Let’s assume that proposed minimum wage increase to $10.10 is signed. Then according to very basic upward sloping supply curve, we would expect more labor supply. That means, there would be more people entering to the labor force from the pool of discouraged workers. These entering people wouldn’t find a job quickly. Therefore, there will be some upward movement in unemployment rate.
The point of this post is that if the minimum wage indeed increases and the unemployment rate increases, that isn’t necessarily be a bad, and the increase in minimum wage shouldn’t be blamed as much. On the other hand, the increase in minimum wage could overturn discouraged workers into labor force, and I believe that is not a bad.
Of course, there might be a direct effect of the increase in minimum wage on unemployment because companies would have to fire some workers when the minimum wage increases (I believe that is what people who are against the minimum wage increase are saying). What I am suggesting is that let’s not fully blame an increase in minimum wage if there is to be higher unemployment rate after this change in wage.
This argument is just to show that any certain change in only unemployment rate doesn’t tell the whole story on whether the economy is performing well. If we look at the recent unemployment rate which came out on Friday morning, 6.6% of unemployment is a good news for the economy. As I said on higher minimum wage’s effect on labor force participation rate, this change in unemployment rate could be caused by people going out of or getting in the labor force. In December’s job report, the decrease in unemployment rate from 7% to 6.7% as the economy gained 75,000 more jobs was mostly due to the increased number of people dropping out of labor force.
Also, this one number called unemployment rate doesn’t tell us enough information because it is an aggregate rate over the U.S.. The WSJ article nicely sums up this point:
“We have multiple unemployment rates—by race, gender, geography and above all educational attainment. When people talk of an unemployment crisis, it would be more accurate to speak of an education crisis or a crisis of men whose skills are mismatched to today’s jobs. It would be more accurate to speak of a jobs crisis in specific regions of the country or for specific industries. Yet we maintain the collective fiction that one simple average accurately captures multiple realities.”
The WSJ article says that we have to consider the employment rate as we discuss economic condition. The recent job report shows another improvement in terms of increased employment-population ratio. The ratio increased to 58.8% in January, which is the highest level since August 2009, but it is well below pre-recession level of 63%.
As the unemployment rate goes down faster than expected, another news we are watching is whether the FED will increase its federal funds rate because of a decreasing unemployment rate. The FED’s January meeting statement says:
The Committee also reaffirmed its expectation that the current exceptionally low target range for the federal funds rate of 0 to 1/4 percent will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.
This policy of low interest rate as long as the numbers are within the range has been re-evaluated. The FED’s same statement reads:
The Committee now anticipates, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal.
What we can tell from this FED’s change in policy view is that the FED doesn’t give any meaning for the 6.5% of unemployment. Pointing out some number is just the FED’s way to increase their credibility and convince the public that it will maintain its low interest rate policy. The FED, seems like, didn’t expect the unemployment rate would fall down to this rate this quickly. It will be interesting to see what target rate the FED will choose if they continue the low interest rate policy even though the unemployment rate falls below 6.5%.
In conclusion, even though unemployment rate is one of the main economic data we look, it hides so much of what is happening in the economy. Therefore, we shouldn’t draw quick analyze from the rate.