Unexpectedly Intriguing!
May 7, 2014

April 2014 was essentially a flat month for the U.S. employment situation. The number of employed fell across the board for each of the age groups we track, but at relatively low numbers:

Change in Number of Employed by Age Group Since Total Employment Peak Reached in November 2007, through April 2014

Overall, the unemployment rate fell in April 2014 because of a sharp increase in the number of Americans who are no longer being counted as being part of the U.S. labor force. For Econtrarian Paul Kasriel, that data presents a mystery:

In the 12 months ended April 2014, there has been a 0.5 point net decline in the labor participation rate, the civilian labor force as a percent of the civilian noninstitutional population. In these same 12 months, there has been a 1.2 point net decline in the headline unemployment rate. Given the decline in the participation rate, a statistic that the media has been trained to focus on when interpreting a decline in the headline unemployment rate, can we conclude that the decline in the headline unemployment rate overstates the improvement in labor market conditions because potential workers are choosing not to “participate” in the hunt for jobs due to weak job prospects? No, because in these same 12 months there has been a 1.3 point decline in the U-5 unemployment rate, which accounts for labor force dropouts due to weak job prospects.

It remains a mystery as to why in April the labor force plunged by 806 thousand and why the labor participation rate fell by 0.4 points. Looking at changes in the participation rate by age categories, it is revealed that the largest April declines were concentrated in the 16-to-24 year old cohort. Perhaps a light when on in the brains of our youth, alerting them to the value of education and inducing them to stay in or go back to school. I don’t know. But what I do know from the data in other parts of the Household Employment Situation Survey is that the bulk of the declines in the April labor force and participation rate was not due to people suddenly deciding to sit on their couches and eat Cheetos all day because job prospects were so bleak in April.

That, of course, is ridiculous. We know why so many 16-24 year olds suddenly found no good reason to even begin looking for jobs: minimum wage increases at the state and local level.

Beginning in January 2014, 13 U.S. states covering 30% of the U.S. population increased their minimum wage over their 2013 levels.

Three of these states, covering 10.2% of the U.S. population, increased their minimum wage by more than 10%: New York (from $7.25 to $8.00 per hour), New Jersey (from $7.25 to $8.25 per hour) and Connecticut. Not uncoincidentally, one out of ten U.S. teens (Age 16-19) and young adults (Age 20-24) live in these three states. Teens and young adults, by the way, account for approximately 50% of all the people who earn the minimum wage or less in the U.S.

Minimum Wage Demand Curve for Age 16-24 Americans, 1994-2013, Constant 2000 U.S. Dollars

From what we've previously observed, it takes about six months for the full impact of a minimum wage increase to be felt in the economy after its hiked - whether at the state level or at the federal level. Typically, those who already have jobs will not lose them after a higher minimum wage goes into effect. Instead, what happens is that few, if any, jobs are created for people who are already not employed - especially for those who lack the education, experience and skills to be worth employing at the increased minimum wage.

Even outside of recessions.

By the way, there's still a very large hammer waiting to fall. California will hike its minimum wage in July 2014 from $8.00 to $9.00 per hour, an increase of 12.5% over its current level. Since California is home to nearly one out of eight Americans, its looming minimum wage hike will mean that a total of one out of five American teens and young adults on the margins of the U.S. job market will discover this year that there is no point in their pursuing gainful employment, which they will learn as word spreads among their peers that employers cannot justify hiring them at the greatly hiked minimum wages in these states.

It's only a mystery for those who insist on ignoring the role of destructive minimum wage hikes upon teens and young adults.

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