Minimum Wage a Winner Both Politically and Economically
President Obama’s proposal to raise the minimum wage to $9.00 per hour puts the Republicans between a rock and a hard place politically. Paul Krugman echoes the point that a big majority of the population supports a minimum wage increase, including a majority of Republicans (his linking to the original poll source appears to have crashed that website, but I will update later). Yet the Republican leadership remains trapped because it opposes this increase as well as any alternative policy that might make the poor better off, such as increasing the Earned Income Tax Credit or endorsing a Guaranteed Minimum Income (points Matthew Yglesias makes in the link above). As further evidence, the minimum wage increase Proposition B in Missouri in 2006 passed 76-24, probably helping Senator Claire McCaskill to her first Senate victory with under 50% of the vote.
Moreover, much recent research (via Think Progress) shows no “job killing” effects from raising the minimum wage. As originally shown by David Card and Alan Krueger, there was strong evidence of “publication bias” in the studies underlying the former economists’ consensus that the minimum wage reduced jobs. That is, economics journals tended to prefer to publish studies with statistically significant results and not publish those showing no effect from the minimum wage. Researchers thus adjusted their statistical specifications until they achieved statistical significance, thereby generating a mass of studies that all barely reached statistical significance despite larger volumes of data which should have produced stronger results. As the Schmitt paper emphasizes, more recent studies of studies (“meta-analysis”) continues to support the conclusion that the purported job killing effect was a mirage.
As I have pointed out before, cross-national comparisons of the minimum wage and unemployment rates also do not support the view that the minimum wage is the job killer Republicans claim it is. Indeed, as in my September 2011 post, nine OECD countries have higher minimum wages rates than the U.S. does on a purchasing power parity basis that adjusts for the cost of living, yet only two have higher unemployment rates (France and Ireland), while the U.K.’s unemployment rate is the same. The table below illustrates this and underscores the point that the minimum wage is a winner for the middle class.
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Source: http://stats.oecd.org/index.aspx | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
For 2011 real minimum wage at PPP, click on “statistics by theme,” then “labour,” then “Real hourly minimum wages,” then adjust the series to “In US$ PPP.” For unemployment, click on “statistics by theme,” then “general statistics,” then “key short-term indicators,” then “harmonized unemployment rates.” | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cross-posted from Middle Class Political Economist. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
“As originally shown by David Card and Alan Krueger, there was strong evidence of “publication bias” in the studies underlying the former economists’ consensus that the minimum wage reduced jobs.”
Supply siders are on the run. If there is even a whiff that the labor demand curve is upward sloping (or even flat), it vitiates their entire argument regarding MC of production and how policy should be enacted on that basis.
Phrases which share a common theme.
My dog ate my homework
Honestly, the train had a flat tire.
But officer the light was yellow.
This won’t hurt one bit.
Because it will make you blind.
Because I have a thyroid condition.
A minimum wage reduces employment.
Higher taxes will reduce total receipts.
Saddam supports al Quida.
They’ll lower property values.
But if you love me you would.
Guns don’t kill things.
Increasing the minimum wage decreases jobs
Eliminating the minimum wage adds jobs.
Slaves love their masters.
Markets correct themselves.
Reducing SS benefits will save SS.
Work gives one a reason to live.
A certain similar ring to them all, but who knows where or when?
John:
Interesting name you have there. Where are you located? Our resident attorney Beverly Mann will probably chat with you also.
Just moved to the greater Boston area, where I get to put my J.D. up against Harvard, BU, and BC students . . . which means I have a lot of time to play amateur (wannabe) economist and surf blogs.
If the minimum wage had gradually grown 50% from 1968 to present (from $10.50/hr to $15/hr) as per capita income grew 100% I don’t think anyone should have objected strenuously to $15/hr today. In many economies the minimum wage is indexed to automatically grow in step with both inflation an increases in average income — in which case the American minimum wage would be even higher than that …
… depending on whose growth and income numbers you go by. The most commonly accepted inflation measure (CPI-U, used by the BLS) says the minimum was $10.50 in 1968. Another (sounds like CPI-U-RS, used by the Census) say it was only $9.25/hr. Double indexing (inflation and growth) would not give a much different overall index result however because when inflation registers lower, growth registers higher (because money is worth more) …
… in which double indexing case the American minimum wage would be closer to $20/hr.
