Relevant and even prescient commentary on news, politics and the economy.

Wages, prices, "profit", and productivity…and Black Friday too

Black Friday around here in New England begins to night in stores about 8 P.M. On the internet Black Friday’s discounts began last week as the competition heats up between companies with stores and internet based sales. Stores have responded with aggressive discounts, especially visible is Walmart.

This post is relevant to the issue of wages at Walmart, and points to deeper economic issues one has to keep in mind when reading about the economics overall versus a company policy.  This becomes especially poignant as some Walmart workers attempt to draw attention to wages, benefits, and hours the company paints as necessary.

Demos has some figures for thought in How Raising Wages Would Benefit Workers, the Industry and the Overall Economy.   Here’s a summary of the study from Demos:

This study assumes a new wage floor for the lowest-paid retail workers equivalent to $25,000 per year for a full-time, year-round retail worker at the nation’s largest retail companies, those employing at least 1,000 workers. For the typical worker earning less than this threshold, the new floor would mean a 27 percent pay raise. Including both the direct effects of the wage raise and spillover effects, the new floor will impact more than 5 million retail workers and their families. This study examines the impact of the new wage floor on economic growth and job creation, on consumers in terms of prices, on companies in terms of profit and sales, and for retail workers in terms of their purchasing power and poverty status.

“There is a flaw in the conventional thinking that profits, low prices and decent wages cannot co-exist,” says Catherine Ruetschlin, study author and Demos Policy Analyst. “The findings in the study prove the country’s largest retailers are in an ideal position to launch a private sector stimulus, leading the way towards a new model for American prosperity.”

Robert Reich offers his viewpoint below the fold:

Most new jobs in America are in personal services like retail, with low pay and bad hours. According to the Bureau of Labor and Statistics, the average full-time retail worker earns between $18,000 and $21,000 per year.

But if retail workers got a raise, would consumers have to pay higher prices to make up for it? A new study by the think tank Demos reports that raising the salary of all full-time workers at large retailers to $25,000 per year would lift more than 700,000 people out of poverty, at a cost of only a 1 percent price increase for customers.

And, in the end, retailers would benefit. According to the study, the cost of the wage increases to major retailers would be $20.8 billion — about one percent of the sector’s $2.17 trillion in total annual sales. But the study also estimates the increased purchasing power of lower-wage workers as a result of the pay raises would generate $4 billion to $5 billion in additional retail sales.

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US wages trail 10 OECD countries, but with higher unemployment than 9 of them

by Kenneth Thomas

US wages trail 10 OECD countries, but with higher unemployment than 9 of them

Contra Eric Cantor, Labor Day celebrates the importance of labor and the labor movement in American history. But the bluster of Cantor, where he celebrates the so-called job creators, does illustrate that organized labor has been in decline in this country for quite some time.

One result of having a weak labor movement is that average wages in the United States have fallen behind those of 10 other industrialized democracies that are members of the Organization for Economic Cooperation and Development (OECD). What is most confounding, for Republicans at least, is that nine of these countries also have lower unemployment, which contradicts their view that high wages (and high minimum wages) harm employment.

The table below below is constructed from data at OECD StatExtracts, showing the average earnings of all wage and salary workers in each country, as well as its most recent unemployment rate (usually July 2012).
Source: OECD StatExtracts.

