Basic Economics
Page 27
DIFFERENTIAL IMPACT
Because people differ in many ways, those who are unemployed are not likely to be a random sample of the labor force. In country after country around the world, those whose employment prospects are reduced most by minimum wage laws are those who are younger, less experienced or less skilled. This pattern has been found in New Zealand, France, Canada, the Netherlands, and the United States, for example. It should not be surprising that those whose productivity falls furthest short of the minimum wage level would be the ones most likely to be unable to find a job.{368}
In Australia, the lowest unemployment rate for workers under the age of 25, during the entire period from 1978 to 2002, never fell below 10 percent, while the highest unemployment rate for the population in general barely reached 10 percent once during that same period.{369} Australia has an unusually high minimum wage, relatively speaking, since its minimum wage level is nearly 60 percent of that country’s median wage rate, while the minimum wage in the United States has been less than 40 percent of the American median wage rate.{370}
In early twenty-first century France, the national unemployment rate was 10 percent but, among workers under the age of twenty five, the unemployment rate was more than 20 percent.{371} In Belgium, the unemployment rate for workers under the age of twenty five was 22 percent and in Italy 27 percent.{372} During the global downturn in 2009, the unemployment rate for workers under the age of 25 was 21 percent in the European Union countries as a whole, with more than 25 percent in Italy and Ireland, and more than 40 percent in Spain.{373}
As American laws and policies moved more in the direction of those in other modern industrial nations in the early twenty-first century, the unemployment rate among Americans who were from 25 to 34 years old went from being lower than unemployment rates in the same age bracket in Canada, Britain, Germany, France and Japan in 2000 to being higher than in these same countries in 2011.{374}
Some countries in Europe set lower minimum wage rates for teenagers than for adults, and New Zealand simply exempted teenagers from the coverage of its minimum wage law until 1994. This was tacit recognition of the fact that those workers less in demand were likely to be hardest hit by unemployment created by minimum wage laws.
Another group disproportionately affected by minimum wage laws are members of unpopular racial or ethnic minority groups. Indeed, minimum wage laws were once advocated explicitly because of the likelihood that such laws would reduce or eliminate the competition of particular minorities, whether they were Japanese in Canada during the 1920s or blacks in the United States{375} and South Africa during the same era. Such expressions of overt racial discrimination were both legal and socially accepted in all three countries at that time.
The history of black workers in the United States illustrates the point. As already noted, from the late nineteenth-century on through the middle of the twentieth century, the labor force participation rate of black Americans was slightly higher than that of white Americans. In other words, blacks were just as employable at the wages they received as whites were at their very different wages. The minimum wage law changed that. Before federal minimum wage laws were instituted in the 1930s, the black unemployment rate was slightly lower than the white unemployment rate in 1930.{376} But, then followed the Davis-Bacon Act of 1931, the National Industrial Recovery Act of 1933 and the Fair Labor Standards Act of 1938—all of which imposed government-mandated minimum wages, either on a particular sector or more broadly.
The National Labor Relations Act of 1935, which promoted unionization, also tended to price black workers out of jobs, in addition to union rules that kept blacks from jobs by barring them from union membership. The National Industrial Recovery Act raised wage rates in the Southern textile industry by 70 percent in just five months, and its impact nationwide was estimated to have cost blacks half a million jobs.{377} While this Act was later declared unconstitutional by the Supreme Court, the Fair Labor Standards Act of 1938, establishing a national minimum wage, was upheld by the High Court. As already noted, the inflation of the 1940s largely nullified the effect of the Fair Labor Standards Act, until it was amended in 1950 to raise minimum wages to a level that would have some actual effect on current wages.
The unemployment rates of young black males during the late 1940s—the years prior to the repeated escalations of the minimum wage that began in 1950—contrast sharply with their unemployment rates in later years. As of 1948, for example, the unemployment rate for blacks aged 16–17 years was 9.4 percent, while that of whites the same ages was 10.2 percent. For blacks 18–19 years of age, the unemployment rate that year was 10.5 percent, while that of whites the same ages was 9.4 percent.{378} In short, teenage unemployment rates were a fraction of what they were to become in later years, and black and white teenage unemployment rates were very similar.
Even though the following year—1949—was a recession year, rising black teenage male unemployment rates that year still did not reach 20 percent. The black teenage unemployment rate during the recession of 1949 was lower than it was to be at any time during even the boom years of the 1960s and later decades. Black 16 and 17 year-olds had an unemployment rate of 15.8 percent in the 1949 recession year, but that was less than half of what it would be in every year from 1971 through 1997, and less than one-third of what it would be in 2009.{379} Repeated increases in the minimum wage marked these later years of much higher unemployment rates among black teenagers.
