Paul R. Hollrah, O.E.

Unemployment Flim-Flam
November 4, 2009

In January 2009, as Obama unveiled his plans for economic recovery, he assured the Congress and the American people that, if we would just agree to set up a $787 billion slush fund for him to play with, he would fix our sick economy and that the unemployment rate would never exceed 8 percent. With a straight face, and with words that came straight from his teleprompter, he vowed that he would accomplish something that no man, and no government, has ever accomplished before: he would halt the downward spiral of the economy and stimulate economic growth, and he would do it all with borrowed money.

Democrats in Congress gave him what he asked for. By June 2009, just five months later, the unemployment rate was at 9.5 percent, and by mid-October it stood at 9.8 percent, the highest level since 1940 during the Roosevelt Administration. But what is most curious about current discussions of our economic plight is that no one, Democrat or Republican, ever seems to mention one of the greatest contributing factors to unemployment… the minimum wage.

The first attempt at establishing a minimum hourly wage occurred in 1933, during the early years of the Great Depression, when Roosevelt’s National Industrial Recovery Act set a minimum wage standard of $0.25 per hour. However, in a 1935 court decision (Schechter Poultry Corp. v. United States), the United States Supreme Court found the act to be unconstitutional. The Roosevelt Administration made a second attempt in 1938 with the federal Fair Labor Standards Act. The minimum wage was again set at $0.25 per hour and that legislation has withstood the test of time.

Whether Democrats conceived the idea of a minimum wage as an economic tool with which to buy the votes of those at the bottom rung of the economic ladder, or if the potential political benefits occurred to them as an afterthought, we may never know. What we do know is that, since its inception, the minimum wage has been a political football, a major factor in business economics and government social engineering.

Contrary to opinions on the political left, the minimum wage was never intended to provide a living wage for a head of household; its purpose was to provide a wage floor, preventing unskilled and entry-level workers from being exploited unfairly by unscrupulous employers.

However, it did not take long for the leaders of organized labor to figure out that, by exerting constant upward pressure on the minimum wage, the “trickle-up” effect on the higher wage brackets made non-economic wage demands in the skilled trades much easier to sell. And while liberals and labor leaders insist that the minimum wage has little or no impact on overall employment, they tend to ignore the impact of the minimum wage on the availability of entry-level jobs… the tens of millions of jobs at which teenagers and unskilled workers begin to learn the work ethic and the economic realities of the capitalist system.

Most liberal apologists for “progressive” social engineering have claimed that increases in the minimum wage have little, if any, effect on overall employment statistics. However, in spite of what leftists may say, numerous studies show that increases in the minimum wage do have a significant impact on overall employment… particularly on the availability of entry-level jobs.

 In a study titled, “The Effect of the Minimum Wage on Covered Labor Demand,” Dr. Walter J. Wessels of North Carolina State University, a leading expert in labor-management relations, agrees with most studies on the subject. His study finds that, “for every 10 percent increase in the minimum wage, overall employment decreases by 0 to 2 percent. It finds a stronger effect for covered (entry level) employment: a decrease in covered employment ranging from 4 percent to 5 percent.”

The U.S. national minimum wage was held at $5.15 per hour from 1997 until 2007, perhaps because even liberal politicians were finally willing to admit, grudgingly, that businessmen, especially small business owners, must look very closely at their overall labor costs and that an increase of $0.75 or $1.00 per hour in the minimum wage could have a major impact on the number of minimum wage jobs that a given employer might have available.

However, after gaining control of both houses of Congress in 2006, Democrats made a major push in 2007 for the largest increase in the minimum wage in many decades, a forty percent increase from $5.15 per hour to $7.25 per hour. And although the effort was strongly opposed by Republicans and by the Bush Administration, on the grounds that such a large increase would have a damaging impact on an already faltering economy, congressional Democrats attached the minimum wage increase to an Iraq War funding measure and the president was forced to sign it.

The minimum wage went from $5.15 per hour to $5.85 per hour in July 2007, from $5.85 to $6.55 in July 2008, and from $6.55 to $7.25 per hour on July 24, 2009. Bearing in mind that increases in the unemployment rate lag increases in the minimum wage by a year or more, a comparison between the two shows a clear corollary:

1999     Minimum Wage: $5.15 per hour     Unemployment Rate: 4.2 percent
2000     Minimum Wage: $5.15 per hour     Unemployment Rate: 4.0 percent
2001     Minimum Wage: $5.15 per hour     Unemployment Rate: 4.7 percent
2002     Minimum Wage: $5.15 per hour     Unemployment Rate: 5.8 percent
2003     Minimum Wage: $5.15 per hour     Unemployment Rate: 6.0 percent
2004     Minimum Wage: $5.15 per hour     Unemployment Rate: 5.5 percent
2005     Minimum Wage: $5.15 per hour     Unemployment Rate: 5.1 percent
2006     Minimum Wage: $5.15 per hour     Unemployment Rate: 4.6 percent
2007     Minimum Wage: $5.85 per hour     Unemployment Rate: 4.6 percent
2008     Minimum Wage: $6.55 per hour     Unemployment Rate: 5.7 percent
2009     Minimum Wage: $7.25 per hour     Unemployment Rate: 9.8 percent

This is not to suggest that the doubling of the unemployment rate from 4.6 percent to 9.8 percent over a three year period is all due to a forty percent increase in the minimum wage. However, Professor Wessels’ findings would suggest that a forty percent increase in the minimum wage would result in the loss of as many as 12.3 million jobs in a civilian workforce of some 154.5 million over a three year period.

But the greatest damage is done in the number of jobs that are never created because of the significant increase in the minimum wage. Prof. Wessels suggests a 4-5 percent decrease in the number of available minimum wage jobs for each ten percent increase in the minimum wage.

Needless to say, it is nearly as problematic to estimate the number of jobs that were never created because of a forty percent increase in the minimum wage, as it is for Obama to take credit for the number of jobs saved by hundreds of billions of dollars of mostly wasted federal spending. These are things that no one can possibly know, or even estimate with any degree of certainty.

What is important for the American people to understand as we approach the 2010 mid-term elections is that the concern over joblessness shown by the Obama Administration and their Democratic friends in Congress is pure “flim-flam.” Their unemployment concerns cannot be taken seriously when the Democratic Party and Democratic administrations have an unbroken record for killing millions of jobs through uneconomic increases in the minimum wage.

When teenagers can’t find summer jobs to save money for college, and when young married couples need second jobs to make ends meet, but can’t find them because they’ve been killed off by uneconomic, politically motivated, increases in the minimum wage, they should know where to place the blame.