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Sunday, July 15, 2007

Min. Wage, Jobs, and Unemployment

In his Weekly Newsletter, Gov. Rendell takes credit for "improving the lives" of workers who received a minimum wage increase. In it the Governor note:

"Pennsylvania’s economy is strong enough to absorb the affects of the very necessary wage increase. This year our unemployment rate hit a 30-year low and we continue to attract businesses and add jobs that bring new opportunity for our workers."

While this may be the first time Gov. Rendell has admitted that a minimum wage increase could lead to lost jobs, I want to talk about the unemployment rate. While the unemployment rate is down since Dec. 2006, that doesn't tell the whole story.

The Unemployment Rate equals Unemployed Persons divided by the Labor Force.
The Labor Force equals Unemployed Persons plus Employed Persons.
Unemployed Persons are only those actively seeking jobs (thus retirees, homemakers, college students, etc. are not considered unemployed).

Thus the unemployment rate could fall in one of three scenarios:
1. Strong Economy: The number of unemployed persons falls, and the number of employed persons increases. This indicates a strong economy, where people are leaving unemployment for work.

2. Population Growth: The number of unemployed persons increases, but the number of employed persons increases faster. This indicates where the labor force is growing (either through population growth, or a higher percentage seeking work) and the economy/jobs are growing in accordance with population.

3. Labor Force Decline: The number of unemployed persons decreases, and the number of employed persons also decreases. There are fewer people in the job market, and fewer jobs. This could be because of mass retirements, or a discouraged workforce no longer seeking jobs. Unfortunately, this scenario explains the drop in Pennsylvania's unemployment rate.

Using seasonally adjusted data, there are 33,000 fewer unemployed persons since the first minimum wage increase went into effect in January, but there are also 42,000 fewer people with jobs (see table below).

Two notes: I am not claiming that the minimum wage increase caused these job losses. Our own study on the minimum wage increase predicted a loss of 10,000 jobs due to the increase - but not necessarily a net loss of jobs in entire state economy. Second, the BLS survey of employers indicates jobs have gone up; but the unemployment rate comes from a survey of households (the above data), indicating job losses (it also indicates more total jobs, as it includes self-employment and small businesses not captured in the employer survey).

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