Minimum wage

Students will have a midterm soon. There will be some questions on the very likely shutdown (using the ISLM) and the minimum wage. The figure below shows the real (deflated with CPI) and nominal minimum wage for the US since 1939.

No surprises in the story. Minimum wage in real terms peaked in 1969, a culmination of an expansion that started in the 1950s. It fell significantly starting in 1979, with the Volcker shock and the fixed nominal minimum wage during the Reagan years, and never recovered the Golden Age peak. Since the 1970s, Dems managed to increase the rate in nominal terms (Carter, Clinton and Obama), but not reverse its decline in real terms. So far Congress has managed to stop the Biden administration attempts at raising the rate. And even when procurement contracts should give the executive some power over minimum pay, conservative judges have acted to stop it.

Minimum wage at historic low

Or close to. The figure below is not just the real minimum wage, which I posted before (most recently here). It is as it says the ratio of the minimum wage to the average wage.

The figure neatly shows that while in the 50s and 60s the minimum wage was about 50% of the average wage, since the 1980s it has been closer to a third. Read rest here.

Minimum wage and inequality

Carlos Medeiros reminded me the other day that the minimum wage had played an important part in the reduction of inequality in developed economies, something often not discussed in detail or given proper emphasis in mainstream stories, that in the US tend to emphasize the role of education (for example, in Claudia Goldin and Lawrence Katz's work). By the way, Medeiros comment was prompted by the fact that Piketty in his Capital in the Twenty-First Century does note the role of the minimum wage in the reduction of inequality during the Golden Age.

The graph below shows the real minimum wage since its creation until 2013, and the income of the top 1%, from the Piketty and Saez data.

This exhibits a similar pattern as the one shown by the relation of inequality and the top marginal tax rate. The fall and then stagnation of real minimum wage over the last thirty years is certainly part of the story of increasing inequality, and to reverse it would require strengthening the labor force, and a higher minimum wage.

Elise Gould on Why America’s Workers Need Faster Wage Growth

In the previous post, see here, Matias shared an EPI video on the need for significant wage growth to curb inequality, specifically starting with raising the minimum wage. As a follow up, below is from a briefing paper by EPI economist Elise Gould.

By Elise Gould

The last year has been a poor one for American workers’ wages. Comparing the first half of 2014 with the first half of 2013, real (inflation-adjusted) hourly wages fell for workers in nearly every decile—even for those with a bachelor’s or advanced degree. Of course, this is not a new story. Comparing the first half of 2014 with the first half of 2007 (the last period of reasonable labor market health before the Great Recession), hourly wages for the vast majority of American workers have been flat or falling. And even since 1979, the vast majority of American workers have seen their hourly wages stagnate or decline—even though decades of consistent gains in economy-wide productivity have provided ample room for wage growth. The poor performance of American workers’ wages in recent decades—particularly their failure to grow at anywhere near the pace of overall productivity—is the country’s central economic challenge. Indeed, it’s hard to think of a more important economic development in recent decades. It is at the root of the large rise in overall income inequality that has attracted so much attention in recent years. A range of other economic challenges—reducing poverty, increasing mobility, and spurring a more complete recovery from the Great Recession—also rely largely on boosting hourly wage growth for the vast majority.

Read rest here.

If you care about inequality, raise the minimum wage

From the Economic Policy Institute (EPI). Yes wages in general should grow, starting with the minimum wage. A no brainer.

CEPR on "Minimum Wage Workers Pay Cut Clock"

The last time the federal minimum wage was raised was July 24, 2009, to $7.25 per hour. Workers making the minimum wage have been facing a continual pay cut since then, as inflation has eroded the purchasing power of the minimum wage.

The first minimum wage pay cut clock shows how many dollars America's minimum wage workers have lost since July 2009. Every second it shows how much more money they're losing, as long as the federal minimum wage remains stuck at $7.25. Mind you, even if the federal minimum wage were to catch up to its July 2009 level, it would still be far below its historical level. The peak year for the U.S. minimum wage was 1968.

The second clock shows how many dollars America's minimum wage workers have lost since July 24, 2009 if the minimum wage had instead been raised to its 1968 level and then kept pace with inflation since then. Every second it shows how much more money they're losing, as long as the federal minimum wage remains below its historical peak.

See here.

