In the comments to my last post, reader Peter Schaeffer provides exactly what I asked for: a breakdown of the discrepancy between 30 per cent growth in US household income over the last 40 years and 117 per cent growth in income per person. In addition to the factors I’d mentioned (falling household size and growing inequality) Schaeffer notes two more: the fact that GDP has grown faster than national income and the fact that prices faced by households (the CPI-U-RS) have risen faster than the GDP deflator. He provides the details to show that this fully explains the discrepancy.
What should we make of this. As far as the situation of the average American is concerned, the only correction we need to make to the household income figures is to correct for changes in household size. That makes the increase over the last 40 years about 63 per cent, or an annual growth rate of 1.2 per cent. By contrast, the 117 per cent growth in GDP per person implies a rate of just under 2.0 per cent. So, changes in GDP per person (let alone changes in total GDP) are essentially irrelevant as a guide to how the average household is doing.
And of course, the poor have done much worse. Household incomes for the bottom quintile have barely moved for decades. Growth in consumption has been driven largely by increasing access to debt, a process that now looks to have run out of road. That would seem to indicate a looming social crisis. But the coming election will still turn on whether Obama called Palin a pig.
John Quiggin 
Here is my sidelined cabdriver megalomaniac plan to end so called “inequality” (I prefer the “Great Wage Depression”). The real point of the following is: if an old high school educated cabbie like me can hatch a reasonable sounding labor bounce back program out for pretty much boiler plate ideas (no mission from Mars or Marx stuff), then, every economic professional out there ought to have one (or more) comprehensive plans of their own.
*******************************
How to legislatively (re)impose a fair and balanced American labor market:
First, double the minimum wage to $13/hr over three years (a dollar every six months?) — and — legally guarantee inflation adjustments for incomes under $100,000.
Doubling the minimum wage could potentially add an average 50% more pay to below 50 percentile earnings ($13/hr being today’s 35 percentile wage) — accompanied by only (an easily computed) 3%* direct price increases plus perhaps (?) 3% more after other wages are pushed up — a minimum wage-force multiplier.
Next, legislatively introduce French-Canadian style (lite) sector-wide labor agreements to the US labor market (airline and supermarket employees would kill for sector-wide contracts) — and — legally mandate union certification and re-certification elections (every four years?) at every work place (periodic re-certification could clean up the most common objections to unions: entrenched, complacent or even corrupt leaderships).
Top 10 percentile incomes enjoy 40 percent of the take these days (up from 27.5% in 1973) — plenty of headroom there for the mid 50-90 percentile to rake back more missing share points through higher labor prices — a collective bargaining-force multiplier.
Finally, (at least temporarily?) hike marginal tax rates (75% over $500,000, $1,000,000?). Folks earning 2500% more than folks doing the same work 25-35 years ago will not return all the way to earth through 12.5-25% price increases — erode a force multiplier.
America’s lower 90 percentile earners never think to impose legislative hegemony to recoup the 12.5%** income share they have lost to top 3 percentile since 1973 — their unemployed force multiplier.
* http://ontodayspagelinks.blogspot.com/2008/08/3-cost-of-gdp-output-and-inflation.html
** http://ontodayspagelinks.blogspot.com/2008/08/income-share.html
If Obama cannot get the momentum back the pig with lipstick comment will be a defining moment. However the nasty things in Alaska about the patronage and poor economic management under Palin may begin to infiltrate the minds of the poor and the middle class under pressure – if the Democrats are able to articulate it.
The willingness of the US citizens to vote for the interests of the rich over their own families and communities shows the benefits to the Republicans of a strong religious base in politics where belief will outweigh evidence.
It is amazing that Palin who sounds like a better looking version of Bush can portray herself as a maverick and get political credit for it. The true American dream of style over substance.
You really think the road has run out? I doubt it very much. The king of the printing press Ben Bernanke seems quite content to keep the managed price of credit at 2%. He has well and truely capped the one price signal that might otherwise tighten belts. It is not as if we can expect a functional credit market when the price of credit is not free to float.