The wide gap between the unemployment rates of black and white teenage males likewise dates from the escalation of the minimum wage and the spread of its coverage in the 1950s.{380} The usual explanations of higher unemployment among black teenagers—less education, lack of skills, racism—cannot explain their rising unemployment, since all these handicaps were worse during the earlier period when black teenage unemployment was much lower.
Chapter 12
SPECIAL PROBLEMS IN
LABOR MARKETS
The promotion of economic equality and the alleviation of poverty are distinct and often conflicting.
Peter Bauer {381}
Although the basic economic principles underlying the allocation of labor are not fundamentally different from the principles underlying the allocation of inanimate resources, it is not equally easy to look at labor and its pay rates in the same way one looks at the prices of iron ore or bushels of wheat. Moreover, we are concerned about the conditions where people work in a way that we are not concerned about the conditions where machinery is used or where raw materials are processed, except in so far as these conditions affect people.
Other issues that arise with labor that do not arise with inanimate factors of production include job security, collective bargaining, occupational licensing and questions about whether labor is “exploited” in any of the various meanings of that word.
The statistics that measure what is happening in labor markets also present special problems that are not present when considering statistics about inanimate factors of production. The unemployment rate is one example.
UNEMPLOYMENT STATISTICS
The unemployment rate is a very important statistic, as an indicator of the health of the economy and society. But, for that very reason, it is necessary to know the limitations of such statistics.
Because human beings have volition and make choices, unlike inanimate factors of production, many people choose not to be in the labor force at a given time and place. They may be students, retired people or housewives who work in their own homes, taking care of their families, but are not on any employer’s payroll. Children below some legally specified age are not even allowed to be gainfully employed at all. Those people who are officially counted as unemployed are people who are in the labor force, seeking employment but not finding it. Patients in hospitals, people serving in the military forces and inmates of prisons are also among those people who are not counted as part of the labor force.
While unemployment statistics can be very valuable, th
ey can also be misleading if their definitions are not kept in mind. The unemployment rate is based on what percentage of the people who are in the labor force are not working. However, people’s choices as to whether or not to be in the labor force at any given time means that unemployment rates are not wholly objective data, but vary with choices made differently under different conditions, and varying from country to country.
Although the unemployment rate is supposed to indicate what proportion of the people in the labor force do and do not have jobs, sometimes the unemployment rate goes down while the number of people without jobs is going up. The reason is that a prolonged recession or depression may lead some people to stop looking for a job, after many long and futile searches. Since such people are no longer counted as being in the labor force, their exodus will reduce the unemployment rate, even if the proportion of people without jobs has not been reduced at all.
In the wake of the downturn of the American economy in the early twenty-first century, the unemployment rate rose to just over 10 percent. Then the unemployment rate began to decline—as more and more people stopped looking for jobs, and thus dropped out of the labor force. The labor force participation rate declined to levels not seen in decades. Although some saw the declining unemployment rate as an indication of the success of government policies, much of that decline represented people who had simply given up looking for jobs, and subsisted on resources provided by various government programs. For example, more than 3.7 million workers went on Social Security disability payments from the middle of 2009 to early 2013, “the fastest enrollment pace ever,” according to Investor’s Business Daily.{382}
Rather than relying solely on the unemployment rate, an alternative way of measuring unemployment is to compare what percentage of the adult population outside of institutions (colleges, the military, hospitals, prisons, etc.) are working. This avoids the problem of people who have given up looking for work not being counted as unemployed, even if they would be glad to have a job if they thought there was any reasonable chance of finding one. In the first half of 2010, for example, while the unemployment rate remained steady at 9.5 percent, the proportion of the non-institutional adult population with jobs continued a decline that was the largest in more than half a century.{383} The fact that more people were giving up looking for jobs kept the official unemployment rate from rising to reflect the increased difficulty of finding a job.
Things become more complicated when comparing different countries. For example, The Economist magazine found that more than 80 percent of the male population between the ages of 15 and 64 were employed in Iceland but fewer than 70 percent were in France.{384} Any number of things could account for such differences. Not only are there variations from country to country in the number of people going to college but there are also variations in the ease or difficulty with which people qualify for government benefits that make it unnecessary for them to work, or to look for work, or to accept jobs that do not meet their hopes or expectations.
