Tuesday, June 18, 2013

Michigan teens will face job shortages

Story Originally Appeared on The Detroit News 

Michigan parents, prepare yourselves: With a 22.9 percent teen unemployment rate heading into the summer of 2013, your jobless kids might be making frequent withdrawals from the Bank of Mom & Dad for their vacation spending cash.

There are a number of factors at work: More competition from older jobseekers, for instance, has put young and inexperienced applicants at a competitive disadvantage. But also at fault are a series of ill-conceived minimum wage mandates at the state and federal level, which raised the cost to hire and train the teens who fill those jobs.

Those same teens can only hope that President Obama and Congress won't make it worse by following through on another proposed increase.

Nationally, teen unemployment has been above 20 percent every summer since 2009. That's four straight summers — soon to be five — of record teen unemployment. And tellingly, they've all occurred during or since the 40 percent hike in the federal minimum wage between 2007 and 2009.

The timing is more than just coincidence. Writing in 2010, economists at Miami and Trinity Universities estimated that — even accounting for the effects of the recession — at least 114,000 young adults lost job opportunities as a direct result of the federal wage hike. (Other economists have put that figure above 300,000.)

Percentage-wise, this came out to a 6.9 percent drop in teen employment in the states affected by all three stages of the federal wage hike. For those teens with less than 12 years of schooling, the relative drop in employment was even higher at 12.4 percent.

One need only look at the businesses where teens are employed to understand why. Nearly 40 percent of the nation's employed teens work in the leisure and hospitality industry (think restaurants, movie theaters, and hotels), while another 25 percent work in retail jobs at grocery stores, service stations and the like.

These types of businesses aren't exactly rolling in the dough. Their profit margins are generally 2 or 3 cents on every sales dollar. Sudden spikes in labor costs — like a 40 percent jump in the minimum wage in two years — leave these businesses with two options: Raise prices, or reduce costs.

When raising prices isn't an option — good luck with that in a rough economy — the only other option is to provide the same product with less service. This might mean having waiters or waitresses bus their own tables, or opting for a self-service alternative to young grocery baggers.

The data bears this trend out: Teens' share of employment in the leisure and hospitality industry dropped by over 20 percent between 200 and 2011. In retail, it's fallen by nearly 30 percent over that period.

This makes it all the more baffling that wage hike advocates in Congress, seeking to fulfill the president's State of the Union call for higher rates would raise the minimum wage by another 40 percent to $10.10.

This may be good politics, but it's certainly not good policy. Teens — whether in Michigan or anywhere else — start climbing the employment ladder through their first summer jobs. Further minimum wage hikes only postpone their ability to get these jobs, which research shows hurts their future earnings, employability, and professional development.

That might not seem pressing to the teens who will just lie on the beach or lounge on the couch for the next three months. But it is much more concerning for their parents, who want nothing more than a good future for their kids — and maybe even some peace and quiet between now and September.

Michael Saltsman is the research director at the Employment Policies Institute.

Bankers: College debt bubble mimics housing bubble

Story Appeared On USA TODAY

A group of bankers have just dumped two more problems on the Federal Reserve's plate.
The Federal Advisory Council, made up of 12 bankers who meet quarterly to advise the central bank, warned that farmland prices are inflating "a bubble" and growth in student-loan debt has "parallels to the housing crisis," which was the primary cause of the Great Recession in the U.S.

Their alarm comes at a time when financial heavyweights on the Federal Open Market Committee, the Federal Reserve's policy-making arm, are debating whether the benefits created by their monthly purchases of $85 billion in bonds outweigh the risk of financial instability.

Fed Chairman Ben Bernanke has argued time and again that the program is essential to the economic recovery, but others are less convinced. Fed Governor Jeremy Stein and Kansas City Fed President Esther George have raised concerns the extended period of low interest rates is increasing the risk of asset bubbles.
"Agricultural land prices are veering further from what makes sense," noted the minutes of the FAC's Feb. 8 gathering, according to documents obtained by Bloomberg news service through Freedom of Information Act requests. "Members believe the run-up in agriculture land prices is a bubble resulting from persistently low interest rates."

As for student loans, recent growth has pushed debt levels to nearly $1 trillion, meaning it "now exceeds credit-card outstandings and has parallels to the housing crisis," the council said after its Feb. 3, 2012, meeting. The bankers told the FOMC that student lending exhibited characteristics similar to those seen in the housing crisis, including "significant growth of subsidized lending in pursuit of a social good" — in this case, higher education rather than expanded home ownership.

Just as the mortgage lending boom pushed home prices upward, student loan lending has put upward pressure on tuition. The bankers said both examples showed a "lack of underwriting discipline."
Bernanke has dismissed parallels between student lending and the subprime mortgage crisis. "I don't think it's a financial stability issue to the same extent that, say, mortgage debt was in the last crisis because most of it is held not by financial institutions but by the federal government," Bernanke told a Bloomberg reporter on Aug. 7.

After the Fed first lowered its target interest rate to near zero in December 2008, the central bank promised to keep it at that level until the unemployment rate — currently at 7.5%, drops to 6.5% or the annual inflation rate rises above 2%. The Fed has also launched three rounds of bond purchases, called quantitative easing, which have pushed its balance sheet to a record $3.3 trillion as of May 1.

The QE spending's impact on farmland prices is being documented by regional Fed banks, particularly across the Midwest's corn belt. The Chicago Fed said the value of irrigated cropland in its district rose 16% in 2012, while the Kansas City Fed reported a 30% jump in the same period.

"Investors who are seeking a positive return on their funds have shied away from bond markets," the council said, according to a Bloomberg story. Instead, they opted for real estate "as both a hedge against inflation and a means of achieving better than the negative real return associated with fixed-income securities."
Increases in land prices have continued even as commodity prices have weakened. Since hitting a record high in March 2011, the S&P GSCI agriculture index, a broad measure of price pressures on commodities, has fallen 25%.

The FAC said it supports the central bank's monetary policy at their February meeting, noting that the recoveries in the housing and auto sectors have been "especially encouraging."

Yet, there have been "collateral consequences" of the current policy; the low-interest environment has pushed "many to seek higher returns by accepting greater interest rate or credit risk," the FAC's minutes said. "As the period of low rates is extended, these pressures have increased."