*******
IN CASE ANYBODY POSSIBLY MISSED MY RANTING ABOUT THE MINIMUM WAGE IN THE LAST OPEN THREAD:
More than doubling the federal minimum wage from $7.25/hr to $15/hr ($600/wk) would cause less than 4% direct inflation:
$3.87/hr (half/average raise) X 2080 hours (full work year) = $8,049/yr X 70 million workers (half the workforce — $15/hr is today’s median wage) = $563.4 billion. (3.5 million workers at the minimum wage would get a full $16,020 raise may be left out to simplify eighth-grade math.) Divide $563.4 billion by a $15.8 trillion GDP and we get 3.6% direct inflation (not counting leap frog pushups which may not add up to that much – LBJ’s median wage was only 25% higher than his minimum – high minimum wages often approach median level in other economies).
In 1956 majority leader LBJ steered an $8.50/hr ($1/hr nominally) minimum wage bill through the US Senate. In 1968 (hourly increments and retail workers added in years between) president LBJ piloted a minimum wage of $10.50/hr ($1.60/hr nominally) into law — per capita income having expanded 25% in the dozen years intervening.
Per capita income has doubled in the two generations since 1968.
******
All the issues raised by our elite progressive economists sound like so many term papers by econ undergraduates to me — all talking as if the minimum wage were not so low that it might as well be $2/hr for all the relevance of these issue to the underlying reality: the minimum wage is now $3.25/hr below 1968 even though PER CAPITA INCOME HAS DOUBLED.
I’ve been thinking that unlike other professions (doctor, lawyer, chemist, engineer) economists don’t have to do anything. They have no reality check in everyday life.
I’ve also been thinking that doctors (the highest tech profession) have to see their patients in person everyday — make the rounds — every day. Maybe something economists can actually do is get in touch with the patients. Get to know the fast food workers — see them struggling to make a living (in the USA; oh, wont see any Americans, they’d rather join street gangs then work for nothing) on half what they could easily be paid.
Want to be shocked? When I get back to Chicago after living for a while in the San Francisco/Berkeley area — for the first two weeks I am afraid to talk to African Americans I don’t know. That’s because like Pavlov’s dogs I have developed an automatic expectation that half the time they will act like I am not even there (in Evanston, home of North Western, of course this still hold true).
It is a matter of these very well off white folks talking a blue streak of liberal hot air and never lifting a little finger to do a thing for their small number of minority folks.
America, your labor market is crazily distorted and you (economists included) have no clue of the scale of the distortion.
I will reprint my open letter to Oakland may Jean Quan below — which I will email eventually to everyone who might care on paper in the country over 100,000 circulation as well as many others.
Open letter to Oakland mayor Jean Quan:
The only legislation that can realistically end gun violence in Oakland – and Chicago – is a labor law: doubling the minimum wage to $30,000/yr. The Crips and the Bloods could not whip a decent paying Ronald McDonald.
Crackpot? More than doubling the federal minimum wage from $7.25/hr to $15/hr ($600/wk) would cause less than 4% direct inflation:
$3.87/hr (half/average raise) X 2080 hours (full work year) = $8,049/yr X 70 million workers (half the workforce — $15/hr is today’s median wage) = $563.4 billion. (3.5 million workers at the minimum wage would get a full $16,020 raise may be left out to simplify eighth-grade math.) Divide $563.4 billion by a $15.8 trillion GDP and we get 3.6% direct inflation (not counting leap frog pushups which may not add up to that much – LBJ’s median wage was only 25% higher than his minimum – high minimum wages often approach median level in other economies).
Oakland won’t educate its way out of poverty and crime. Catch 22: political scientist Martin Sanchez-Jankowski, from neighboring UC Berkeley — who spent nine years in five poor New York and Los Angeles neighborhoods (and ten years before that researching street gangs) — explains in his 2008 book Cracks in the Pavement that ghetto schools don’t work mostly because students (and teachers!) don’t expect anything decent awaiting for them in the labor market, so think it hopeless to make the effort.
In 1956 majority leader LBJ steered an $8.50/hr ($1/hr nominally) minimum wage bill through the US Senate. In 1968 (hourly increments and retail workers added in years between) president LBJ piloted a minimum wage of $10.50/hr ($1.60/hr nominally) into law — per capita income having expanded 25% in the dozen years intervening.
Per capita income has doubled in the two generations since 1968.
There would be a dismal gap even between a minimum wage of $15/hr, or $30,000/yr and a reality-based minimum needs (poverty) level for a family of three – and even between a median wage 25% higher of $18.75/hr, or $37,500/yr.
