perry explains that he is using the “more comprehensive measure of total civilian employment” instead of the total payroll number, which recently climbed up to pre-recession levels  However, his bigger point is supported by the troubling increase in the working age population during that time.

As good as that might sound, surpassing the previous high-water mark in terms of payroll employment is cold comfort for recent graduates and other new entrants into the work force, as well as for the legions of Americans who lost their jobs in the Great Recession. While payrolls may be back to where they were before the downturn, the working age population has risen by roughly 15 million over the same period.

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Mark J. Perry, “The current state of the US economy in one chart”, Carpe Diem, September 5, 2014.

Is the dreary jobs outlook the reason we are pessimistic about our kids’ future?

Why are Americans so pessimistic about their children’s future?

Some 63% of all Americans said most children in the U.S. won’t be better off than their parents. This dour view comes despite most respondents, 54%, feeling they are better off than their own parents.

This is a “stunning reversal from CNN data at the end of the last century (1999 to be exact) — when two thirds of Americans predicted that children would grow up to have it better than their parents”.

Some key factors seem to influence this pessimism.

The vast majority of Americans have higher incomes than their parents, but that’s in large part because most families have two earners now, she said. Only half have more wealth, she said. Meanwhile, the savings rate is low and unemployment is high. College costs are rising faster than inflation and student loan debt is exploding.

But income mobility “has not changed significantly over time”.  And college completion rates have continued to increase over the long term.

I agree with the majority view, and the bleak jobs picture is a primary reason for my pessimism.

Although the latest jobs report showed that payroll numbers have finally returned to pre-recession levels, there is a negative side to this news.

As good as that might sound, surpassing the previous high-water mark in terms of payroll employment is cold comfort for recent graduates and other new entrants into the work force, as well as for the legions of Americans who lost their jobs in the Great Recession. While payrolls may be back to where they were before the downturn, the working age population has risen by roughly 15 million over the same period.

According to one calculation, the country still needs a “whopping 7 million”  jobs to accommodate the needs of a healthy economy.  The outlook is dreary.

At a rate of 217K per month with 150K needed to keep pace with population growth, how long will it take us to catch up to that 7 million? Oh …. eight years and nine months.

Meanwhile, American “women are having fewer kids, and demographers don’t know why”.

Perhaps this lowered fertility rate is partly a consequence of the pessimism expressed by the latest poll.  Paradoxically, lower birth rates could be exacerbating the downhill slide of our economy.

The consequences of America’s recession baby bust are already significant. “We’re getting to the point where it’s dropped far enough and for a long enough period of time that it’s going to have serious implications” for the population and the economy, Mather said. With declining fertility, the U.S. population would age, and ultimately the labor force would decline as older workers retire — a trend already well underway with the Baby Boom generation reaching their mid-60s.

The financial crisis “has had the most punishing impact on demographic trends of anything since the Great Depression,” Johnson said.

Perhaps the jobs crisis is fundamentally transforming our nation, but in ways that were not foreseen.

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Tami Luhby, “The American Dream is out of reach”, CNN, June 4, 2014.

Nelson D. Schwartz, “217,000 Jobs Added, Nudging Payrolls to Levels Before the Crisis”, New York Times, June 6, 2014.

David Leonhardt, “‘The Great Shift’: Americans Not Working”, New York Times, August 27, 2013.

Joseph Lawler, “Women are having fewer kids, and demographers don’t know why”, Washington Examiner, June 7, 2014.

Ed Morrissey, “May jobs report: 217K jobs added, jobless rate steady at 6.3%”, Hot Air, June 6, 2014.

What will happen when computers can handle most white-collar jobs?

Computers may soon be able to do white-collar jobs meant for college graduates.

Noriko Arai of the Todai Robot Project explains how the future is shaping up.

… a machine should be capable, with appropriate programming, of doing many — perhaps most — jobs now done by university graduates.

With the development of artificial intelligence, computers are starting to crack human skills like information summarization and language processing….

How would college graduates be affected by this technological evolution?

There is a significant danger, Ms. Arai says, that the widespread adoption of artificial intelligence, if not well managed, could lead to a radical restructuring of economic activity and the job market, outpacing the ability of social and education systems to adjust.

