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The Agenda

NRO’s domestic-policy blog, by Reihan Salam.

The Real Unemployment Crisis



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The most troubling aspect of the recession so far has been the sharp increase in unemployment, which, as economist Casey Mulligan has observed, has proved far worse than you’d expect given GDP decline. Mulligan has been outlining the many ways the federal government has been exacerbating the unemployment problem.

And today, of course, the federal government has mandated an increase in the minimum wage. Bruce Bartlett runs through the implications in his latest column for Forbes.com, perhaps the most disturbing of which is the implication for youth unemployment and also for the black-white employment gap.

Back before the minimum wage was sharply increased and its coverage greatly broadened, teenage unemployment rates were in the single digits and the unemployment rate for black teenage males was actually lower than that for white teenage males.

In 1952, the unemployment rate for black males aged 16 to 17 was just 8% versus 10.9% for white males the same age. Since the 1961 amendments to the Fair Labor Standards Act, which greatly broadened coverage of the minimum wage, the unemployment rate for black teenage males has rarely been below 20%. Today, the unemployment rate for black teenage males is an astonishing 50% and the rate for white teenage males is 26.5%.

If anything, these unemployment numbers understate the magnitude of what you might call the real unemployment problem. Via Mike Konczal, Kevin Murphy, in an interview with the Minneapolis Fed, noted the extent of “nonemployment” in the U.S. economy.  

It’s difficult to look at, for example, the very low unemployment rates we saw in the early 2000s and say that represented an economy in which everyone was working. Unemployment rates were at roughly the same level that they were in the late 1960s, but if you look at prime-age males, the fraction actually working who were, say, 30 to 40 years old was quite a bit lower in 2001 because there was a big increase in the number who were out of the labor force in that age category.

It wasn’t a random selection of people who were out of the labor force. It was primarily low-skilled workers who had withdrawn from the labor market as two things happened. One, the opportunities in the labor market for low-skilled workers had deteriorated quite a bit with the rise in demand for skill and fall in demand for low-skilled workers; and second, other things like the growth in disability benefits had allowed some of those individuals to withdraw from the labor market. We saw mostly a demand shift that caused people to move out of the labor market at the low end.

One way of looking at this is that the rising demand for skills — cognitive and non-cognitive — has created a kind of ratchet, with an ever-growing number of people, disproportionately less-skilled men, dropping out of the mainstream economy. The end result has been more crime, more family breakdown, and more poverty than we’d have otherwise.

Advanced economies in Europe and East Asia are going through a similar process, driven by some of the same short-sighted policies. In Foreign Policy, Annie Lowrey has detailed the consequences of staggeringly high rates of youth unemployment in Europe, ranging from wage scarring to high crime rates to depression and poorer health. To bring youth unemployment down, European economies would need to grow at a consistent rate of 2-3 percent a year, which looks very unlikely in the medium term. The only “bright spot,” if you can call it that, is Europe’s shrinking population, i.e., the fact that there will be fewer young people seeking jobs in a decade’s time, though this will also lead to a severe skills shortage as currently employed workers retire and, lest we forget, depend on transfers from the state to support them in old age. 

So let me throw something out there that should be noncontroversial: shouldn’t we do everything we possibly can to increase employment in the mainstream economy? And doesn’t that suggest, as Mulligan has been arguing for months now, that we reconsider the minimum wage hike, the means-tested mortgage modification, and various other tax hikes? This isn’t just about fighting the recession: we’ve had a silent nonemployment problem for the last two decades at least, and we’re facing the possibility that it will soon get vastly worse. 



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