I didn’t intend to take up so much bandwidth today, but, I am sort of from the greatest raped generation who were cheated of our economic lives before we realized what was slowly happening (most don’t understand it yet), but:
If you want “non-liberals” (I am prolife and prowar myself) to vote in their own economic interests: IT MIGHT HELP IF YOU ACTED LIKE YOU WERE ACTUALLY CONCERNED ABOUT THEIR ECONOMIC INTERESTS! Charity could very plausibly cover a multitude of your “wicked” liberal sins. 🙂
Come up with a real comprehensive plan to reverse their fallen conditions — not the “bone-throws” of Obama’s $9/hr minimum wage (in 2008 money by the time it ever gets voted in): a dollar behind LBJ’s 1968 min — not the Dem’s merely expanding on the card check retread, spotted by some sharp labor lawyer, buried in 1930s legislation and almost never used.
Come up with the full quantum jump needed to American labor’s bargaining power back in the economic — and political — driver’s seat: a minimum wage that is 30%* ahead of LBJ’s 1968 level; double the average income later — a truly up to date unionizing law, perfectly designed to cancel out the race to the bottom pressure from ownership: sector-wide labor agreements — as practiced in third, second and first world economies: unheard of here!
Supermarket workers (now being two-tiered by Wal-Mart entering retail food) and airline workers would kill for sector-wide legislation. Obama’s and the Dem’s plans would not be acceptable in poorer times or in poorer places than 2008 USA.
******
*LBJ’s minimum wage was about 75% of what I call the real average wage. Today’s fed average wage report is $17/hr.
If you divide the $14 trillion GDP by 2/3 to get personal income you get $9.4 trillion. Divide that by 280 billion hours (140 million worker X 2000 hours) you get $33/hr — w/part-timers, probably closer to $35/hr. Strip off capital income and you probably get $25/hr. The fed must not be counting execs or something.
I am advocating a $13/hr minimum wage that is half of what I call the real average wage.
If you figure LBJ’s real average must have been half today’s — about $12.50/hr — then LBJ’s minimum wage was 3/4 of 1968’s real average wage — quite a push; makes you wonder how far you could push it today.
crowdsourcing does work: in politics it’s called d-e-m-o-c-r-a-c-y.
i suspect the real charm of democracy is that it must be done in public. very hard to be crooked or incompetent with the whole nation looking over your shoulder, and having the power to say “stop”.
of course, there is much talk about ‘transparency’ nowadays, but in a society where government and business routinely slap ‘confidential’ on their activities- it’s just talk.
Denis Drew,
The notion of a national legislated minimum wage is daft old socialism. In so far as there should be any legislated minimum wage it should be set on a regional basis so as to accomodate variations in living costs, variations in age demographics, variations in unemployment and most specifically variations in the market clearing price for labour.
Take Australia as an example where the minimum wage is now around A$13. To suggest that this figure makes equal sense in the inner cities as it does in the suburbs or in regional towns let alone remote regional communities given the huge variations in housing costs makes no sense. Compound this with the fact that the inner cities generally have high employment prospects and remote economies have low employment prospects but typically higher costs to business in other regards and it makes even less sense. Legislating a single nation wide minimum wage creates regional unemployment and casts the burden of adjustment for this onto the welfare system and onto population movement. The former merely accomodates the problem whilst the latter breaks up communities and erodes the factors that might otherwise strengthen civil society in the regions.
The ALP answer to these issues has always been greater investment in education (ie raise the market price of labour), which is fine in so far as it works but brutally indifferent when it doesn’t. The Liberal Party response of recent years has been to whip people who take welfare whilst also increasing the range of welfare options available and essentially doing nothing to dissuade illusions about the minimum wage.
One thing they got right in constituting the EU is the effective ban on any harmonization of the minimum wage.
Why anybody would wish to impose a policy that creates unemployment (often double digit) in those communities that are the most economically challenged and typically the most socially challenged already is beyond me. It seems to entail a form of morality that is entirely indifferent to consequences.
TerjeP,
Socialism? Don’t remember making any suggestion for the oppressed 🙂 to seize the means of production. The minimum wage is a bargaining demand in a free market and if it is met the utility of the labor is worth the cost.
If labor was paid less before the minimum wage hike then labor was not getting the max its utility was worth — which doesn’t sound more efficient than the previous condition to me.
Now for recent American labor market history — very weird:
There is a maximum pay labor can command and a minimum lower than which workers wont show up. The American minimum wage until last June was so low that it was way below the LOWER line. About the only workers who would show up (in my fast food experience) were Mexicans (and in SanFrancisco) Chinese.
