Your Fat Paycheck Keeps Your Neighbor Unemployed

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Some observations perfectly at home in economics textbooks can be so beastly in practice that nobody is willing to mention them.

Ignoring the facts, though, leads to bad policies, and with the U.S. unemployment rate at a stubborn 9.6 percent, we don’t need more of those.

So here comes the leap into ice-cold water: The biggest problem with the labor market right now is that wages are too high. As Washington again turns to government spending as a cure for unemployment, some against-the-grain thinking is in order.

Economics teaches that full employment would be reached if wages adjust downward, to a level that better reflects current circumstances. At lower wages, employers would desire more workers. Labor markets generate persistent unemployment only if wages are sticky, failing to fall as demand declines.

A number of reasons help explain why wages don’t and won’t drop, beginning with federal and state minimum-wage laws.

Second, because union contracts generally cover multiple years, adjusting wages in response to economic circumstances would require a return to the bargaining table, which rarely happens.

Third, the natural reluctance of workers to accept lower pay is amplified by how their wage helps define their identity. A $60,000-a-year office worker might have an extra-hard time coming to terms with becoming a $40,000-a-year worker.

Finally, workers and jobs might be mismatched, either geographically or occupationally. Workers might be needed in places they don’t want to move to, or can’t afford to live.

There are ample signs that these obstacles to lower wages are helping drive high unemployment today.

In an example of poor policy timing, Democrats chose to lift the minimum wage during the worst possible time, just as wages should have been reduced.

Since 2007, the year the recession began, the federal minimum wage has risen to $7.25 an hour from $5.15 -- an increase of 41 percent. Democrats in Congress proposed the three-stage increase, and Republican President George W. Bush enacted it, as part of a spending measure that focused mainly on financing the war in Iraq.

Increasing labor costs via higher minimum wages at any time poses a risk of higher unemployment; doing so during a recessionary labor market is policy negligence. It would be nice, and perhaps fanciful, to think that had Democrats seen the recession coming in 2007, they might have cut back on their minimum-wage blowout.

Teenage workers, who as a group fill many minimum-wage jobs, have been hit disproportionately hard by the recession. The teen unemployment rate has increased to 26.3 percent from 16.9 percent in December 2007.

In a similar vein, evidence shows that union workers are harmed, in terms of employment rates, by their generally higher wages. In 2009, the percentage of union members among the employed dropped to 7.2 percent -- the lowest rate in postwar history.

That Americans in large numbers aren’t pulling up their roots to follow jobs is made clear by the disparity in state unemployment rates. Nevada suffers the highest unemployment at 14.3 percent, while North Dakota weighs in at a surprisingly low 3.6 percent, a rate any state would be bragging about even in the best of economic times.

So why isn’t there a traffic jam of job-seekers trekking from Las Vegas to Fargo, and from other high-unemployment areas to high-employment ones?

One reason is unemployment insurance. State unemployment insurance programs usually limit benefits to 26 weeks. However, between various state and federal programs to extend benefits during the recession, unemployment benefits can continue up to a total of 99 weeks, giving people less incentive to pick up and move on when they lose their jobs.

Another complication is the American culture of homeownership. In today’s market, lots of people couldn’t sell their house and relocate even if they wanted to. So chalk one up for renting.

If, as we’ve seen, wage stickiness is driving unemployment higher, the challenge is to enact the public-policy equivalent of Goo Gone. A few ideas come to mind.

First, the minimum wage should be scaled back to $5.85, its level when the recession began in December 2007. There were about 980,000 minimum-wage workers in 2009, half of them more than 24 years of age. This change could have a big impact on aggregate employment.

Second, government policies should induce workers to take the plunge and accept lower wages. These policies could include carrots -- tax credits that offset large wage declines, for example -- and sticks, such as a reduction in the duration of unemployment insurance benefits.

Finally, unions should be willing to reopen collective bargaining agreements and accept lower wages.

While painful, and perilous for a politician even to discuss, these measures would do a lot to move the economy back toward full employment.

(Kevin Hassett, director of economic-policy studies at the American Enterprise Institute, is a Bloomberg News columnist. He was an adviser to Republican Senator John McCain in the 2008 presidential election. The opinions expressed are his own.)

http://www.bloomberg.com/news/2010-09-07/your-fat-paycheck-keeps-your-neighbor-unemployed-kevin-hassett.html

[mawilson 2,133]

The biggest problem with the labor market right now is that wages are too high.

