Posts Tagged ‘minimum wage’

wage share-growth

We’ve been hearing this since the recovery from the Second Great Depression began: it’s going to be a Golden Age for workers!

The idea is that the decades of wage stagnation are finally over, as the United States enters a new period of labor shortage and workers will be able to recoup what they’ve lost.

The latest to try to tell this story is Eduardo Porter:

the wage picture is looking decidedly brighter. In 2008, in the midst of the recession, the average hourly pay of production and nonsupervisory workers tracked by the Bureau of Labor Statistics — those who toil at a cash register or on a shop floor — was 10 percent below its 1973 peak after accounting for inflation. Since then, wages have regained virtually all of that ground. Median wages for all full-time workers are rising at a pace last achieved in the dot-com boom at the end of the Clinton administration.

And with employers adding more than two million jobs a year, some economists suspect that American workers — after being pummeled by a furious mix of globalization and automation, strangled by monetary policy that has restrained economic activity in the name of low inflation, and slapped around by government hostility toward unions and labor regulations — may finally be in for a break.

The problem is that wages are still growing at a historically slow pace (the green line in the chart above), which means the wage share (the blue line in the chart) is still very low. The only sign that things might be getting better for workers is that the current wage share is slightly above the low recorded in 2013—but, at 43 percent, it remains far below its high of 51.5 percent in 1970.

That’s an awful lot of ground to make up.

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The situation for American workers is even worse when we compare labor productivity and the wage share. Since 1970, labor productivity (the real output per hour workers in the nonfarm business sector, the red line in the chart above) has more than doubled, while the wage share (the blue line) has fallen precipitously.

We’re a long way from any kind of Golden Age for workers.

But, in the end, that’s not what Porter is particularly interested in. He’s more concerned about what he considers to be a labor shortage caused by a shrinking labor force.

So, what does Porter recommend to, in his words, “protect economic growth and to give American workers a shot at a new golden age of employment”? More immigration, more international trade, cuts in disability insurance, and limiting increases in the minimum wage.

Someone’s going to have to explain to me how that set of policies is going to reverse the declines of recent decades and usher in a Golden Age for American workers.

Cartoon of the day

Posted: 18 September 2017 in Uncategorized
Tags: , , , , , ,

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Special mention

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min-wage

A couple of weeks ago, I published a guest post, by minimum-wage expert Dale Belman, about a controversial study of the effects of an earlier decision in Seattle to raise the local minimum wage to a level much higher than the federal minimum wage of $7.25 an hour.

Now, in Trump’s America, we’re seeing exactly the opposite: an attempt, on the part of the Republican-controlled Missouri legislature, to roll back local minimum wages to levels that are no higher than the state minimum of $7.40 an hour.

Of course, that’s already happened in other places, such as Ohio and Alabama, which affected minimum-wage workers in Cleveland and Birmingham. And, in all these places, Republican legislatures have used the arguments mainstream economists—but not most empirical studies—have offered them: higher minimum wages might seem to be the best way of helping low-wage workers but, since they lead to a loss of employment (either though dismissals or automation), workers earning at or just above the existing minimum wage are actually hurt.

Well, I’ve dealt with that argument many times on this blog, including a post I did in July of last year, in which I argued that employers’ profits were the real obstacle:

The fact is, when employers threaten to let workers go (or not hire additional workers) if the minimum wage is increased (or mainstream economists make the argument for them), they’re attempting to protect their bottom line. If they kept their existing workers, so the argument goes, their profits would fall; and if they wanted to maintain their current level of profits, they’d have to fire some of their workers and replace them with one or another form of automation. It’s all about pumping out the maximum profits from their employees.

Profits also enter the story in a second way. Private employers see the possibility of compensating for minimum-wage-related job losses—by offering workers public relief and by creating new jobs through public programs—as a challenge to their existing control over workers, jobs, and ultimately profits. That’s the second reason they oppose an increase in minimum wage, because they know full well society has the means to make up for their willingness to eliminate jobs. But then their own role in the economy and the profits that come from that role are called into question.

For both those reasons—the threat to fire workers and the threat to their monopoly as employers—profits are the real obstacle to raising the minimum wage.

Republicans and business groups in Missouri, as elsewhere around the country, are doing all they can to push back on the wave of municipal minimum-wage increases in order to safeguard those profits—with the same boiler-plate rhetoric:

“We can’t let the biggest economic engine in the state, St. Louis, become an island that employers avoid due to higher labor costs,” Missouri Chamber of Commerce & Industry President Daniel Mehan said in an interview Friday. Elevated city minimum wages would cost workers jobs, encourage businesses to automate, and create confusion along city borders, he said.