Way back around 1991, BusinessWeek reported that McDonalds had a 70% employee turnover every 90 days. For years now I see the same smiling Mexican (and Chinese) faces behind the counters.
Recently the state of Illinois took it upon itself to raise its minimum to $8/hr. Since then I am beginning to see some young black and older while faces behind my local counters.
Oh, and there has been a definite uptick in business — all in the foreign born clientele end — since the raise. Seems minimum wage workers tend to patronize minimum wage businesses (fast food not four star).
Which brings up another point: the wheels within wheels aspects of an economy. Raising one person’s wage and not another shifts income from one to the other (just as inflation shifts wealth from creditors to debtors).
As a matter of fact that is exactly what the minimum wage does — with a powerful multiplier effect: a 1% increase in cost to you (in the American economy) yields a 33% increase in pay to the minimum wager (fast food is more like 11% to 33%) — because the bottom has dropped out from under low end American pay (Chicago cab driving literally pays HALF! what it did when I showed up here in 1980 — why I moved to liberal SF — meanwhile average income grew over 50%).
Uniquely in the American economy labor let its bargaining power slip for the last 35 years – meantime top earners learned to bargain like never before (“Barry McGuire). 12.5% (one-eighth) of overall income shifted from the bottom 90% to the top 3%. Top 1% now get 4X the income share for the same work they did 35 years ago — top .1% get 25X.
Its just physics. Squeeze all the way up the toothpaste tube without any squeeze back: it all come out the top. I don’t blame the top for taking what the bottom was too sleepy to want.
My minimum wage proposal is just the BEGINNING of squeezing that toothpaste back where it belongs. Modern unionizing is the second step in chain shifting income from the top.
As a practical matter (not theories) a $13/hr minimum wage that is one-half of the real* average wage ($25/hr) is very practical. In 1968 the minimum wage was $10/hr when the real* average wage was about $12.50/hr: three/quarters of the average wage!
Theoretical ideal, the minimum would be higher here and lower there — in practical experience there just doesn’t seem to be any problem with a nation wide minimum wage, which is a heck of a lot better in any case than a minimum wage that, until last yea,r was the same as the 1939 minimum wage ($4.50/hr w/no taxes in 2008 dollars — seems a lot of practical headroom there doesn’t it?) If you insist on local adjustments go to the full fledged (German style) sector-wide labor agreements system (sometimes called de facto minimum wages — I’d be all for it here).
*The fed reports $17/hr average wage — but I get $33/hr if I divide $9.4 trillion (2/3 of GDP) of income (counting capital gains: everything) by 280 billion hours (140 million workers X 2000 hrs). Probably comes to more like $35/hr with part-timers. Anyway, knock off $8/hr for capital income and you get $25/hr (which I have seen recently somewhere). The fed number is only averaging about half of all income so it is not the number that we need.
You seem to have side stepped the point I was making which was that “one size fits all” is a poor approach.
True in some instances but not in aggregate unless after introducing a minimum wage the same number of hours of labour in total are purchased as before the increase. A casual glance at a typical demand curve suggests that this is unlikely. In practice the point at which capital is used to displaces labour will be shifted, although no doubt with some delayed effect. Ultimately some of the previous workers will now have better paid jobs and some will have no job at all. In so far as there is a reduction in output there will be a secound round downward effect on the market price for labour, although in practice this would typically be marginal (but still in the wrong direction). Your anecdote suggest that the mexicans are the ones that lose out in such situations but the social implications of this doesn’t seem to bother you.
I presume you see some upper limit to the minimum wage. For instance I suspect that you would clearly see $50 per hour as a minimum wage as being unrealistic. And yet you think that there is one number that can fit the entire nation. There isn’t one number, and in so far as you choose one for the nation it will either be so low that it is completely irrelevant or else too high for some regions.
In the USA there is no case for setting the minimum wage at the federal level. If it should exist at all then it is better set at a state level or even at a local government level. In this regard the decentralised approach of Canada or the EU would be a better model to follow.
Likewise Australia should not have a single minimum wage. We could have a central wage fixing body that sets the minimum wage rate for the regions or we could enable the local governments to set minimum wages and wind down the national minimum in the process. So for example the national minimum could be reduced by 5% per annum for the next 20 years and local governments could fill the void. I suspect that local communities would on average do a better job of balancing the various considerations.
PrQ,don’t know the etiquette, but perhaps worth a more direct link/post of the answer & your comments on the Economist’s View thread.
