Piketty on the minimum wage
A lot going on with the minimum wage lately, but I will contextualize it first with Thomas Piketty’s analysis in Capital in the Twenty-First Century, pp. 308-313. It’s important to remember that one of the keys to the book’s success is that it is built on a gigantic trove of long-term data. His French wealth data, for example, goes all the way back to the immediate aftermath of the French Revolution!
Piketty writes in this section about increasing labor income inequality in the United States and the importance of labor market institutions in affecting wages in the medium term even as education (though see Jeff Faux’s dissent in The Servant Economy) and technology are the keys to the long-run wage possibilities. He counterposes the steady increase in the real (i.e., inflation-adjusted) value of the French minimum wage since 1950 to the decline of the real U.S. minimum wage since it peaked in 1969 at $10.10 in 2013 dollars. At $7.25 today, it is a full 28% below its peak, and 1/3 less than the current French minimum wage at purchasing power parity in 2013 (see stats.oecd.org, search “data by theme” and select “labour,” then “earnings,” then “real minimum wages,” and set the series to “US$PPP” and the pay period to “hourly.”)
This decline of the real value of the minimum wage is why Piketty argues that an increase in the U.S. would make sense, much more so than in France. At this low level, there is much less danger of a negative impact on the number of jobs. His key insight is that if wages are too low, that itself causes economic inefficiencies and can even create inefficiencies for the firm. In particular, if wages are too low, it can cause workers to acquire fewer firm-specific skills than would be optimal for the employer. This would seem to hold economy-wide as well: if the general wage level is too low, workers have less incentive to acquire skills that would make them and the economy as a whole more productive. Additionally, Piketty argues that employers’ superior bargaining position and the absence of “pure and perfect” competition in labor markets justifies the limits on companies’ power embodied in the minimum wage.
The minimum wage has also been in the news this month. The biggest story is that for the first time Germany has adopted a minimum wage effective in 2015, set at €8.50 ($11.60) an hour. This was the price Angela Merkel had to pay to bring the Social Democratic Party into her governing coalition. In addition, the minimum wage in the future will be set by a national commission made up of labor and business representatives.
Finally, a new study by the Center for Economic Policy Research finds that the 13 states that raised their minimum wage on January 1 had higher rates of job growth (0.99% vs. 0.68%) through May 31 than the 37 states that did not raise their minimum wage. While the study does not claim to be definitive, it is one further piece of evidence that the minimum wage is not a job killer at the levels seen currently in the United States.
Cross-posted at Middle Class Political Economist.
Lambert
thanks for this. it is good for me to see that Picketty actually has a nuanced discussion of causes, as well as an impressive data base. one does not always get that sense from “the news.”
i had a visitor to one of my posts who was quite beside himself about the lunatic, dishonest Left, and Picketty for not counting Social Security promised benefits as “wealth,” and thus, I suppose skewing the “inequality” results. Or maybe he was only trying to say that I was dishonest by talking about SS as “the workers money.” Again, given the irresponsibility of Congress and politics in general, he would have a point, if my point was not that workers need to remember it is their money, held in trust for their retirement by “the government” which is the only agency in a position to guarantee it against inflation, market losses, and the workers own personal bad luck.
I think I have some idea of the problems involved in accounting SS as “wealth”, but there is some merit to the concept. Do you have any thoughts?
What constitutes “labor market institutions?”
I haven’t read the book, not sure I’ll get to it before Christmas at the earliest.
Do anarchists in the streets count as a “labor market institution?”
That’s what it took to create/restore some balance to the labor market at the turn of the century, and I wonder if we’re headed there again someday. I’d prefer that not happen.
One factor that should be the first consideration in every minimum wage (or any wage) versus job loss discussion – first things first, please — is just exactly how much of the price of the end product comes from labor’s price.
If demand for a product goes up and down in perfectly even lockstep with change in consumer price, then, labor may have a perfect opening to leverage wages. For instance, Wal-Mart labor costs are 7%. If Wal-Mart’s labor costs double – Jimmy Hoffa’s union would see to it (plus holidays and benefits) – Wal-Mart prices would go up all of 7%. Even if Wal-Mart’s sales – and employment – dropped 7% in reaction, labor comes out way ahead with a hundred percent wage increase! (A $15 minimum wage would probably raise demand for Wal-Mart.)
