Much of Michigan’s political establishment believes (or pretends) that the state’s unemployment rate rose to more than 8 percent last month because of high gas prices and the entry of young workers into the labor market. That begs the question, though: How is it that in previous years Michigan unemployment rate wasn’t similarly affected by the entry of young workers into the market? And how is that, although the whole nation is experiencing high gas prices, the national unemployment rate rose just 0.5 percent last month, compared to Michigan’s 1.6 percent? What’s the matter with Michigan?
There are many factors, but a fair reading must include the strong possibility that misguided public policy is partially if not mostly responsible. For example, Michigan employers just had a big jump in the “minimum wage” imposed on them. Yet any business can only devote a certain amount on employee wages without becoming uncompetitive and unprofitable. This can be illustrated in the hypothetical example listed below:
In May 2005, XYZ Corp. produced widgets with 50 Michigan employees. It earned an annual margin-on-sales of $300,000 (which may or may not represent a reasonable return on investment). Lets assume that every worker was paid at Michigan’s old minimum wage ($5.15/hour before October, 2006) and that they all worked 40 hours a week. Company XYZ would have experienced annual wage expense of $535,600. That’s $5.15 (wage) x 40 (hours per week) x 52 (weeks in a year) x 50 (employees) = $535,600.
Starting in July 2008 the mandated minimum wage has risen to $7.15/hour. Using the same calculation as before, XYZ Corp’s annual wage expense has jumped from $535,600 to $743,600. That’s an additional $208,000 worth of expense, with no associated increase in productivity. To sustain the firm’s $300,000 margin-on-sales, XYZ will have to cut employees and get much higher productivity out of the remaining ones. If forced to accept less return on capital (but no reduction in risk) the company’s investors might be justified in pulling the plug on the entire operation and investing their money in Treasury Bills – or moving the plant to a state with a friendlier labor climate.
Another factor to consider is that with the higher unemployment generated by the minimum wage increase the demand for XYZ Corp’s widgets may decrease. Reduced sales and revenues will cause them to need even fewer workers. Minimum wage advocates may have good intentions, but we all know what road is paved with good intentions.
In a labor market, people voluntarily trade their time for money. No one is forced to work in a particular job. A policy allowing the market to set wages is not only more economically efficient than the arbitrary minimum wage levels imposed by politicians, it also yields better outcomes for workers. Working 40 hours at $5.15 beats working zero hours at $7.15.
Higher energy costs and “more young workers” entering the market is an excuse, not an explanation for Michigan’s higher-than-average unemployment rate. If the political class is looking for the real reason they can find it easily enough – just look in the mirror.