The New Direction: Unemployment jumps to 5.5%

Up to now, employment had held steady through a rocky economy barely staying out of recession. In May, that changed for the worse, as unemployment rose to its highest level since October 2004. However, only 49,000 workers lost their jobs, which doesn’t nearly account for the four-tenths rise:

The government reported the U.S. lost 49,000 jobs in May as the unemployment rate rose by the largest amount since February 1986.

The Labor Department reported the fifth consecutive month of declines in nonfarm payrolls. The decline was better-than-expected however, as economists had been expecting a 60,000 job decline for last month.

The unemployment rate, which is calculated separately by a survey of households, soared to 5.5% in May. Wall Street had only been expecting a slight rise to 5.1%. It’s the highest the rate has been since October 2004.

The government reported that the number of people classified as unemployed jumped by 861,000 last month to 8.5 million. According to the Bureau for Labor Statistics, the increase in unemployed people is a reflection of job cuts as well as new and returning job seekers. It also said the unemployment uptick was “disproportionately large” among 16 to 24-year olds.

The real story here is unemployment among entry-level workers to the employment system. In summer, teenagers and college students enter the marketplace looking for seasonal and part-time work. This accounts for the significant rise in job-seekers and the 0.4% increase in unemployment. Otherwise, an overall job loss of 49,000 jobs would account for a 0.04% increase in a market of 138 million workers.

Why have these new job seekers found it difficult to get jobs? One reason is that Congress made jobs costlier just in time for this economic slowdown. Congress raised the minimum wage last year by seventy cents an hour, from $5.15 to $5.85. It will rise again in July to $6.55 an hour, and next year will hit $7.25 per hour. That makes entry-level labor as much as 27% more expensive this summer, when consumers have already slowed down their spending. The natural loss of work from the slowdown amplifies the effect of the minimum-wage increase, because businesses now cannot afford to raise prices to maintain their entry-level positions.

When the minimum wage increase was under debate last year, many of us warned that it would have precisely this effect. Now we see it unfolding before our eyes. Will the Democrats acknowledge the error and take the blame for hundreds of thousands of jobs lost to their economic meddling — or will they try to shift the blame to the Bush administration for no good reason at all? (via Power Line)

Update: As with all economics issues, I turn my attention to King Banaian, the chair of economics at St. Cloud State University, the blogger at SCSU Scholars, and my good friend:

 Aside what I think is a math error in that first paragraph (I think he means 0.04%, not 0.0004%), what he is proposing is that the higher minimum wage is inducing a large increase in the supply of labor. Setting aside the timing issue (did really all the teenagers wait until May to decide “hey, let’s get a job”?), we still have a 12% increase this summer, which is to have led to a 3.7% increase in labor supplied by teens two months prior to the change in wages. And most of these teens will give those jobs up by Labor Day. I don’t have a very good feel for teen labor supply elasticities, but Ed’s suggesting that the short run elasticity here is above 0.3, which feels high to me. In the long run, it would certainly be higher than that.

In terms of teen unemployment rates, though — which involves both supply and demand — the jump is quite large but not necessarily unbelievable if you think demand shifted down due to recession and then moved along the new, lower demand to reflect the minimum wage increase.

I fixed that error, and be sure to read King’s entire analysis of this report; it’s excellent.