This brand of common sense often seems far distant from American discussions (and even progressive economists’ thinking! – hopefully not to far from AB’s). No factor is more important in any wage discussion – or less dispensable.
[SIDE BOX: Remarkably, Fortune Magazine has a current story – in Fortune’s very esoteric financial terms (left me behind) – explaining that if Wal-Mart voluntarily raised wages 50% across-the-board that Wal-Mart’s stock price (Fortune’s angle) would not take a hit.
http://fortune.com/2013/11/12/why-wal-mart-can-afford-to-give-its-workers-a-50-raiseperfectly/]
I just read a yet another typically silly American essay — this in Forbes — that $15 minimum wage would cost McDonald’s $8 billion a year eating up its $10 billion pretax income. Of course McDonald’s would raise prices 25% – as would competitors Burger King, Wendy’s, etc.
http://www.forbes.com/sites/adamhartung/2013/08/01/will-the-living-wage-trend-kill-or-make-mcdonalds-and-walmart/
[SIDE BOX: 65% of McDonald’s customers nationwide go through the drive-through in their five-dollar-a-gallon gas gulping four wheelers (slight exaggeration :-]) . Neither diabetes, nor clogged arteries, nor a reasonable price will stay drive-through customers from their appointed grounds. The 35% walking in the door will be getting an average $8000 year raise. Mickey D’s stock should definitely go up.]
Another point – which I cannot link back to – but for another useful comprehensive wage reality exercise (Graham Greene should have written “The Missing All Important Market Factors Americans”): some still focus on the myth that most minimum wage workers are teens living at home. But would not matter a bit. A $15 minimum wage would reach 45% of the American workforce. It’s grown up to do all the eighth-grade math, people. Let’s get in practice.
PS. Piketty (I think): “the real U.S. minimum wage since it peaked in 1969 at $10.10 in 2013“
I get 10.94 in 1968 in 2014 dollars. But, here we go again. Our big progressive hero doesn’t seem to factor any meaning out of average income doubling over that 45 year (!) span. If we could have predicted to Americans of 1968 that by now the minimum wage would have lost almost $4 in value (almost half by early 2007) they would have asked what disaster was going to hit: a comet strike, a limited nuclear exchange, the sun knocking out electric power supply?!!!
http://data.bls.gov/cgi-bin/cpicalc.pl?cost1=1.60&year1=1968&year2=2014
Today, half of Americans top out at $500 a week (LBJ’s minimum wage). I am horrified as I walk around looking at all the folks I deal with every day, knowing they must be living penurious lives (how could it be otherwise?) This is not “inequality”; this is a Great Wage Depression.
For which there is no rationale economic necessity. Since 1980 top 1 percentile share of income has soared from 10% to 23% (and going up! – even if everyone else stands still their share will grow as they take all the growth). Doubling the federal minimum wage would cause 3.5% increase in costs of output – or shift in income. (E.I.T.C. shifts 1/10 as much.)
http://blogs.wsj.com/source/2011/08/07/five-false-premises-about-economic-recovery/
[45% of workers wont get laid off over 3.5% price hike — $15 the 45 percentile level (you have to mention this).]
[70 million employees X $8,000 average wage = $560 billion — or 3.5% of our $16 trillion GDP. 140 million workforce — $15 is 45 percentile; add 5% for minimum wagers who would get two half raises.]
LET’S GO FOR A BETTER LINK:
Why Wal-Mart can afford to give its workers a 50% raise by Stephen Gandel
November 12, 2013, 3:27 PM EDT
http://fortune.com/2013/11/12/why-wal-mart-can-afford-to-give-its-workers-a-50-raise/
@J. Goodwin, of course such institutions include labor laws and the minimum wage. I think the existence of protesters (anarchist or otherwise) is not itself a labor market institution, but may change labor market institutions via the political process.