Intelligent machines could be used to replace expensive human resources, potentially undermining the economic value of much vocational education, Ms. Arai said.

“Educational investment will not be attractive to those without unique skills,” she said. Graduates, she noted, need to earn a return on their investment in training: “But instead they will lose jobs, replaced by information simulation. They will stay uneducated.”

In such a scenario, high-salary jobs would remain for those equipped with problem-solving skills, she predicted. But many common tasks now done by college graduates might vanish.

Mostly good or mostly bad?

…  A recent study published by the Program on the Impacts of Future Technology, at Oxford University’s Oxford Martin School, predicted that nearly half of all jobs in the United States could be replaced by computers over the next two decades.

Some researchers disagree. Kazumasa Oguro, professor of economics at Hosei University in Tokyo, argues that smart machines should increase employment. “Most economists believe in the principle of comparative advantage,” he said. “Smart machines would help create 20 percent new white-collar jobs because they expand the economy. That’s comparative advantage.”

Others are less sanguine. Noriyuki Yanagawa, professor of economics at Tokyo University, says that Japan, with its large service sector, is particularly vulnerable.

“A.I. will change the labor demand drastically and quickly,” he said. “For many workers, adjusting to the drastic change will be extremely difficult.”

Smart machines will give companies “the opportunity to automate many tasks, redesign jobs, and do things never before possible even with the best human work forces,” according to a report this year by the business consulting firm McKinsey.

Many business leaders dismiss a takeover by machines as “futurist fantasy”.

… Gartner’s 2013 chief executive survey, published in April, found that 60 percent of executives surveyed dismissed as “‘futurist fantasy” the possibility that smart machines could displace many white-collar employees within 15 years.

“Most business and thought leaders underestimate the potential of smart machines to take over millions of middle-class jobs in the coming decades,” Kenneth Brant, research director at Gartner, told a conference in October: “Job destruction will happen at a faster pace, with machine-driven job elimination overwhelming the market’s ability to create valuable new ones.”

Will these changes create a future of leisure and “self-realization”?

Optimists say this could lead to the ultimate elimination of work — an “Athens without the slaves” — and a possible boom for less vocational-style education. Mr. Brant’s hope is that such disruption might lead to a system where individuals are paid a citizen stipend and be free for education and self-realization.

“This optimistic scenario I call Homo Ludens, or ‘Man, the Player,’ because maybe we will not be the smartest thing on the planet after all,” he said. “Maybe our destiny is to create the smartest thing on the planet and use it to follow a course of self-actualization.”

It sounds too good to be true.  Although the concept of a future as an “Athens without the slaves” has its appeal, it sounds too fantastic to believe.  I wonder what will happen to the segment of the population that lacks the highest level of problem-solving skills.

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Michael Fitzpatrick, “Computers Jump to the Head of the Class”, New York Times, December 29, 2013.

The jobs gap between college and high school graduates continues to grow

College graduates continue to fare the best in this feeble economic recovery.

College graduates claimed the bulk of last month’s job gains, while high-school grads with no college lost jobs, highlighting a persistent divide in the recovery.

While both groups have seen improvements in unemployment rates, 3.4% for college grads and 7.3% for high school grads with no college, there is general agreement that progress has been slow.

Underemployment is a problem.

… Of course, though college grads are getting the lion’s share of the jobs, it doesn’t mean those are good jobs. Overall employment gains have come from lower wage jobs, with many graduates underemployed.

The divergence in jobs growth is clear.

Among all segments of workers sorted by educational attainment, college graduates are the only group that has more people employed today than when the recession started.

The number of college-educated workers with jobs has risen by 9.1 percent since the beginning of the recession. Those with a high school diploma and no further education are practically a mirror image, with employment down 9 percent on net. For workers without even a high school diploma, employment levels have fallen 14.1 percent.

Related:

• Why parents push their kids to go to college (Cost of College)
• College-educated households are gaining in economic clout (Cost of College)

Surge in part-time jobs may be good for working mothers

Are we seeing a convenient confluence of moms wanting to work less with a surge in part-time jobs?