TerjeP,
All I can say is that on the practical level you have it all mixed up. You say “in practice” and they you roll out what sounds very much like pure classroom theory.
In fact we are having a Great Wage Depression here in the US — incongruously reported as “inequality” which sounds like the few exploited by the many. You gloss over this extravagant pay shortfall while I like hundreds of millions of Americans are just waking up to the fact that we have been getting economically raped (we could have been paid MUCH more) for most of our working lives (Chicago cab drivers now earn about half the hourly wage I earned — adjusted for inflation — 28 years ago; at this point mid-easterners don’t even show up for the job anymore, mostly only Africans). I am 64 and I am not talking classroom theory.
In fact we had a $10/hr minimum wage in 1968 when that represented 75% of what I call the “real” average wage (apparently you read too fast or you would not have to say “you suspect” I would not support $50/hr — $35/hr is about all you could squeeze out if you wanted to pay everyone the same wage and included capital income in the squeeze).
In fact we had 3.7% unemployment in 1968 (there was a medium size war on but it did not take even a million extra men out of the workforce at a time of the universal draft). In fact we never experienced this need for a carefully adjusted local minimum wage in practice — hinting that there is a lot of headroom in bottom wages; meaning they may not even be close to what they could command even with the minimum wage (AS LBJ SHOWED BY TAKING THE MINIMUM TO 3/4 OF AVERAGE).
Just keep repeating to yourself over and over: the Great Wage Depression, the Great Wage Depression, the Great Wage Depression — instead of inapplicable (because IMAGINING the minimum wage anywhere near the margin) schoolboy formulas.
Terjep,
I invite you to read “75% OF AMERICAN WORKERS DON’T HAVE DECENT WAGES AND BENEFITS”* on Barbara Erenreich’s website based on a CEPR report** — if you want to know what is actually plaguing American labor in the real world — as opposed to scary sounding formulas so out of touch with Americas all out of proportion income distribution that they amount to kindergarten stuff. The money is there all right; we just fell asleep at the bargaining wheel and veered right off the fair share highway.
* http://www.barbaraehrenreich.com/decent_wages.htm
** http://www.cepr.net/publications/labor_markets_2005_10.pdf
JR
JQ’s last sentence and your comments are so scarily on the money that it hurts to think about it. And the current financial meltdown, entirely a product of Bush’s mismanagement of the country, may very well be the vehicle to keep republicans in power as the American wealth ideal clings to the party of hope, rather than reason. There is a very good article on the BBC about how Bush’s haphazard policy decisions may well lead to the International Space Station being left uninhabited for five years.
It is almost as if the the real “west wing” has moved to Hollywood and the Police Academy 5 cast have moved into the White House and are running the country. And the Police Academy 6 cast are auditioning right now.
Denis,
The US 3.7% unemployment figure you quote from 1968 is not so different to Australias current unemployment rate. However a low national unemployment rate still leaves plenty of scope for some horrid regional unemployment rates. Some communities in Australia have unemployment over 40% in spite of a low national average. Those communities should not have the same minimum wage. And they are not living in a textbook.
“True in some instances but not in aggregate unless after introducing a minimum wage the same number of hours of labour in total are purchased as before the increase. A casual glance at a typical demand curve suggests that this is unlikely.” – Terje
Except that “typical” demand curves assume there’s no market power held by either party.
In practice, employers have a very significant advantage in market power and can use it to maximise their own surplus (but not output or economic growth) by keeping wages below the market-clearing rate.
Raising minimum wages forces employers to dismiss less productive workers. This would consequently have the largest effect on those with the least education, job experience and maturity. This would include, teenagers, some ethnic groups, poorly educated and elderly.
How does the minimum wage give these groups of people the opportunity to earn a living? This dosen’t even start to address the social consequences of unemployment on our society.
Ubiquity – you know about the New Jersey basic wage study, don’t you?
It’s the one where an increase in the basic wage in the fast food sector led to an increase in employment.
Most of the empirical evidence says that moderate shifts in the minimum wage has minimal impact on employment and the impact can be either positive or negative.
Ubiquity,
In the real world of American anyway we have:
One, a minimum wage that up to last year was actually at the 1939 Great Depression level; Two, a modern prohibition, drugs (instead of alcohol). Upshot: a vast proliferation of dangerous criminal gangs — only this time instead of the gangs being Irish, Italian and Jewish, they are Black and Hispanic. The Crips and the Bloods would disappear if the minimum wage were half the real ($25/hr) average wage: and would not want to (there is plenty to go around)!