For average wages, select data by theme, then labour, then earnings, then average annual wages, and use “2011 USD exchange rates and 2011 constant prices” for each country. For unemployment, select data by theme, then labour, then labour force statistics, then short-term statistics, then short-term labour market statistics, then harmonized unemployment rates.
This table does not make use of purchasing power parity (PPP) conversions to wages (and the U.S. in fact has the highest wages when adjusted for PPP), for a very important reason. Essentially, the PPP calculation adjusts actual exchange rates for differences in the cost of living between countries. In practice, this means downward adjustments for expensive countries like Norway (where I had a personal pan pizza for $25 on my honeymoon six years ago; the New York Times recently published more examples) and upward adjustments for developing countries and even Eastern European countries. As I note in Investment Incentives and the Global Competition for Capital, gross national income per capita for the Czech Republic in 2006 was $12,680 at actual exchange rates, but $21,470 at PPP (page 99).
The reason we should ignore PPP when dealing with wages and jobs is that a company deciding to invest in one place rather than another has to pay the wages using the actual exchange rate and is not affected by PPP. Thus, if there is an effect of wages on employment, that will be a response to what an employer actually has to pay to hire someone, not a hypothetical measure of how well off the worker is in terms of PPP-adjusted dollars. The data here does not show any negative effect of wages on unemployment.
Moreover, I would argue that living in a high-wage, high-cost location has distinct advantages over living in a low-wage, low cost location, even if after adjusting for cost of living (via PPP or within a single country) the lower wage location has “higher” pay. One important reason is that having extra cash gives you extra options. You will have a higher retirement benefit and will keep it if you move to a lower-cost area, whereas the reverse is not possible. You will have better quality services on average, particularly health care. It is far easier for you to vacation in a low-cost location than it will be for someone in a low-cost location to vacation to a high-cost location ($25 personal pan pizzas!).

Your high salary will be the benchmark if you take a job in a lower-cost location. If you economize from the standard basket of goods used to measure cost of living, your benefit will be higher in the high-cost area. Of course, a full treatment of this issue requires another post, but the big point is that high wages do not necessarily create unemployment and reducing wages is not the route to middle class prosperity.

cross posted with  Middle Class Political Economist

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Wages driven down, now relative to market you’re over paid!

Update: spelling corrected in title.

I heard and then went to look see that Caterpillar is working hard to control it’s costs.

“Despite earning a record $4.9 billion profit last year and projecting even better results for 2012, the company is insisting on a six-year wage freeze and a pension freeze for most of the 780 production workers at its factory here. Caterpillar says it needs to keep its labor costs down to ensure its future competitiveness.” 

It has purchased 17 other business since 2008, 9 were non US companies. Two companies were purchased in 2011. Here’s the thing, a 6 year freeze? I guess there will be no inflation? I mean like zero. Though economist are saying inflation is needed as part of the solution to our slow economy. Of course, Obama having frozen government wages, I guess Caterpillar is just being patriotic. Nothing like We the People blazing the trail for how we want the private sector to treat We the People.

Caterpillar made $4.9 billion profit. If they raised these people’s pay $10,000 each, your only talking $7.8 million. It is 0.159% (0.00159)of Caterpillar’s profit. Inflation has averaged since 2008 about 2.075%.  Giving the worker $10,000 more per year does not equal the inflation rate as a share of the profit. If the worker were getting their due based on inflation they would get a piece of $101,675,000. This would be $130,352.56 each for the 780 workers. Caterpillar would still have $4,798,325,000.00 profit. Imagine what that $130,352.56 would do for the economy in Joliet! I’ll bet Caterpillar equipment sales would rise do to demand for construction.

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Cowen and truck driving jobs in North Dakota

by Mike Kimel

Tyler Cowen has a post on truck driving jobs in North Dakota:

My poking around showed that some of them start at 75k a year, though with raises for good performance.

The implication, of course – why don’t unemployed people move to North Dakota and drive trucks for good wages rather than stick around and collect unemployment?

I’ve got a theory:

Figure 1

Screenshot from Job Service North Dakota, run by the State Gov’t of North Dakota.

Advertised wages for light truck drivers are quite a bit lower ($21,736 for entry level).

More generally, I imagine there is a reason why unemployed relatively unskilled people, in, say, Lincoln, Nebraska don’t go through the expense of moving their families to Bismark and taking the coursework needed to get certified in order to get a job paying $32K a year or to do the equivalent to become a roughneck at a gas boomtown, even ignoring the fact that the jobs pay less than outsiders believe and the costs of taking them are greater. See… we’ve been through this before many times.

The boom in the new skillset often ends before the new entrants can recoup their investment in gaining the skillset. And not just for the unskilled. Ask the folks who flocked to Silicon Valley in the 1990s for those great jobs as programmers. I’m sure you can find someone who drove out to Palo Alto in 1996 who is still programming and making north of $175K to boot but I’m guessing those people are huge outliers, not the trendline.