Headlines continue to remind us of the surge in part-time employment.

Part-Time Work On The Rise, But Is That A Good Thing? — NPR

The Rise of Part-Time Work — New York Times

Most Of The New Jobs Were Part-Time — Business Insider

Who Can Deny It? Obamacare Is Accelerating U.S. Towards A Part-Time Nation — Forbes

The trend is undeniable.

And then we have this:  ‘Many Working Moms Want To Work Less’

According to a recent Pew poll, 67% of all mothers would ideally forego full-time work in favor of working part-time (47%) or not at all (20%). By contrast, only 25% of fathers would choose part-time work (15%) or not to work (10%). Among all women who describe themselves as “financially comfortable,” only 31% would ideally work full-time and another 34% wouldn’t work at all. And among married mothers, only 23 percent would ideally like to work full-time. These are large percentages of different types of women who would choose family or personal priorities over full-time employment.

Current labor statistics bear out these fantasies: women are twice as likely as men to work part-time even though they are also more likely to be college-educated and thus more marketable.

Of course, part-time employment does not work as a solution for everyone.

It’s true that the trend toward part-time, benefit-free employment can be financially ruinous to individual workers. One fifth of the country’s jobs are part-time, and many are low-skilled, dead end positions. But it’s easy to overlook how unrewarding full-time employment can be for many people, too – especially when the researchers and reporters and pundits who write about workforce trends tend to have fascinating, flexible jobs with decent pay.

Moms who want to cut down their working hours may look more attractive to employers.

I just wonder if there may be a glimmer of hope for mothers wanting to downsize their work week, but who have not been able to find suitable part-time opportunities.  The new economics of employing part-time workers creates an environment that dissolves some of the old arguments used to defend policies requiring every staff member to put in 40+ hours per week.  Now the parent who wants to spend less time at the office and more time at home may be a more attractive job candidate.

Related:  Long hours may explain why educated women quit the workforce – ‘the time divide’ (Cost of College)

Lack of jobs may become a problem for the ‘majority of the population’

On the topic of sluggish jobs growth, Megan McArdle says our stubborn unemployment problem is rooted in “technology and trade”.

… Global shipping and trade liberalization has made it more practical to manufacture in low wage countries.  Meanwhile, in high wage countries, technology is substituting for labor.  At its peak, General Motors employed 600,000 people to make slightly less than half the cars in the country.  Today it employs 77,000 to produce about 1/5th the cars on the US market.  Even if it regained the market share it has lost to imports, employment in the industry would be way down.

Remember this chart of the hollowed out middle class?

But the lower class is also on shaky ground.
Highly skilled individuals who are motivated and persistent will always find ways to support themselves.  But there is a surplus of workers for middle class jobs McArdle describes as “seated, skilled, steady, decently paid”.  And while large numbers of low-skill jobs continue to be created, these “jobs are, on average, pretty unattractive ones”.  They are generally low statue, and sometimes miserable.  In some cases, our government safety net is a more attractive alternative to these low-end jobs.

The “majority of the population” may be in for a long struggle.

… we are not creating a lot of good new jobs–defined as jobs that are relatively secure, physically tolerable, and decently paid.  People with enough grit and imagination can invent themselves new jobs, but at no time in history has that described the majority of the population.  The alternatives for the rest aren’t very attractive.  And since modern-day America tries hard to keep people from becoming truly desperate, those jobs aren’t being created.

McArdle points out that part of the problem is cultural, with families and communities undergoing massive changes that break with traditional attitudes towards work.  And education is not a solution by itself.

… Until roughly the last five years, it was possible to believe that education would be the solution: send more kids to school, retrain people for new jobs.  But college graduates aren’t finding it so easy to obtain solid employment either.  It’s true that having a college diploma is still much better than not having a college diploma, but that doesn’t mean that by sending more kids to school, we’re actually making the workforce more productive, much less mitigating the problem of economic change; we may just be forcing people to jump over a higher bar to gain access to a shrinking number of jobs….

A stronger safety net does not seem like a good solution.