Economies have a use for those with “the least education, job experience and maturity” (probably even you! :-]). Money can be made hiring everyone in sight as long as labor prices don’t get out of sight (there is plenty to go around). Experience shows we rarely even approach that level — even CEOs and ballplayers and news anchors who earn 25X what they did 25 years ago still get employed.
When was the last time you heard of high unemployment blamed on high cost of labor? Keynes pointed out that absolutely the wrong move to make in a depression was to lower pay in attempt to hire more workers: just drops demand and makes things much worse.
You and TerjeP (and almost everyone in America) have this notion that everything is pretty much normal and messing with the status quo is very tricky. Just imagine a crazy scenario where the minimum wage dropped in half while average income doubled. What happens in the real world is tens of millions of folks get so poor that they never get educated and reach their potential. Of course that is exactly what has happened in the USA over the last 35 years!
It nice to throw around 101 theories. One of my favorites is the famous price/demand graph which “proves” that raising the minimum wage will cause unemployment: if you raise the price people buy less right? Yes; but if all the “other people” already got THEIR inflation raises ALREADY (the minimum raises always FOLLOWS inflation), then demand has already grown (more dollars chasing the same number of hamburgers) and it is time to raise the price of hamburgers to pay the flippers more (in nominal terms — in real terms too to keep up with real growth).
Meantime, you have to have a day to day grip on the real world to know what a reasonable minimum wage range is (half the real average wage happens to work out without the sky falling) — right now in American the minimum is so low that only the tired, poor and huddled masses yearning to get a foot in the door are willing to be so taken advantage of!
All these anti wage raising arguments are basically Malthusian and don’t take into account that per capita output grows 15-20% every decade (not even counting 3DTV for the same $600 and flying cars for the same $25,000 when they get here — the free gifts of technology not counting in the CPI. There is lots MORE to go around all the time — don’t be a Scrooge.
Ubiquity : “Raising minimum wages forces employers to dismiss less productive workers.”
That would be true if employers hired people for the fun of it and didn’t care about the balance sheet. In the real world employers don’t employ workers unless they need to and when they need to they do.
Its laughable to think that any worker is worth no more than $6.55 an hr
Thankyou for your conmments and I am better informed for them. In response however,
In my opinion unemployment is a bigger problem than low wages.
I am certainly not Malthusain,If anything I am anti-malthusian. To quote a famous malthusian, however, Alexander King, founder of the Malthusian Club of Rome: “My own doubts came when DDT was introduced. In Guyana, within two years, it had almost eliminated malaria. So my chief quarrel with DDT, in hindsight, is that it has greatly added to the population problem.” Definetly not me.
Scrooge has certain qualities I can appreciate. His stinginess has the quality of conserving resources, which means more for the rest. I may not like his personality but the quality of “scroogeness” is better than one of a glutton.
In regard to the Jersey basic wage study, it had a questionable format,
1. Done in the late 1990s — an era of economic boom.
2.It only did a study on fast food restaurant workers.
3. It didn’t separate teenagers with less productivity from adults with more experience and higher productivity.
4. Finally, they didn’t use employment data of the fast food restaurants themselves but instead chose to use labor department statistics.
So it could have gone either way really.
Ubiquity,
On the Jersey study: SHOCK and SURPRISE! Fast food restaurant labor costs are about 10X! higher than typical labor costs — and they are MOSTLY minimum wage. If fast food restaurants can handle a minimum wage raise, any other business should be able to.
Also, I would rather hire a higher productivity teenager than an 64 year old coot like myself. 🙂 Got to stop imagining low end jobs are astronaut (star voyager) jobs.
******
Unemployment worse problem than low pay? My experience with low pay — or should I say with lower and lower and lower pay as a cab driver in the American powerless-labor labor market:
Between 1991 and 1997, Chicago allowed only one 30 cent raise in the meter — at which 1990 point, Chicago began building subways extensions to both airports, opening up unlimited limo licenses and (not the last straw but the coup de grace, the shot in the head) putting on free trolleys between all the hot spots down town (progress?; fine, but why did they have to?) at the same 1990 point Chicago BEGIN ADDING 40% MORE TAXICABS (from 5000 to 7000 — still putting on 50 more every year to make money selling the medallions).
