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EITC vs MJ.ABW: Neo-Liberal Acronymic War

Cryptic enough? Well let me do some unpacking and straight out asserting and then turn this over to AB readers and commenters.

EITC is the Earned Income Tax Credit. Its open premise is that work should be rewarded. Its more hidden premise is that this reward should come as a premium over actual marginal labor productivity and so not come directly in the form of wages paid by the employer. Instead it becomes the obligation of society, or rather taxpayers as a whole. That is the promoters of EITC insist that the market works perfectly when assigning wages as a product of actual productivity but allow that the result is not socially equitable. I mean we can’t actually STARVE people even if the books suggest we should Amirite? After all we are good hearted Neo-Liberals.

EITC is often explicitly promoted as an alternative to increases in Minimum Wage. Which might provide the same or more reward or equity as EITC but are regarded as an economic distortion of actual market wages themselves set by some version of actual labor productivity. The problem here is two-fold. First it just concedes the underlying economic argument to the neo-liberal and classical liberals: that the Invisible Hand works when it comes to wage levels. The second problem is more pernicious. It comes into play when you realize that there is a lot of overlap between the ‘big-hearted’ economic liberals who allow that work should be rewarded even if those rewards are not specifically justified by the economics of the labor exchange and those who believe that taxation on corporations is both inefficient and inequitable. And who would make similar arguments about tax on capital in general. With results as seen in say the respective tax plans of Paul Ryan and Marco Rubio. The end result of this is that employers and capital in general propose to provide big ‘E’ Equity via EITC while shifting all responsibilities for its funding right onto labor share. Much as they propose to do with parallel proposals to shift taxes away from income to consumption. From this perspective all of EITC, and VAT, and FAIR Tax and Flat tax become a combined Acronymic War on labor by the controllers of capital.

In direct contrast to this jumble is the opposing acronym: MJ.ABW. More Jobs. At Better Wages. It too argues that work should be promoted and rewarded. But in the form of pre-tax wages rather than post-tax credits. And to those that would argue that this is just distortionary would simply reject the basic neo-liberal/classical assumption that wages are in practice set by some actual calculation of marginal labor productivity but instead recognize that they are and always have been by some combination of pure pricing power by employers mitigated only by residual wage market clearing power retained by workers. That is given any sort of labor market at all wages have to clear at or above subsistence, else people will just walk away. WHERE it clears above subsistence is some combination of actual labor supply and collective ability to demand higher wages. That is ultimately more of a purely political than economic calculation.

As such I consider most proposals to address inequity via EITC or UBI or tax credits to be potential Trojan Horses. Because in the end the actual equity depends on the actual incidence of the taxes that fund those benefits, income guarantees and credits. And all too often the promoters of such things as EITC propose to couple that with a shift away from taxes on profits and capital gains paid by the 1% to wage and consumption taxes paid by the 90%. With the 91-99% alternately rewarded and screwed as serves the interest of the real bosses.

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Illinois’ next governor may make Romney look like a saint

Does the name Bruce Rauner ring a bell? No, me neither. It turns out he’s the Republican nominee for governor in Illinois, which under normal circumstances would mean he’s a nobody. But he’s been leading incumbent Democrat Pat Quinn in polls all summer, and could actually end up as the state’s next governor.

This is a problem, because he is even more out of touch with the middle class than Mitt Romney (Rauner is a private equity near-billionaire) whose idea of transparency is to release the first two pages of his 1040 tax return for 2010-12, and nothing else. Romney at least released his full tax return for each of two years. As Think Progress points out, Rauner is also a big fan of the Cayman Islands as a tax haven, just like Romney. In fact, Rauner is invested in at least five funds there. Also like Romney, Rauner takes full advantage of the “carried interest” tax break that lets him treat his fees, which should be ordinary income taxed at 35%, as capital gains, subject only to a 15% tax rate.

Rauner’s agenda is insistent on the need to spur job growth, but somehow misses the fact that Illinois’ unemployment rate has fallen from 9.2% (seasonally adjusted) in June 2013 to 7.5% in May 2013 (the figure Rauner used) and even more since the agenda was published, to 7.1% in June, the third-largest drop in the country year-over-year. Still a full point worse than the June national unemployment rate, but a lot better than it was.

One place where Rauner is worse than Romney is the minimum wage. Romney, rather surprisingly, supports an increase in the minimum wage, though he did not specify a number. Rauner, in both December and January, called for Illinois to lower its minimum from $8.25 to $7.25, the national rate. After getting a tremendous amount of blowback, he now claims to support an increase.