A realistic poverty line for a family of three is $45,476 in 2012 dollars according to the 2001 Ms. Foundation book Raise the Floor (table 3-2 on p.44 — includes $8,786 medical insurance cost). Raise totals up from a comprehensive list of expenses, including taxes to get its figure. (Raise provides extensive explanations for its minimum needs parameters in Appendix B, citing Solutions for Progress — allots $3,000 to yearly medical expenses even if the family has insurance.)
$19,090, supposedly covers the minimum needs for a family of three under the 1955 era federal formula. Both the Ms. and government formulas calculate about $6 per person/per day for food – the ancient federal methodology multiplies the cost of food three times and leaves it at that. Which is why you won’t see the federal measure quoted much anywhere except as a formula multiple (2X, 3X, 4X).A wage even 50% higher than today’s median, of $22.75/hr or $45,000/yr, would barely support a family of three.
“Since 1973 [note: the last year national income gains were shared across-the-board], productivity has grown roughly 80 percent while median hourly compensation improved by roughly 11 percent.” Something more elemental than “raising the floor” needs to be prescribe.
http://stateofworkingamerica.org/fact-sheets/wages/
Anyone can work up a list ruses by which the average American’s interests are being hung out to dry these days. I was just going to say the only thing not foisted upon us so far is foreign firms buying up local water rights and charging them back to us triple.
Then I remembered Chicago leasing its parking meter system for 75 years for $1.15 billion:
http://www.bloomberg.com/news/2010-08-09/morgan-stanley-group-s-11-billion-from-chicago-meters-makes-taxpayers-cry.html
http://www.theatlanticwire.com/business/2010/10/why-does-abu-dhabi-own-all-of-chicago-s-parking-meters/18627/
******
Up the road from Oakland City Hall – up College Avenue – on the UC of Berkeley campus labors as progressive a progressive economics faculty as anyone should wish. They could you tell you, Madam Mayor, and tell everyone else at the same time [this essay may hopefully edge them in the latter direction] about a species of labor legislation that can potentially re-write the American social contract front to back, economic to political.
Legislation that has been tried and tested over half a century in the first world (Germany, France) moving to the second and third worlds (Argentina, Indonesia) as well as right next door (French Canada). Legislation bringing to Americans a labor market setup devised – not by Karl Marx – but by post WW II German and other continental industrialists – not to empower labor — but to stifle union wage races-to-the-top that would divert money from industrial bases rebuilding. (England did not take this path which is why it fell behind – which I’m pretty sure I read in Berkeley’s, Barry Eichengreen’s 2008 The European Economy Since 1945.)
Europe’s fabled welfare state was offered as a compensation for labor price moderation. Magic bullet: legally mandated, sector-wide collective bargaining – wherein everyone working the same category of job (e.g., retail clerk) in the same geographic locale (where applicable) works under one common contract with all employers – thwarts the race-to-the-bottom just as surely – just the right barraging balance.
The late David Broder, dean of the Washington press corps, said that, when he came to D.C. 50 years ago, all the lobbyists were union – which meant: naturally balanced campaign financing, someone minding the store on the average person’s interests, all backed by the majority of voters — perfect democracy.
Your friendly economics faculty up the avenue can tell you all about all of this – but you’ll have to ask.
Denis Drew
Chicago (sometimes Berkeley)
ddrew2u@sbcglobal.net
http://www.ontodayspage.blogspot.com
Japan also has higher minimum wages than the US, though with the drop in the yen, the regions with the lowest minimum wage (which are set centrally) match ours. The vast majority of Japanese live in places with $8.00-$9.00 minimum wage. Unemployment, of course, is low and finding part-time jobs is trivially easy.
@Chad, according to the OECD, Japan’s minimum wage in 2011 was only $6.83 at purchasing power parity (but $9.16 at official exchange rates). My table only includes those countries which exceed the U.S. using purchasing power parity.
Sorry; I’ve been away for two days — but reading a couple of books (Japan the System that Soured was one of them) gave me the impression that half the workers in Japan get their good wages by working 60 hour weeks — the other half may live more like our illegals. Just an impression — can remember the specifics.
http://www.amazon.com/Japan-System-That-Soured-Japanese/dp/0765603101/ref=sr_1_1?ie=UTF8&qid=1361565270&sr=8-1&keywords=Japan%2C+the+System+that+Soured