Meantime, back in New York City (where I came from in 1980), by 2006 the taxi meter was only $1.50/mile — down from $2.25/mile (in 2006 dollars) from 1974, after a successful strike after which successful strike the industry switched over to the lease system and drivers became “private contractors”, successfully breaking up the union. This as average income soared 65%; this in the one place in earth history (Manhattan island) where wealth is a plateau not a pinnacle.
Like fast food which no American born worker would any long show up for, the taxi jobs are no longer filled by American born workers — low pay has become so bad in Chicago that pretty much only Africans (from the very poorest place in the world) will take the job. That is the unemployment I suffer. I had to take my taxi driving to San Francisco where they are so liberal that they treat you like you have a union even if you don’t.
If you were a lower end worker going out into the world I suggest would you feel you could come up with a job eventually if you were persistent — would you not rather have a high paying job once you got it? Ask the minimum wage workers if they want a giant raise — the minimum wage is a bargaining demand made for them in a free market — their desire should rule as long as reasonably plausible (don’t be a paternalistic liberal deciding what’s good for them by denying them a big raise :-]).
Don’t be over impressed by stories of a few pockets of depressed employment — that is always going to happen in big economies and big nations change: can’t slow down the whole workforce’s wages for them — let them move; that’s history. When the mines play out or the steel mills move overseas (or farming goes mechanized) move to where the action is.
If we were not discussing any action but just shooting the breeze abstractly, I think you might agree that if the USA could pay a minimum wage of $400/wk (2008 dollars) in 1968 (at half today’s average income), then, the USA could “probably” pay a minimum wage of $500/wk in 2008 with no big strain. I say “probably.”
If I can con you into “probably”, then, I have conned you into agreeing that a great economic tragedy has “probably” taken place (my Great Wage Depression which I thinks speaks better than mere inequality). We only have to look around to see that in the USA labor bargaining power has been allowed to evaporate, to lapse to zero — to guess what the cause “probably” is.
This wage depression (if you will) is a lot greater tragedy than any few extra points of unemployment suffered in Europe. And the difference in labor bargaining power is not the cause of the difference in unemployment stats. If the USA imported Europe’s can’t fire anybody once you hire them over-regulation and Europe’s putting everyone on the automatic dole when out of work that would result in a great disaster here: would certainly add a couple or few points to our unemployment ANY CONSERVATIVE WOULD ARGUE.
Meantime Americans work 50% more hours per capita then Germans and our bottom 90 percentile anyway take home a lot less in pay and benefits (while our CEO’s take home 25X more than they did 25 years ago — the CEO of Mercedes was raised from $3 million a year to $12 million when they took on hapless Chrysler). Pay, pay, pay is the problem over here — not a few inevitable pockets of unemployment.
Mostly on the minimum wage:
On the Jersey study showing fast food jobs were NOT lost when the minimum wage was raised: SHOCK and SURPRISE!; fast food restaurant labor costs are 10X! higher than typical labor costs — and use MOSTLY minimum wage labor. If fast food restaurants can handle a healthy minimum wage raise, so should any other business.
Don’t become over anxious from stories of a few pockets of depressed employment that a higher minimum wage supposedly would keep going — such are always going to occur in big economies and big nations change: can’t drag down the whole workforce’s wages for the inevitable few (Keynes — in a possibly related situation — showed that lowering wages in a depression actually keeps the downturn going) — let them move to where wages are better; that’s economic history. When the mines play out or the steel mills move overseas (or farming goes mechanized) you can only move to where the action is.
If we were not discussing any immediate legislative action but just shooting the breeze abstractly, I think most might agree that IF the USA could pay a $400/wk (2008 dollars) minimum wage in 1968 (at half today’s average income yet), then, “probably” the USA could pay a minimum wage of $500/wk in 2008 without any strain. I say “probably” — at the least very possibly.
If I can con you into “probably”, then, I have conned you into agreeing that a great economic tragedy has “probably” — at the least very possibly — taken place (my “Great Wage Depression” which I thinks speaks better than mere “inequality” which sounds like the few taken advantage of by the many). We only have to look around to see that, exclusively in the USA, labor bargaining power has been allowed to deteriorate, to lapse to near zero (more a culture of complacency than exploitation) — to make a good guess what the source of the wage depression “probably” — or at least very possibly — is.