EPI | Why It’s Time to Give Tipped Workers A Living Wage

By Sylvia A. Allegretto and David Cooper

Raising the wage floor for tipped workers is crucial for a number of reasons. Rising income inequality and the accompanying slowdown in improving American living standards over the past four decades has been driven by weak hourly wage growth, a problem that has been particularly acute for low-wage workers (Bivens et al. 2014). Tipped workers—whose wages typically fall in the bottom quartile of all U.S. wage earners, even after accounting for tips—are a growing portion of the U.S. workforce. Employment in the full-service restaurant industry has grown over 85 percent since 1990, while overall private-sector employment grew by only 24 percent.4 In fact, today more than one in 10 U.S. workers is employed in the leisure and hospitality sector, making labor policies for these industries all the more central to defining typical American work life. Ensuring fair pay for tipped workers is also a women’s issue. Women comprise two out of every three tipped workers; of the food servers and bartenders who make up over half of the tipped workforce, roughly 70 percent are women. Allegretto and Filion give an historical account of the tipped-minimum-wage policy and bring much-needed attention to how the two-tiered wage system results in significantly different living standards for tipped versus non-tipped workers. For instance, tipped workers experience a poverty rate nearly twice that of other workers. This contradicts the notion that these workers’ tips provide adequate levels of income and reasonable economic security.

Read rest here.

Bivens, Josh, Elise Gould, Lawrence Mishel, and Heidi Shierholz. 2014. "Raising America’s Pay: Why It’s Our Central Economic Policy Challenge." Economic Policy Institute, Briefing Paper #378. http://www.epi.org/publication/raising-americas-pay/

More on wages and employment

So my last post has led to a few comments on the relation between changes in real wages and employment. As my students are probably tired to hear real wages tend to be pro-cyclical, a well established empirical regularity. This poses a problem, not only for mainstream accounts of the labor market (and hence for the conventional views on the minimum wage), but also for Keynes' own views.

Keynes was forced to deal with those issues early on, as a result of the empirical research by Dunlop and Tarshis, and his answer in his famous 1939 paper (often published together with the General Theory, GT) "Relative Movements of Real Wages and Output." He said then:

"The only solution was offered by Dr Kalecki in the brilliant article which has been published in Econometrica. Dr Kalecki here employs a highly original technique of analysis into the distributional problem between the factors of production in conditions of imperfect competition, which may prove to be an important piece of pioneer work."

In other words, he suggests that some sort of constant returns, or increasing returns to scale, and, hence a mildly positively sloped labor demand curve could possibly explain the empirical regularity. Note also that Keynes had already in chapter 2 of the GT argued that the labor supply curve made no sense (two reasons one fundamental, and the other non-fundamental; see here). He says:

"the contention that the unemployment which characterises a depression is due to a refusal by labour to accept a reduction of money-wages is not clearly supported by the facts... A fall in real wages due to a rise in prices, with money-wages unaltered, does not, as a rule, cause the supply of available labour on offer at the current wage to fall below the amount actually employed prior to the rise of prices."

However, even if one gets rid of the labor supply curve, and determines employment in the market for goods, as a function of demand, as Keynes does, as it is clear from his reply to Dunlop and Tarshis the real problem with the conventional marginalist story (and Keynes' own) is on the acceptance of the marginal productivity of labor (MPL) as the source for labor demand.

One possible neoclassical response would be to suggest that real (supply side) shocks, which change the MPL upwards and downwards, is the main cause of fluctuations in output and employment. So Real Business Cycles (RBC) is the solution. In this case, pro-cylcial real wages can be explained by the mainstream. The main critique coming from other mainstream authors about this possibility, is that, since the real wages are only mildly pro-cyclical, a shock to the MPL would lead to small changes in the real wage only if labor supply is very elastic. In other words, workers labor supply would have to be very sensitive to changes in real wages, and, yet, the empirical evidence is that the number of hours worked does not change much with variations of the real wage.

Besides, there is the question of whether one can really assume that business cycles are explained by real shocks. Note that Lucas, who has for the most accepted the RBC interpretation of the working of the economy, still argues that the Great Depression is most likely explained by a demand shock (for him a monetary contraction a la Friedman).

That is why the capital debates, which undermine the rationale for the marginalist labor demand curve, is relevant for solving the pro-cyclicality of real wages conundrum. The capital controversies suggest that there is no reason to expect that firms buy more of a relatively cheap 'factor of production,' implying an inverse relation between remuneration and intensity of use. Once this notion is rejected, the problem of pro-cyclicality is easy to explain.