Disclosure. I’m now currently looking for a full time job. Given the severance package I accepted from my previous employer and since I have some consulting work to do, I’m pretty sure I’m neither eligible for unemployment benefits nor able to move to North Dakota to train for an exciting new career hauling cargo.

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Job Automation, Purchasing Power and Consumer Spending

by Martin Ford

Job Automation, Purchasing Power and Consumer Spending

I’ve had several recent posts here arguing that automation technology is likely to depress wages and lead to significant structural unemployment in the coming years. One of the most common criticisms of my argument is that I am “not thinking like an economist” and that I’m viewing things in terms of dollars, rather than in terms of purchasing power.

Here’s part of a comment that James D. Miller, an economics professor at Smith College, made on my econfuture blog:

Non-economists (even when they are very smart and well-studied) get in trouble when they consider trade issues in terms of dollars (“everyone could work for a dollar an hour?”) It’s better to think of wages in terms of what you could buy. In a world with hyper-productive robots you could buy lots of stuff if you could work at a task for say 1,000 hours that saved a robot 10 seconds of time.

So the basic idea here is that although automation may result in very low wages in dollar terms (as well as high unemployment, since we do still have a minimum wage), things won’t be so bad because the efficiency of production will increase dramatically and everything will be really cheap.

To see the problem with this, view this graph at Visual Economics showing how consumers spend their incomes. The graph makes it immediately clear that consumers spend the lion’s share on their incomes on things like housing, insurance, health care, transportation and food.

“Hyper-productive robots” are not going to lower anyone’s mortgage principle, and interest rates surely cannot go much lower. Nor can rents adjust too far downward without threatening the landlord’s mortgage. The same is true of insurance. The reality is that the most of the average consumer’s budget is based primarily on asset (and debt) values—and not directly on how efficient the economy is at producing goods and services. Food and energy prices are likewise unlikely to adjust downward. Expenditure categories that might see falling prices as automation progresses, such as apparel, entertainment and miscellaneous represent a tiny fraction of the average budget, and in many cases prices have already been minimized by globalization.

The only way to have expenditures fall in line with wages so that consumers could maintain their standard of living would be to have asset and debt values collapse. And that, of course, would be catastrophic for the financial system. Asset values in the United States reflect the basic assumption that we are going to continue to have a vibrant mass-market economy and a first-world living standard. You cannot have third-world wages with first-world asset values. That is the reason that countries like Thailand prohibit foreigners from buying property and driving values beyond the reach of their population.

As wages fall and unemployment rises, the average consumer is going to be squeezed by the fixed costs that cannot adjust downward. Mortgage defaults would soar and discretionary consumer spending is likely to plummet.

A recent article in U.S. News noted that spending is already heavily concentrated among high income consumers:

The top 10 percent of earners account for 22 percent of all spending, for instance, according to Moody’s The top 25 percent of all earners account for 45 percent of spending. The bottom 50 percent of earners, by contrast, spend just 29 percent of all the money in the consumer economy.

As job automation (and globalization) drives down wages and creates structural unemployment, these numbers will become even more concentrated. At what point does this become unsustainable? In an environment with extreme financial stress due to loan defaults and falling asset values, can the wealthy few really drive consumer spending indefinitely? Recent history shows very clearly that when fear is pervasive, rich people stop buying as well. So where will consumer spending come from?

Martin Ford is the author of The Lights in the Tunnel: Automation, Accelerating Technology and the Economy of the Future and has a blog at

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H-1B Database

Here’s what Happens When I Click a Link by Accident:

  1. Does anyone believe the market rate for taxi drivers in Maryland is $11.41 an hour?
  2. The base salary for an Assistant Professor of Economics is $115-120K for elite schools (well, Harvard and Stanford, but you get the idea).*
  3. Morgan Stanley offered $85,000 for an Analyst in 2006. No indication whether it was a bonus-payingeligible position (though presumably the answer would have been “yes”).

Have fun with the database. Sure to stun and amaze.

*Columbia offered far less for next year: an Assistant Professor at the Medical Center campus for $90,000 in 2006, an Associate Professor at the main campus for $95,000 in 2007. But not certain what the specialties are.

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