His agenda says the state “should implement a phased-in minimum wage increase, coupled with workers’ compensation and lawsuit reforms to bring down employer costs.” No mention of what the rate would be, or the period over which it would be phased it. He references an op-ed he wrote in the January 9th Chicago Tribune (now only available through the Nexis subscription service), where he clearly buys into the “job-killer” meme and drops a reference to the futility of a “$20 per hour” minimum wage, for good measure. Somehow I don’t think he really supports an increase.

Not only that, but Rauner proposes turning the Illinois Department of Commerce and Economic Opportunity, the state’s investment promotion agency, into what he calls a “public-private partnership.” He doesn’t say it, but this means there will be less public oversight into the agency’s affairs. As Good Jobs First has shown, such privatized agencies have exhibited high levels of abuse in recent years.

Rauner is a living, breathing example of how we have one tax system for the 1%, and another one for the rest of us. His flip-flop on the minimum wage is as phony as the concern he professes for the middle class. Yet there’s a very good chance he will be the next governor of Illinois.

Cross-posted from Middle Class Political Economist.

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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.

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CBO Whiffs on Minimum Wage

The Congressional Budget Office has just issued a report on the minimum wage that is a real head-scratcher. Analyzing proposals to raise the minimum wage to $9.00 or $10.10 per hour, it concludes in the latter case that there would be 500,000 fewer jobs in the second half of 2016 than there would be under current law (100,000 fewer for $9.00/hr.).

Predictably, conservatives have seized on this number as proof that the minimum wage is a “job killer.” Even liberal media, such as Talking Points Memo in this paragraph’s link, seem to think that number is a big problem, going on to say, “It’s not all bad, though, for one of the centerpieces of Democrats’ middle-class agenda ahead of the November congressional elections,” as if the CBO report were mostly bad news for Democrats.

There are two problems with these claims. First, the CBO’s calculations undervalue the best research on the minimum wage. Second, even in the CBO’s estimated world, low wage workers are much better off as a whole than under the current $7.25/hr. minimum wage.

As I’ve discussed before, a relatively crude cross-national comparison of rich countries’ minimum wages and unemployment rates does nothing to suggest any job-killing is going on. But the CBO’s estimation procedure has serious flaws. It begins (p. 6) with what it calls “conventional economic analysis,” which is already a big mistake. Simple Econ 101 reasoning (when the price of something goes up, the quantity purchased goes down) has had only sketchy empirical support, something that has been especially clear from meta-analysis of minimum wage studies (ungated version of Doucouliagos and Stanley 2009 here).

The CBO, of course, has heard of these studies, but it remains with a non-transparent explanation of how it weighted different studies (p. 22), saying it gave the most weight to contiguous state comparison studies. The only thing is, according to Arindajit Dube, these are the studies least likely to find a negative employment effect. Thus, how CBO ends up with a baseline of job loss remains mystifying.

Okay, so 500,000 fewer jobs isn’t entirely plausible then, but what if we accept for the moment that it is? As Jared Bernstein and Dean Baker point out, there are still far more winners (16.5 million direct, another 8 million indirect–the latter being workers just above $10.10 who would probably see raises) than losers (0.5 million among low-wage workers; the rest are people with high incomes) in this scenario. And as Baker emphasizes, “…we are not going to see 500,000 designated losers who are permanently unemployed as a result of this policy.” Instead, what will happen is people will work 2% fewer hours at an hourly rate that is 39.3% higher.

The math is simple: 0.98 X 1.393 = 1.365. In other words, low-wage workers will see their income increase, on average 36.5%. And this is the worst-case scenario!

I’ve said it before, and I’ll say it again: the minimum wage is a winner both economically and politically.

Cross-posted at Middle Class Political Economist.

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Figuring the costs of minimum wage hikes

Real News interviews  Jeannette Wicks-Lim is an Associate Professor at the Political Economy Research Institute in Amherst, Massachusetts. Wicks-Lim specializes in labor economics with an emphasis on the low-wage labor market…

WICKS-LIM: Well, one of the things I’ve been thinking a lot about is that because of the recent proposal by President Obama to raise the federal minimum wage to $9 an hour, I’ve been thinking about the debate that always, you know, gets rehashed each time the minimum wage proposal is put on the table. And every single time the minimum wage proposal has been put on the table, there is this back-and-forth argument about whether there are negative employment effects from raising minimum wage. There’s almost verbatim this fight about, you know, whether or not raising minimum wage is going to cost jobs, and despite the fact that there’s been a large amount of research in the recent years that has pointed towards basically finding no negative employment effects from minimum wage increases, and we still have the same old debate.

And so I’ve been thinking about, you know, what is it that would really help answer this question about whether or not there are job losses from raising the minimum wage. And one of the simple facts that we’ve come up with here in PERI in our research around the minimum wage is that actually when you look at the cost that businesses face when the minimum wage goes up, the costs are actually quite modest. And that’s what explains why there isn’t some big negative, you know, job loss that you can associate with any minimum-wage hike. This is something that we try to make clear but seems to get lost in the debate.