If that's our biggest problem, Obama's already fixing it.

[Peikko 1,575]

I don't get why reducing wages magically solves problems, particularly when for the individual outgoings don't change. Surely the economy is dependent on more variables than wages, and as a % of overheads wages necessarily varies significantly dependent on many and variable factors? Seems to me like this article is creating a boogy man for us all to blame, when the reality is that workers really are the least influential of all the variables.

[^_^ 5,021]

Surely the economy is dependent on more variables than wages...

For most large businesses, payroll is the largest expense.

[Peikko 1,575]

For most large businesses, payroll is the largest expense.

OK, but surely what matters as regards to whether or not more people are employed over all is what happens to the increase in profit margin that reducing the payroll a couple of % points releases? If a company sees a reduced payroll as a way to simply stay still, no more jobs will be created and the workers have less spending power so are of reduced use as an economic stimulant.

[Heracles 417]

The biggest problem with the labor market right now is that wages are too high.

Second, government policies should induce workers to take the plunge and accept lower wages.

Kevin Hassett - adviser to Republican Senator John McCain - The opinions expressed are his own.)

Is this guy ###### retarded or just stupid? Only a Repub could pull that #######.

The US pretty-much has the lowest and crappiest wages amongst the first world, yet the wages are apparently too high.

[Heracles 417]

People need money to spend, that is how this pyramid scheme service economy works here. Yet apparently paying people less money will magically help the economy and even make them spend more. This guy needs to read up on the concept of a recession as he clearly doesn't grasp squat. A recession is a contraction of the economy. AKA contraction of spending.

Like saying, you have been diagnosed with Cancer, now eat and move less and it will all go away.

Edited September 9, 2010 by Heracles

[Bad_Daddy 2,209]

Is this guy ###### retarded or just stupid? Only a Repub could pull that #######.

The US pretty-much has the lowest and crappiest wages amongst the first world, yet the wages are apparently too high.

Golden Parachutes, costly bs bogus wars, corporate white collar bonuses, stock exchange and bank frauds, etc, etc, etc... and Repubs have the balls to say we need to lower the minimum wage ?

L

[lostinblue 1,989]

unions and their unfunded pensions

[Texanadian 10]

There are a lot of good key factors to debate in the article.

1) Minimum wage. Most people think of this as how much a working person at the bottom end gets paid. In reality what it is is a rule that says you can't pay somebody less money than what the min wage is. Ever notice you don't see full serve gas stations anymore? Or elevator operators? These jobs have become obsolete as min wage has gone up. We've determined that it's better for people to be unemployed than work for low wages. Raise the min wage to $10 and you'll have people that are earning min wage now, having to compete with people who are currently worth $10/hr. Who loses? The person earning $7 in current times. This isn't a minimum wage phenomenon. It occurs in all wage groups. An accountant without a degree generally earns less than a CPA. The accountant can get a job by undercutting the CPA on salary. But institute a minimum accounting wage roughly equal to what CPA's make and accountants without a degree can't compete. Teenagers have no work history and no skills. Raising the min wage makes it harder for them as now they're competing with people in their 20's who have work history. People who are high school drop outs have a harder time finding work when min wage goes up. Employers get more picky when min wage goes up. Ditto people with criminal records.

Regardless, I don't see the need for a federal min wage in the USA. Canada has no nationalized min wage. It's set by each province. The USA could do the same. 14 states already have higher minimum wages than the national level. 5 states have lower min wages. 5 states have no min wages. The 10 states with lower or none still have to pay the federal level.

2) Relocating. The Vegas to Fargo example is a good one. My sister is a dentist. Here in Houston there are more dentists than there are Starbucks. My Dental HMO plan lists about 50 dentists in a 5 mile range. My sister doesn't work in Vancouver or Toronto or even Victoria. No, she works up in the North West Territories in Northern Canada. There is a shortage of doctors and dentists up there. Why else would anybody want to move there? As far as Vegas vs Fargo goes, where would you rather live?

3) Government tax credits/unemployment. There is no point in pushing for tax credits for workers earning less. They already pay less taxes by virtue of earning less. The unemployment benefits duration is another debate. Both sides have some merit.