Job losses continue to mount in jaw-dropping magnitudes, and with today's weekly jobless claims report coming in so far above the 400k rule of thumb (566,000 seasonally adjusted moving average, 580,944 unadjusted) imply that the next BLS employment situation will be a stunner. Here are some bullet facts I am processing:
1. The Federal Reserve's Ben Bernanke forecast a peak unemployment rate of 10.1 percent. (a mistake he will probably regret). Unemployment could easily surpass that level, and soon. Here's a few reasons why ...
2. New $7.25 Minimum Wage. Friday, July 24 is the day of a forced nationwide increase in the price floor for labor in the U.S. That's tomorrow. It is the third big increase in 24 months, and the timing could not be worse. Federal price controls are ineffecitve in general, but this one is certain to drive up joblessness among the most vulnerable, certainly more than most models anticipate because employer balance sheets have such little flexibility now. Consider it a punch from the U.S. Congress right to mouth of unskilled labor in America. Who says Congress can't time it's economic policy with precision?
At Bench Warmers Bar and Grill in the southeast Kansas farming town of Chanute (pronounced sha-NOOT), owner Cathy Matney has decided to let some of her dishwashers go rather than pay all 22 of her employees more.
3. Induced Labor Rigidity. During last night's presidential press conference, President Obama suggested the labor market is likely to recover slowly:
And I'll be honest with you: New hiring is always one of the last things to bounce back after a recession.
He may honestly believe that, but the statement is untrue. The "jobless recovery" is a recent phenomenon. Historically, labor markets are flexible and responsive, especially in the U.S., but after the 1991 and 2001 recessions, employers were abnormally slow to grow their workforces. Why? A popular 2003 Fed study theorized structural change was one root cause. The international evidence points to rising labor market (i.e. doingbusiness data). More rigid labor rules make employers averse to hiring, as does uncertainly about policy changes. It seems fair to say the U.S. has been constantly meddling with labor market rules in recent decades. Indeed, the entire effort to reshape health care is intertwined with employer-sponsored health insurance. Uncertainly over health reform will inevitably chill hiring, I would venture to say that reforming health care during a recession is akin to extracting a lung tumor while the patient is having a heart attack.
4. Speaking of timing, the stimulus bill may not get dollars into the economy until next year, but it is chock full of new labor rules (see 3 above) that take effect immediately. Not only does ARRA extend unemployment benefits for many weeks, but it requires new and controversial rules be adopted by each state taking stimulus funds. UI for part-timers? It's just another brick in the barrier to recovery. The knife in the back of federalism is just icing on top.
Add everything up, and count me skeptical of a turnaround in jobs. When I saw Chairman Bernanke make the 10.1 unemployment rate peak estimate, I just cringed. I dislike the political attacks on Bernanke, and have a ton of faith in him. But if that projection turns out wrong - and I am confident it will - he will lose credibility.
"At Bench Warmers Bar and Grill in the southeast Kansas farming town of Chanute (pronounced sha-NOOT), owner Cathy Matney has decided to let some of her dishwashers go rather than pay all 22 of her employees more."
This sounds a bit alarmist...
Cathy runs a restaurant, so in all likelihood, only about half of her employees are covered by the minimum wage
But assuming they are, the Minimum Wage went from $6.55 to $7.25 - a difference of $0.70 an hour. Each dishwasher she lays off 9 covers other employees. Laying off two dishwashers should cover her extra expense.
...But now who will wash the dishes? Assuming that she isn't paying her staff to just stand around, any extra time they spend washing dishes will have to be compensated. If she is running a truly tight ship, then that extra time will have to be paid out at the overtime rate of $10.80 an hour.
More likely she will raise the price of soda by a quarter.
Posted by: Charles | July 24, 2009 at 09:28 AM
I'm guessing you've never been to Chanute... I'd say nearly everyone at the bar and grill makes minimum wage... regardless, that's a minor point. As usual, the minimum wage is great if you have a job and are making minimum wage and not so good when you look at "that which is not seen"... the jobs that don't exist because they are not profitable for companies to create at the minimum wage.
Posted by: Derek | July 24, 2009 at 09:44 AM
There are other costs associated with labor, not just the minimum wage but that are tied to it. Taxes and UI play heavily into the equation.
Who says that anyone has the leverage to *raise prices* during this period. The consumer has shown they are unwilling to purchase, much less, pay higher prices.
Finally, the left would like to say that the $56 a week for those 2 people isn't that much... they would ask, "why can't she afford to pay an extra $56 a week to keep 2 people employed?" (I actually heard this today). When you look at her work force of 22, the $0.70 per hour increase would cost nearly $2700 a month MORE. Yes, this is significant.
Sluf
Posted by: Sluf | July 25, 2009 at 09:52 PM
Our leaders in Washington must seriously consider new and innovative policies that promote a better, more confident, prosperous, and secure America in the 21st century. One of the things I think we can do to help make that happen is support American businesses and the U.S. Chamber of Commerce (http://bit.ly/oanAT). They're doing things to reach out and show people that they can get involved, too.
Posted by: Janet Brown | July 27, 2009 at 12:51 PM
The U.S. Chamber of Commerce is the biggest cheerleader for exporting jobs offshore. Don't think the U.S. Chamber of Commerce is helping many people except the uber-wealthy.
How can entrepreneurs find trained help when skilled labor was laid off 10 years ago? You can't. I know for fact, as a member of a startup, we will not be manufacturing our mechanical device in the U.S because no one manufactures our kind of devices in the U.S. anymore. We are going to China for our manufacturing.
I would love to hire Americans, but the option doesn't exist, except for shipping and handling of the products, and maybe a bookkeeper.
The U.S. Chamber of Commerce has been the biggest proponent of ignoring that the Chinese Yuan is pegged at an unfairly low rate to the USD.
Posted by: Mark Syman | July 28, 2009 at 07:15 AM