Another Reason to Miss Low Unemployment

June 28th, 2011 at 7:54 am

I recently wrote about how important low unemployment is to middle and lower-income working families, as it gives them the bargaining power they lack when there’s slack.

Looking at recent wage trends in this context, I was reminded of some analysis Dean Baker and I did back in the day on how low unemployment affects working people at different points in the wage scale.   Using a simple statistical model, we looked at the impact of a one-percentage point decline on the real hourly wage at different percentiles in the wage scale.

The figure below shows the results for low, middle, and high wage earners by gender.

Starting with the results for men, for the lowest wage earners—those at the tenth percentile—a point lower unemployment  translates into about a one-and-a-half percent increase in their real wage; for middle –wage men (50th percentile, or median), the boost is just below one-percent.  For high wage men, it’s nothing.   (The “insig” above that bar means the impact is statistically indistinguishable from no impact at all.)

Women, interestingly, yield a significant boost from low unemployment all across the wage scale, though the impact is lower for middle- and high-wage women.

This result regarding high wage workers is interesting in its own light.  High-wage men don’t need low unemployment to boost their earning power; high wage women still do.

But the big takeaway here is that it’s very tough for middle and lower wage workers to get ahead unless the unemployment rate is low.   When job markets are tight, even low-wage employers have to bid up their wage offers to get and keep the workers they need.

I’ll assume you’re now convinced that low unemployment is better than high unemployment.   Now we can argue about how best to get there.

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7 comments in reply to "Another Reason to Miss Low Unemployment"

  1. foosion says:

    >>I’ll assume you’re now convinced that low unemployment is better than high unemployment.>>

    It’s not better for businesses that would have higher payroll costs. While in theory those businesses might benefit from higher demand for their products from an economy with lower unemployment, lower labor costs is actual cash today, not a speculative benefit.

    Business has a vast amount of political power and ability to influence the national agenda. Compare the airtime given to discussions of the deficit compared to discussions of unemployment.


    • Kevin Rica says:

      Jared,

      Is this relationship linear? (Does the effect of a one percentage point drop depend on the level of unemployment?)


      • Kevin Rica says:

        Whoops didn’t mean to post my previous comment as a reply to foosion.

        But foosion makes a good point. The Chamber of Commerce is always complaining that they are SHORT OF LABOR even when unemployment is high.

        Which also proves that the CoC doesn’t approve of the market system anymore than netroots. They know that an unchecked labor market could raise wages and has done so in the past.

        That is why they are always complaining that they need more immigrants! Without more immigrants wages might go up!


      • Jared Bernstein says:

        I’ll check.


  2. Tyler says:

    Jared,

    Gary Johnson advocates abolishing the corporate tax to reduce unemployment. Is he not aware that corporations are already sitting on two trillion dollars because demand is so low?

    Demand-side policy is the way to go, but I fear that a mere extension of the payroll tax holiday is not enough to get unemployment below 8 percent before November of next year.

    Thanks,
    Tyler


  3. Tyler says:

    Just to let you know, before Reagan won reelection by a landslide, unemployment was already down to 8.5% in November of 1983.

    If President Obama wants to emulate that success, he needs to stop talking about the deficit and focus on jobs.


  4. Michael says:

    Man, I love that we’ve gone from “the audacity of hope” to “I hope Obama can be a less crappy President than the average Republican.”

    Anyways, the problem with these posts is that they prove to Republicans and libertarians that low unemployment is very, very, very bad. Because yes, it helps women and the poor. But also because if it helps them, FSM preserve us, it might help African-Americans or immigrants, too.

    Though at this point, conservative hate is so diffuse that they might have rounded up and now just hate every American.


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