Classical (not neoclassical, but the old classical political economists and Marx) presumed that the real wage was determined by the relative bargaining power of workers and capitalists, and it is expected that in a boom, with low unemployment, workers would have the upper hand, and would be able to demand higher wages. So there is no need to resort to real shocks to explain this empirical regularity.

What do mainstream economists think about the minimum wage?

A third think it's bad, while slightly less than a quarter think it's fine. Or so it seems according to David Colander. In the update of his 1987 analysis of "The Making of an Economist" (original one with Arjo Klamer; subscription required) David asked graduate students what did they think about several economic issues (a short version here; the book here). I have some doubts about David's new overall conclusion about the state of the profession, in particular his views on how the profession has changed (see for example my debate here), but there are several interesting points raised by the replies given by the graduate students of 6 mainstream programs. One is related to their views about the minimum wage.

The table (from the book) shows the views then (1987) and now (2005), by publication dates, on whether the minimum wage increases unemployment among young unskilled workers. The evidence seems to suggest overall there is not much of a change, with 34% back then and 33% now agreeing with the conventional neoclassical proposition. But a small change suggests that more economists believe that the minimum wage does NOT lead to unemployment now, from 18% to 23%. In Chicago the percentage of graduate students holding a conventional view fell from 70% to 56%. Only Harvard seems to go in the opposite direction. MIT shows the biggest increase among those that disagree with the conventional view (from 11% to 30%).

There are several problems with the conventional mainstream (marginalist) story about the effects of minimum wages. The capital debates actually are relevant here too. There is no reason to believe that firms will hire more workers when the price of labor falls, exactly for the same reasons that hold for capital. The principle of substitution does not necessarily work, and there is no relation between the intensity of the use of a factor of production (labor) and its remuneration (real wage). Put in simple terms, there is no reason to hire workers, even if their wages are lower, if there is no demand for your products.

But the reasons for the change in views, small as they are, are not related to the logical flaws of the mainstream model. I don't even think it is solely the increasing evidence since the publication of Card and Krueger's analysis (here; discussed here too), about the absence of a negative effect of minimum wage increases on employment, that has been the driving force in these changing views. My guess is that income inequality has played a role in the willingness of mainstream students to reject the conclusions of the theory they are taught. But in order to really know why, we would need another survey.

Obama's Minimum Wage Hike Excludes Thousands and Fails to Look at Roots of Income Inequality

David Cay Johnston:

It's important that we restore the minimum wage. We're not talking about raising it. We're talking about restoring it. Back in the mid '60s, it was almost $11 an hour. And education is certainly very important and too much neglected in this country. We put huge barriers to bright but poor and middle-class children getting first-rate educations, especially at college. But we have much more fundamental problems than that. Many of these problems involve things like government rules that hardly anybody knows about that take money from the many and redistribute it to the few, the use of tax dollars to build factories, office buildings, and shopping malls, the rules that allow multinational corporations--not domestic, not mom-and-pop corporations, but multinational corporations-- to actually profit off their corporate income taxes by delaying payment of them for 30, 40, 50 years and having you and I let them deposit that money with the government to collect interest while the value of the tax they owe erodes.

The Economic Policy Institute on the Unfinished March

An EPI Report that is worth reading on the incomplete economic goals of the civil rights movement . From the intro:

"On August 28, 1963, more than 250,000 people participated in the March on Washington for Jobs and Freedom. They marched for equal access to public accommodations, voting rights, and the end of racial discrimination in employment. While achieving the full measure of these rights remains a work-in-progress, legislative and policy commitments to these goals were secured. But the marchers also demanded the following:

• decent housing
• adequate and integrated education
• jobs for all
• a minimum wage worth more than $13 an hour today

Fifty years later, on all socioeconomic measures, African Americans still lag whites by wide margins. At the same time, economic opportunities are shrinking for working people of all races. Until we achieve all of the march’s goals, there is little hope for reducing black-white socioeconomic disparities and providing genuine opportunity for economic advancement to all Americans."

Read the rest here.