I don’t agree with the war on drugs (see link #1 below) however it illustrates an interesting point. Many front line workers in the drug industry work for less than minimum wage. It seems reasonable to suspect that they would work for the same wage in a legal industry if not for the fact that it was criminal to employ them at that rate. If it it is illegal to get a job that pays your marginal utility then you can always try out for an illegal job. However why would we want to impose rules that get people aclimatised with criminality.
Making people move in order to defend a universal enforced minimum wage seems daft when you can simply have regionalised minimum wages that are taylored to suit local circumstances. It also seems to ignore real social and economic costs. Communities get pulled apart when populations are required to move and capital and infrastructure gets abandoned. In instances where economic circumstances are merely trasient, all be it sometimes decades long, a lot gets wasted and lost in the process. Sometimes it is worth while letting go of sunk costs however it is silly to cast the burden of adjustment onto the relocation process by enforcing a specific minimum price for labour when people who really don’t like the price their labour is paid are generally able to fix it by moving anyway. Why force people to make trade offs that they are quite capable of doing so without coercive laws?
I stand by the view that minimum wages laws should be set on a regional basis not on a centralised national basis. If you want to save people from low wages then a taxpayer funded social wage (or negative income tax) would make more sense than creating unemployment via wage regulation.
#1 http://alsblog.wordpress.com/2008/03/04/heroin/
“It seems reasonable to suspect that they would work for the same wage in a legal industry”
Well sure – if the legal industry also offered them the possibility, however remote, of becoming a millionaire within a decade or so.
The drug industry, like pro sports and acting, is an example of a “champion market” in which people accept low wages in exchange for the chance to win big.
TerjeP,
Please read the next section carefully because it is obvious you have the language or the eighth-grade math confused:
What I propose by doubling the minimum wage (to all of 30% higher than 1968 in real terms, double the average income later) is making it illegal to hire drug workers (if you will) for LESS than they are willing to show up for.
Example: drug workers who are making $10/hr to sell drugs (about the 1968 minimum wage level — at 3.7% unemployment, lowest ever) will not show up for $5.15/hr.
OTW, ownership will very plausibly pay $13/hr if it has to (see 1968). It is a matter of proportion that you miss on thinking $13/hr unrealistically high — if you look at the overall pay rate in the economy (real average wage $25/hr — 33% increase in the minimum wage adds only 1% to cost of GDP output) you may come to the realization at last that the minimum wage and lower end American wages are absurdly out of line with what they could be (low).
As for your regional minimum wages:
Each of the 50 states contains within them the entire range of situations you describe — maybe every town. Zillions of local (within local?) minimums might just cause chaos (or corruption?) — while the national minimum never seemed to cause any disruption in practice.
*********************************
And now for some boilerplate minimum wage ideas I hatched yesterday:
UNHEALTHY Motive For Opposing Minimum Wage Raises
I just checked out a research paper by one of those institutes that spend their whole existences defending low wage workers from minimum wage increases (as both inflation and average income boom) — for their own good. It is claimed by the study that a minimum wage raise in Sante Fe resulted in a small increase (3.3%) in overall unemployment (adjusted for something ??? — unemployment actually dropped nominally across the board), but resulted in a larger increase (8.3%) in unemployment for the least skilled.
This can mean — either — that lower skilled workers were priced out of the market, which would be self-defeating as charged — or — it could mean the raise returned the price of labor to the point where better skilled employees no longer stay away in droves, which is arguably very healthy.
One — arguably unhealthy — example of under-pricing better skilled labor out of the market would be the new two-tier supermarket contracts (which California supermarket unions fought so hard against and lost) On a recent trip to my local Jewel which used supply good middle class careers thanks to the union I realized that my (Haitian) packer could not understand a word of English. Ditto for underpricing labor to such a low point, $5.15/hr federal minimum wage (equivalent to FDR’s 1939 minimum), that only Mexican born (or in San Francisco Chinese born) workers will show up.
Another point forever ignored by both sides is that an 8.3% job loss while the minimum wage is being raised 66% from $5.15/hr to $8.50/hr (Sante Fe example) is a great trade off for workers.
If the consumers of labour are able to pay more for labour and they actually want more labour then why would they continue to pay a price so low that it causes labour suppliers to stay out of the market?
