Rand Ghayad is a labor economist at Northeastern University and a research fellow at the MIT Institute for Career Transitions. He is the author of “The Jobless Trap.” Ghayad will be joining The Brattle Group in June as an associate. The comments below are the author's own and do not necessarily reflect those of the organizations with which he is affiliated.
Look at the jobs numbers since we cut long-term unemployment benefits in January. Do you see a big increase in employment? No, neither do I, even when I squint.
Now, cutting off benefits was supposed to encourage all those lazy, unemployed workers to go out and get jobs. Instead, more and more of the long-term unemployed have become discouraged and have left the labor force altogether. How, exactly, will they find jobs when there are three times as many job seekers as job vacancies? I don’t know.
Jobs today are demand-constrained, not supply-constrained. Businesses aren't failing to hire because they can't find willing workers; they're failing to hire because they can't find enough customers. Slashing unemployment benefits —which reduces incomes, and, hence, consumer spending — has only caused more misery for many, with little to no apparent gain.
This is still our biggest economic crisis, and still our biggest policy failing. Which brings us to President Obama's proposal to raise the minimum wage from $7.25 to $10.10 an hour. Although it was increased a few years ago, the national minimum wage is still low by historical standards, having consistently lagged both average wages and inflation. The question, though, isn't how high or low the minimum wage is relative to the past. The question is whether it would be good policy now. And the answer, perhaps surprisingly, is yes, but only if it excludes the long-term unemployed — and only if we make up for that by subsidizing their wages with an expanded Earned Income Tax Credit (EITC).
Around 3.5 million people are still long-term unemployed. Of them, about one in five has less than a high school diploma, and one in five is age 26 or younger. In other words, many of them are probably applying for minimum-wage jobs. The problem is that there's clear evidence that employers are discriminating against the long-term unemployed, based on the belief that they must be bad workers to be out of work for so long. It has created a jobless trap: Once you've been unemployed for six months, it's hard to come back.
This isn't going to change. Now, the administration has asked companies to give the long-term jobless a chance, but that's not going to happen as long as there are more unemployed people than job openings. Firms will continue to be very choosy about whom they even bring in for an interview, let alone hire — and will almost exclusively look at people who haven't been out of work for long.
But what if companies could pay the long-term unemployed relatively less? That might make up for some of the stigma associated with prolonged joblessness. And that's why a higher minimum wage shouldn't apply to the long-term unemployed, not for now. If it did, it could become a permanent hiring obstacle for people who need to be hired the most.
Now, I know what you're going to say: It's bad enough that the long-term unemployed can't find work, and you want to pay them less when they do? No. I want to pay them the same, but I want to make sure they find work first. We can do both if we increase the EITC for the long-term and increase the minimum wage for everybody else. People who've been out of work for awhile would make just as much, but instead of getting all of it from their employer, they'd get some from the government, too. I know some people think companies that don't pay their workers a living wage, and rely on the government to fill in the gaps, are "welfare queens," but that's not important. What is important is getting the long-term unemployed back to work. This could do that.
That leaves us with a final question: Should we even increase the minimum wage to begin with? Opponents argue that even if it's low now, raising it would cost jobs. Is that trade-off worth it? Well, most of the empirical evidence points to little, if any, negative effects on employment from modest minimum wage increases. In fact, turnover goes way down when there are minimum wage raises. Not only that, but it effectively redistributes money from higher-income people who would likely save a marginal dollar to lower-income people who would spend it. In normal times, that wouldn't be much of a consideration, but these are not normal times. We still don't have enough demand, so this could boost spending and the economy.
Recent research has shown that the long-term unemployed aren't that different from the rest of the unemployed. A two-tiered minimum wage, coupled with wage subsidies, would give companies a financial push to take a shot on someone who's been out of work for six months or more when they probably wouldn't otherwise. Other countries have experimented with something like this, a lower minimum wage for young people and apprentices -- the idea being that it helps inexperienced workers build their skills and move up. And it worked for them.
This would admittedly only help at the margins, but helping at the margin is better than not helping at all — like Congress today.