High as the unemployment rate has been in France for years, French unemployment statistics tend to understate how many adults are not working. That is because the French welfare state makes it easier for senior citizens to withdraw from the labor force altogether—and unemployment rates are based on the size of the labor force. Thus, while more than 70 percent of people who are from 55 to 64 years of age are working in Switzerland, only 37 percent of the people in that same age bracket are working in France.{385}
The point here is that, while people who choose not to look for work are not employed, they are also not automatically classified as unemployed. Therefore statistics on employment rates and unemployment rates do not necessarily move in opposite directions. Both rates can rise at the same time or fall at the same time, depending on how easy or how difficult it is for people to live without working. Unemployment compensation is one obvious way for people to live for some period of time without working. How long that time is and how generous the benefits are vary from country to country. According to The Economist, unemployment compensation in the United States “pays lower benefits for less time and to a smaller share of the unemployed” than in other industrialized countries. It is also true that unemployed Americans spend more time per day looking for work—more than four times as much time as unemployed workers in Germany, Britain or Sweden.{386}
“Even five years after losing his job, a sacked Norwegian worker can expect to take home almost three-quarters of what he did while employed,” The Economist reported. Some other Western European countries are almost as generous for the first year after losing a job: Spain, France, Sweden and Germany pay more than 60 percent of what the unemployed worker earned while working, but only in Belgium does this level of generosity continue for five years. In the United States, unemployment benefits usually expire after one year, {387}though Congress has, at some times, extended these benefits longer.
There are various kinds of unemployment, and unemployment statistics alone cannot tell you what kind of unemployment currently exists. There is, for example, what economists call “frictional unemployment.” People who graduate from high school or college do not always have jobs waiting for them or find jobs the first day they start looking. Meanwhile, job vacancies remain unfilled while there are unemployed people looking for work, because it takes time for the right employers and the right workers to find one another. If you think of the economy as a big, complex machine, then there is always going to be some loss of efficiency by social versions of internal friction. That is why the unemployment rate is never literally zero, even in boom years when employers are having a hard time trying to find enough people to fill their job vacancies.
Such transient unemployment must be distinguished from long-term unemployment. Countries differ in how long unemployment lasts. A study by the Organisation for Economic Co-operation and Development showed that, among the unemployed, those who were unemployed for a year or more constituted 9 percent of all unemployed in the United States, 23 percent in Britain, 48 percent in Germany and 59 percent in Italy.{388} In short, even the difference between American and European rates of unemployment as a whole understates the difference in a worker’s likelihood of finding a job. Ironically, it is in countries with strong job security laws, like Germany, where it is harder to find a new job. Fewer job opportunities in such countries often take the form of fewer hours worked per year, as well as higher unemployment rates and longer periods of unemployment.
One form of unemployment that has long stirred political emotions and led to economic fallacies is technological unemployment. Virtually every advance in technological efficiency puts somebody out of work. This is nothing new:
By 1830 Barthélemy Thimonnier, a French tailor who had long been obsessed with the idea, had patented and perfected an effective sewing machine. When eighty of his machines were making uniforms for the French army, Paris tailors, alarmed at the threat to their jobs, smashed the machines and drove Thimonnier out of the city.{389}
Such reactions were not peculiar to France. In early nineteenth century Britain, people called Luddites smashed machinery when they realized that the industrial revolution threatened their jobs. Opposition to technological efficiency—as well as other kinds of efficiency, ranging from new organizational methods to international trade—has often focused on the effects of efficiency on jobs. These are almost invariably the short run effects on particular workers, in disregard of the effects on consumers or on workers in other fields.
The rise of the automobile industry, for example, no doubt caused huge losses of employment among those raising and caring for horses, as well as among the makers of saddles, horseshoes, whips, horse-drawn carriages and other paraphernalia associated with this mode of transportation. But these were not net losses of jobs, as the automobile industry required vast numbers of workers, as did industries producing gasoline, batteries, and car repair services, as well as other sectors of the economy catering to motorists, such as motels, fast
food restaurants, and suburban shopping malls.
WORKING CONDITIONS
Both governments and labor unions have regulated working conditions, such as the maximum hours of work per week, safety rules, and various amenities to make the job less stressful or more pleasant.
The economic effects of regulating working conditions are very similar to the effects of regulating wages, because better working conditions, like higher wage rates, tend to make a given job both more attractive to the workers and more costly to the employers. Moreover, employers take these costs into account thereafter, when deciding how many workers they can afford to hire when there are higher costs per worker, as well as how high they can afford to bid for workers, since money spent creating better working conditions is the same as money spent for higher wage rates per hour.
Other things being equal, better working conditions mean lower pay than otherwise, so that workers are in effect buying improved conditions on the job. Employers may not cut pay whenever working conditions are improved but, when rising worker productivity leads to rising pay scales through competition among employers for workers, those pay scales are unlikely to rise as much as they would have if the costs of better working conditions did not have to be taken into account. That is, employers’ bids are limited not only by the productivity of the workers but also by all the other costs besides the rate of pay. In some countries, these non-wage costs of labor are much higher than in others—about twice as high in Germany, for example, as in the United States, making German labor more expensive than American labor that is paid the same wage rate.