To use an analogy. We all want more ice cream, we are all able to pay more for ice cream, we would rather pay more than be without and yet nobody chooses to sell more ice cream because the price is too low. Somehow that doesn’t add up.
TerjeP,
The “labor suppliers” who are kept out of the market by a lower labor prices here are AMERICAN born workers who will not show up for $5.15/hr — only to be replaced by Mexicans who are ecstatic not be earning $1/day (what an American company recently moved to Mexico pays its workers to make washing machines). Imagine if Australia had a thousand mile land border with China — not very well guarded (immigration never arousing much excitement in the land of all immigrants: America) — one way you could keep labor’s price up for Australian workers might be a high minimum wage. Assuming your economy had a minimum wage it would certainly have to be kept high under the gun of tens of millions of illegal immigrants.
FOR WHICH NEW MINIMUM WAGE ARGUMENT I HAVE YOU TO THANK, TerjeP. Which is a big reason I always cross swords with you trolls — whole new arguments pop up. :-)-
“If the consumers of labour are able to pay more for labour and they actually want more labour then why would they continue to pay a price so low that it causes labour suppliers to stay out of the market?”
Because if they increased the wages on offer to attract additional staff, they’d have to pay the same higher wage to their existing staff.
Outut would increase but their profits would go down.
Also, you are assuming that employers make decisiosn rationally – in point of fact there’s a huge amount of evidence that humans don’t make economic decisions rationally. For starters, we know that people value potential losses and gains differently and are irrationally risk-averse.
In my own industry, I pay well above average wages. The result is that I attract and retain better staff and my busienss is much more profitable than my direct competirors as a result.
My competitors know this, they complain regularly about the difficulty of finding and keeping good staff (I turn away job applicants daily and haven’t had an employee quit in about 10 years.) Somehow, thr idea of matching my wages and conditions never seems to occur to my competitors.
Actually it would seem that you are when you say:-
You seem to be assuming that industries are made up of large singular players rather than a diversity of competing players many of whom are attempting to achieve greater scale and who will sacrifice profits in the interum. I suspect that few industries match your implicit assumption.
I’d also suggest that your experience in business (ie paying people more to get better outcomes) is typical of most employers. Driving down costs rarely involves paying the lowest wages possible. However I’d prefer to leave a marchet niche in which those people with skills or attitudes that don’t make them worth much to employers were still able to be profitably employed by somebody.
Your example is a case of employers discriminating in favour of Mexicans on the basis of price. If the price advantage is removed then typically ethnic minorities and foreigners (such as Mexicans in America) are usually the ones that suffer the most unemployment as well as the associated social exclusion. As such I agree that those from the social and ethnic mainstream may benefit from some wage regulations however it would come at a cost to the more hard up ethnic minorities. Such a policy is not my cup of tea.
TerjeP,
I am sure that just like every Karl Markets who endlessly defends the low paid worker against the dangers of a precipitous raise in pay imposed by government, you too must have a sincere heart. After all, when buying and selling replaced the lord of the castle’s commands as the director of economic life, how could such medieval people imagine that all the history of unjust attempts of men to eat other mens’ lunches would all end in a stroke — if the government will only not interfere with the automatic social perfecting process of, er, uh, buying and selling.
Your mocking me aren’t you? I suppose that means you have run out of steam on this topic.
Who is mocking? Just because the (imperial, medieval) government is no longer controlling 90% of the economy in the industrial age, all of a sudden the government is supposed stay way far out of the business of economic policy making or it will ruin everything!
After all the new system is…
…buying and selling.
Karl Markets is a play on words that suggests that unfettered market types are every bit as bereft of the doings of the selfish human animal. The same selfishness that has nowhere to go to invent and create positively under central planning gets loose and steals all in its wake under no planning economic at all. It’s a pretty good comeback for the types that yell socialism at everything and then don’t have to produce any logical argument (here in American anyway where everyone runs at the mention of the word).
“You seem to be assuming that industries are made up of large singular players rather than a diversity of competing players many of whom are attempting to achieve greater scale and who will sacrifice profits in the interum. I suspect that few industries match your implicit assumption.”
not at all – in fact it’s small businesses that are more likely to be risk-averse.
It’s also BTW, small businesses that have least flexibility in adding or firing staff.
Anyone who thinks small businesses can readily add or fire staff based on a $10 a week fluctuation in wages has obviously never run one.
Do I need to explain about straws and camels and how change happens at the margin?