For starters, it is politically difficult to imagine a really large class of people who simply permanently live off the state.  The safety net is rooted in human instincts about reciprocal exchange.  … They will lose political support if you have one group of people paying taxes, and a different group of people who can expect to live their entire life on the dole.

Such an arrangement would also be socially toxic.  Being out of work is astonishingly bad for your state of mind, your social relations, and even basic skills like math and reading….

 Glenn Reynolds does not think it’s a temporary problem.

There’s a lot of flailing going on, and there has for years been insufficient concern about what all the folks on the left half of the bell curve are going to do with their lives — only now it’s looking like the left 2/3 or maybe 3/4. I’m not sure what to do either. … I do think there’s something structural going on, not just an economic cycle.

Amid declining household debt, rising student loans remain a drag on the economy

Total household debt continues to decline, but rise in student debt hampers economic recovery.

The total amount of debt held by Americans fell again in the first three months of the year and stood at the lowest level since the middle of 2006, the New York Federal Reserve said Tuesday….

The level of household debt in the first quarter fell by $110 billion, or 1%, to $11.23 trillion, mainly because consumers reduced mortgage balances and used their credit cards less.

A…
Auto and student loans rise.

The increase in the value of auto loans was the smallest in four quarters, suggesting that car companies might have cut prices to attract buyers as demand for new vehicles slackened. Still, auto loans rose $11 billion to $794 billion to mark the ninth straight quarterly gain.

Student loans have ‘surged 46% since the end of the recession’.

Student loans, which climbed $20 billion in the first quarter, have surged 46% since the end of the recession to an all-time high of $986 billion. More students are going to college or remaining in school longer to obtain graduate degrees to improve their chances of finding a job amid a slow economic recovery.

Yet the escalation in student loans is also leaving many young people saddled with large debts. Although the delinquency rate on student loans fell slightly in the first quarter to 11.19%, that’s still the second highest rate ever. Before the recession, delinquencies averaged around 7%.

The decline in household debt is good for a recovering economy, but economists believe growing student loans are ‘acting as a drag on growth’.

The anemic economy has left millions of younger working Americans struggling to get ahead. The added millstone of student loan debt, which recently exceeded $1 trillion in total, is making it even harder for many of them, delaying purchases of things like homes, cars and other big-ticket items and acting as a drag on growth, economists said.

Deconstructing the college premium – it depends on major and ability bias

The college premium is derived from several elements.

The college premium of better pay and job prospects should be considered as a composite of several elements, not all directly resulting from actual college attendance.  The premium can be affected by the amount of genuine learning (influenced by major and institution), ability bias, signaling capacity, and other factors.  A hard-working computer science MIT graduate with a 130 IQ will likely enjoy a higher college premium  than a lackadaisical ethnic studies major with a 100 IQ who graduated from a directional state college.  Even if neither attended college, the MIT-wannabee would still probably out-earn the second individual.  [Edited to add that these comments refer to actual dollar amounts.  In terms of percentages, I can see how the slacker kid could have a higher college premium.]

Bryan Caplan has written extensively on this topic, including a recent post about how ‘stronger students typically choose harder – and more lucrative – majors’.

Economists usually talk about the college premium, but the college premium heavily depends on your major.  At the same time, though, stronger students typically choose harder – and more lucrative – majors.  Thus, the college premium is doubly infected by ability bias: People who would have made more money anyway are more likely to go to college, and college graduates who would have made more money anyway are more likely to select demanding majors.

Incorporating this information, Caplan calculated the premium for various majors.  Here are the top five, broken down by gender.
…

EARNINGS COMPARED TO H.S. GRADS

Major	Males	Females
Electrical engineering	+63%	+72%
Computer Science	+61%	+63%
Mechanical engineering	+61%	+72%
Finance	+61%	+55%
Economics	+60%	+59%

…
While Caplan admits these figures “lack the precision of Planck’s constant”, he considers them better than much of the information typically available to high school seniors.  Although as I look at this table, I’m not exactly sure how I would use the data in advising a particular student.  He also notes the relatively high rank of economics,  confirming his belief that “Economics is the highest-paid of all the easy majors.”