I’ll just give you a very concrete example. One year, in 2006, we looked at Arizona state minimum wage proposal, which was a 30 percent increase in the state minimum wage. At the time, it was $5.15, and it was being proposed to be raised to $6.75. This [incompr.] typical size of minimum-wage increase.

And what we did is we went and we looked to see how much would this cost businesses. We looked at what are the wages of workers at the time, how many hours did they work. We added that all up. We looked at payroll taxes and how much that would go up for employers. We looked at the raises that would go to workers who earn more than the–that would be earning more than the minimum wage, that is, more than $6.75 [incompr.] little bit of a boost from the minimum-wage increase. We added all that up and we compared that to businesses’ sales revenues. So that’s sort of the capacity, what they had to work with to cover these costs.
What we found is, for the average business in Arizona, that the cost increase would be less than 0.1 percent. And so if you want to think about it in real concrete terms, businesses, by raising their prices by less than 0.1 percent, would be able to cover all the costs of a minimum-wage increase of a size of 30 percent.

Further reading in connection to Europe can be found here.

Elizabeth Warren can be found at Senate hearing asking food industry representatives about their claims there is a significant impact:

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Minimum wage…who and how much??

Spencer England has written about minimum wages and employment,

and Minimum wage and employment from 2008 and Teen unemployment and the minimum wage

What the fiscal cliff means for the middle class and state and local taxes

Economist Robert Pollin, Professor of Economics at the University of Massachusetts in Amherst and founding co-Director of the Political Economy Research Institute (PERI), has a series on wages/employment and the minimum wage via Real News Network (they provide transcripts) here

Professor Richard Burkhauser has commented on President Obama’s call to raise the minimum wage to $9 an hour. And here’s what Burkhauser had to say:

President Obama’s call for an increase in the minimum wage to reduce poverty flies in the face of 30 years of evidence from Card and Krueger to Newmark and Washer that increases in the minimum wage have no effect on poverty rates.
Bob, the argument that Burkhauser gives is that most people working at minimum-wage jobs are not heads of families, they’re younger people in families that already have income earners, and that if you raise the minimum wage, it’s going to reduce the number of jobs available for young people who are mostly in these minimum-wage jobs and really do nothing about poverty levels, because the main bread-earners are already earning more than the minimum wage, he argues. He says that’s the evidence for 30 years. What do you make of that?

POLLIN: Well, that’s not the evidence that I’m familiar with. The evidence that I’m familiar with, having studied living-wage proposals, minimum-wage proposals around the country at state levels, at municipal levels, and national levels, the evidence is the overwhelming majority of people who are at or near minimum-wage levels of wages are not teenagers—let’s put it that way. They’re—the median age is roughly in the 30s. Most of the people have been at their job or at similar jobs for over a decade. They are on their long-term employment trajectory; they’re not about to jump up to some middle-income job as soon as they get out of college.
That doesn’t mean that there aren’t teenagers. The number of teenagers in the labor force are disproportionately at or near minimum-wage jobs. But the majority of people at or near minimum wages are not teenagers.

Now, there is another point. There are many cases in which teenagers or young people who are working at or near minimum-wage jobs are part of families that are above the poverty line, and some of my own research has shown that in fact the contribution of the teenager is what significantly helps to bring the family above the poverty line…

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John Boehner Should Travel More. To Australia.

Yesterday, both sides drew their battle lines in the coming war over the minimum wage. After Obama called for a minimum wage hike in his State of the Union speech, House Republicans dug in against it, casting their opposition as grounded in concern for the plight of low wage workers. John Boehner asked: “Why would we want to make it harder for small employers to hire people?”

Dems to use minimum wage against GOP in 2014, Greg Sargent, Washington Post, this morning

To me, one of the great frustrations in Obama’s failure during most of his first term to communicate, effectively or at all, the basic premises of Keynesian and other liberal economics-related arguments (including on healthcare) was his apparent resistance to mentioning–early, often, or ever–specific other countries’ successes or failures that illustrate the point.

But there’s no time like the present for him and the congressional Dems to start to do do this, by maybe mentioning these facts: that Australia’s minimum wage is $15 U.S. and that its unemployment rate is 5.4%, and that the United States has (surprise!) the largest gap between the minimum wage and the median wage of any advanced economy in the world.

I learned those facts yesterday when I read Washington Post columnist Matthew Miller’s Feb. 6 column.  He mentioned it and linked to it in his column yesterday about Obama’s State of the Union address.  In yesterday’s column, he suggested seemingly, facetiously, that it was his February 6 column that had persuaded Obama to include a minimum-wage-hike proposal in his address.  But after reading the earlier column, I suspect that it was not only what convinced Obama to make the call but also was what caused Obama to even think of it.  