EPI: Raising the Federal Minimum Wage Would Lift Wages for Millions and Provide a Modest Economic Boost

At a briefing at the Economic Policy Institute on Tuesday, January 14, 2014, Jason Furman (Chairman of the White House Council of Economic Advisers), Sen. Tom Harkin (D-Iowa), Rep. George Miller (D-Calif.) and Lawrence Mishel of the EPI  discussed the economic case for raising the federal minimum wage and the path forward to enact the Fair Minimum Wage Act of 2013.

EPI research shows (see here) the Harkin-Miller bill would give a raise to 27.8 million workers, who would receive about $35 billion in additional wages. A $10.10 minimum wage would increase GDP by $22 billion, creating roughly 85,000 new jobs.

Mind you, raising the federal minimum wage to $10.10 is meager...should be at at least $20.00, which would provide more than just a 'modest boost' to the US economy.

The labor market is still way worse than the official numbers suggest

While in Washington politicians discuss about extending or not unemployment benefits, and Dems for the first time in a while seem to have a winning argument on pro-labor policies (not just unemployment benefits, but also the minimum wage, as noted by Mark Weisbrot here), the rate of unemployment when one counts the total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons continues to be close to 9%.

This is very far from full employment, which should be the central economic goal of any left of center government.

Mark Price on raising the minimum wage

Mark Price, a graduate from the Utah PhD program, writes here on why raising the minimum wage is not just good for workers, but for the whole economy. He says a:

"single fact goes a long way to debunking one of the most repeated reasons for opposing minimum wage hikes: A higher minimum wage will kill jobs, opponents say. 

Except that it doesn't. 

Businesses are much more likely to find other ways to deal with higher payroll costs. They will find ways to increase efficiencies or reduce waste. 

Beyond that, research shows that employment doesn't show any measurable change in states that increase their minimum when compared with states that don't. That's true even for industries most affected by a change, like restaurants. 

Of course a higher minimum wage will also mean businesses that use minimum-wage labor will have to pay more per hour of labor. But in the real world, lots of things change when the minimum wage goes up. 

They might be able to reduce training costs, for example. Or they can reduce turnover, which may also translate into higher productivity. 

The bottom line is that a higher minimum wage will boost wages for a group of workers that will likely spend that money boosting the local economy. And a higher minimum wage will also lead to more innovation in business practices. It's hard to find a more positive vision of the American entrepreneur and American economy than that."

'Tips or Starve' or the Wage crisis: The USA's new underclass

A documentary on the working poor. Not sure if this is right, but it seems that in bars and restaurants the wage is below the federal minimum of US$7.25 (see video at 4:40).

More on why the US should raise the minimum wage

Note that in percent of the median wage the US is at the bottom of the list (Estonia is the only lower in the graph above). Enough said.

Minimum wages around the world

The figure is in Purchasing Power Parity (PPP). One should take these kind of comparisons with a certain caution. At any rate, the US seems to have a lower rate than most Western European countries and Australia. Source here.

Minimum Wage and Unemployment: The Brazilian Experience

The State of the Union address last week raised the possibility of increasing the minimum wage, and a debate on the effects of this ensued. Krugman, among others, has quite correctly pointed out that there is no evidence for positive effects of a higher minimum wage on the rate of unemployment. In other words, a higher minimum wage should not lead to a higher level of unemployment. The classic paper on the subject was written long ago by Card and Krueger.

Below I show the recent evidence (2003-2012) on the relation between minimum wage and unemployment rate in Brazil. As it can be seen, minimum wages almost doubled in real terms (left axis; black line), while unemployment (right axis; grey line), in this case for the Metropolitan area of São Paulo, dropped dramatically (source IPEA Data).

In the Brazilian case, in which median income has not grown too much, the increase in the minimum wage, together with the expansion of the Bolsa Familia, has been one of the reasons behind the improvement in income distribution during the Workers' Party administrations. This suggests that a higher minimum wage is also an instrument for better income distribution. So it seems that the evidence for an expansion of the minimum wage is quite strong, not just in the US.

PS: Note that this does not mean that a higher minimum wage solves all the problems, or that in the case of Brazil the doubling of its value has led to a marked improvement in income distribution. At this point, as shown below, the real minimum wage is at the same real level that it was during the late 1960s to early 1980s period.

Historically, the highest levels of the real minimum wage in Brazil were in the second Vargas and the Juscelino Kubitschek administrations, even though higher inflation implied that the real value was more volatile (also, growth was back then more or less double the average rate of growth of the last decade).