Both of Miller’s columns say that the $9/hr. figure that Obama proposed in his speech would still leave the minimum wage at $1.68 below what the value of the minimum wage was in 1968.  The first column, Miller also mentions that several CEOs of large corporations support a rise in the minimum wage and that a prominent conservative, the editor of American Conservative magazine, suggests raising the minimum wage to $12/hr.  Of course, the Republicans will showcase their own CEOs, and some small-business owners, to support their own position.

Which is where Australia comes in.  Or at least where invoking it should come in. The special beauty of using Australia as an example–whether in support of an increase in the minimum wage or in refuting the Obamacare-is-socialism/makers-vs.-takers mantra–is that few Americans associate Australia with, um, socialism.  They associate it instead with free-enterprise economics and a high standard of living.  And soon, hopefully, also with a higher minimum wage that corresponds to a low unemployment rate.  

Maybe Marco Rubio and John Boehner could get a travel discount if they booked their reservations together.

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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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Unfounded Obsession With the Greek Minimum Wage

by Rebecca Wilder

Unfounded Obsession With the Greek Minimum Wage

The Greek minimum wage is apparently a point of contention between the Troika (ECB/EU/IMF) and the Greek government. The NY Times cites competitiveness gains as a rationale for the minimum wage cut:

The goal of any pay cuts would be to help make Greek workers, who are generally less productive than workers elsewhere in Europe, able to compete more effectively inside the euro zone, where countries share a common currency that does not allow devaluations to help even out differences in labor costs.

Huh? See below. The going line seems to be that the Greeks are lazy. They earn minimum government-negotiated wages without actually doing a whole lot because they’re uncompetitive. This is wrong; the data do not support this view.
First, the Greek people aren’t lazy at all. In fact, Greek workers spent more hours working 2010 (in annual hours actually worked per worker) than those in Chile, Hungary, Czech Republic, Poland, Estonia, Turkey, Mexico, Slovak Republic, Italy, the US, New Zealand, Japan, Portugal, Canada, Finland, Iceland, Australia, Ireland, Slovenia, Spain, the UK, Sweden, Luxembourg, Austria, Belgium, Germany, Norway, and the Netherlands – and in that order. (You can download and view the data from the OECD 2011 Employment Outlook.) Marc Chandler also highlighted this fact back in January.


Sure, one could argue that the Greek workers work a lot of hours, but it’s for less output. Furthermore, labor costs have risen substantially relative to other Euro area countries, so the country’s worse off. That’s the uncompetitiveness route. If you care about productivity and relative wage gains, why not look at the drop in Greece’s relative unit labor costs?
The chart below illustrates the average accumulated gain/loss in nominal labor costs (labor costs per hour) across the EA 12 in the run-up to the crisis, 2005-2008, and then since the recession, 2009-Q32011 (Finland data unavailable). By this measure, Greece is certainly doing what the Troika want of it: relative devaluation in nominal labor costs. Since 2009, Greek labor costs have fallen 5.3%.

(Note: the data are constructed as the percentage gain/loss of the average 2008 quarterly labor costs over the average of 2005 labor costs versus the average of Q4 2010 to Q3 2011 labor costs over the average 2009 quarterly labor costs, all working-day adjusted.)

French and Austrian labor costs appreciated 12% and 10.7%, respectively, spanning 2005-2008, and another 5.7% and 4.0%, respectively, since 2009. In Ireland, the 1.8% average reduction in labor costs since 2009 pales in comparison to the 2005-2008 14.7% surge. Greece saw a lower accumulated gain in labor costs spanning 2005-2008 than most countries and cut labor costs since 2009. The ‘wage’ cost anger towards Greece seems to be misdirected.

Now I’m really wondering what is this obsession with the Greek minimum wage? True, the Greek minimum wage did rise 0.8% spanning 2010-2011 (you can see Eurostat data here). However, as a proportion of average monthly earnings, the 2010 minimum wage in Greece is roughly in line with other program countries, Ireland and Portugal, and lower than that in France, Luxembourg, and the Netherlands.

Only in 2011 do Greece’s policies stick out when monthly minimum wage as a proportion of average monthly earnings surged to 50.1%. However, simple calculations demonstrate that for Greece the higher 2011 ratio of minimum wage to average monthly earnings was largely a function of falling average monthly earnings, -18.7%, rather than the rise in the minimum wage, +0.8%.

Perhaps I am not understanding things clearly here – I am sure that you all will correct me if I am not – but what’s this obsession with minimum wages? It looks to me like the fiscal austerity driven recession is indeed resulting in a reduction in Greece’s relative labor costs irrespective of minimum wage policy. Isn’t that the point?

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