What makes Missouri unique is the higher minimum wage in St. Louis, of $10 an hour, had already been in effect for months before the state pre-emption law kicked in. And workers were already experiencing the benefits:

Bettie Douglas, a worker at a St. Louis McDonald’s restaurant, expects to take a pay cut this week, though she said her manager hasn’t informed her of a new rate. Before May, the 59-year-old received $7.90 an hour, she said. Ms. Douglas, an activist seeking higher minimum wages nationwide, earned about $63 more a week because of the higher wage floor, money she said allowed her to have her water turned back on and buy school supplies for her teenage son.

“It’s made a big difference,” she said Friday. “It’s still a struggle, but I had a little extra to pay my bills.”

Some employers will of course take advantage of the new law and roll back their workers’ wages. But others aren’t convinced it’s a good idea:

“People would be angry and then they wouldn’t do a good job and they’d be resentful,” said Harman Moseley, whose STL Cinemas operates four local theaters, including the Chase Park Plaza, Moolah Theatre and MX Movies.

Of course, workers are going to be angry and resentful—and perhaps even more.

There are, I think, a couple of lessons here: First, working-class movements to improve their lot can in fact succeed, making it difficult—but, of course, not impossible—to roll them back. Second, there’s a reason why working-class Americans are suspicious not only of their employers, but also of politicians and the government. That’s particularly true when politicians are so closely aligned with their employers.

My guess is both of those lessons will be put to the test even more in Trump’s America.

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As regular readers know, I have written about minimum wages many times over the years on this blog. However, after reading about the much-publicized study by Ekaterina Jardim et al., according to which Seattle’s decision to raise the minimum wage actually hurt low-wage workers, I decided to turn to my old friend and minimum-wage expert Dale Belman to see what he thought of the study. Dale is a professor in the School of Human Resources & Labor Relations at Michigan State University and coauthor (with Paul J. Wolfson) of What Does the Minimum Wage Do? I am pleased to publish his guest post here. 

Seattle embarked on an audacious policy change in raising its minimum wage from $9.47 to $15.00 over five years.* The first two increments, to $11 in April 2016 and $13.00 in January 2017, have gone into effect. This policy has notable positive effects for employed low-wage workers and also provides an “experiment” central to the ongoing debate over the employment effects of the minimum wage.

The conventional analysis of the minimum wage suggests that, in the face of a typical (downward-sloping demand curve), a higher minimum wage must cause a reduction in the employment of workers “bound” by the new minimum wage–those who currently work between the old and new minimum wage. However, since 2000, a large body of empirical research has found few-if-any employment effects for historical increases in the minimum wage. Although not universally accepted, many economists are increasingly open to the view that moderate increases in the minimum wage may be good policy for low- wage workers, increasing their earnings with negligible employment costs.

An important remaining issue is whether increases outside of the range of historical experience, such as the increases sought by Fight for $15, reduce employment. The Seattle minimum-wage increase provides data to test the employment effect. One study, “Minimum Wage Increases, Wages, and Low-Wage Employment: Evidence from Seattle,” by Jardim et al., uses Washington state unemployment data that, unique among such state data sets, provides not only quarterly earnings, but quarterly hours of work. This allows computation of the hourly wage. Using established regression methods, the authors report that the increase in the minimum wage to $13 resulted in a 6.8-percent decline in low-wage employment in Seattle. It should come as no surprise that this result reinvigorated the argument that the minimum wage causes large declines in employment, and has been widely featured in the Washington Post (but, interestingly, not the New York Times).

The results are not as decisive as portrayed by Jardim et al., as there are several unresolved methodological issues. The first is that the estimated elasticity of employment (the percentage change in employment for a 1% change in the wage) is well outside the bounds of prior research. Jardim et al. report an elasticity of -3. In contrast, the work of [first name] Neumark and [first name] Wascher, the most prominent researchers arguing for a negative employment effect, finds an average elasticity of -1. Jardim et al.’s elasticity is particularly unexpected since, although Seattle’s $13 minimum wage is high for the United States, it is not unusually high relative to Seattle’s wage structure. Second, the study finds the increase in the minimum wage is associated with a 21-percent increase in employment and hours among workers earning at least $19 per hour. Given that high-wage workers employment should only be marginally affected by the increase, this suggests the study does not properly account for the employment effects of Seattle’s booming labor market. Finally, the study excluded the 38 percent of Washington employees who work for firms with multiple locations. These employees cannot be included because the U.I. data does not record whether they work in Seattle. These multi-location firms, which tend to be larger than single location firms, may respond differently to the minimum wage than single location firms. If there is a shift of employment from single- to multi-location firms in response to the minimum wage, the large magnitude of the elasticity may well result from measuring only part of the relevant labor force.

The literature on the minimum wage developed “falsification” tests that can be used to determine whether or not an estimated results from spurious correlations. These include such issues as estimated results that may be well outside the range that could be expected from a minimum wage increase, whether the effect is found among groups that should not have been affected by the minimum wage, and whether the effect of the minimum wage is found prior to its implementation.

Until the authors include these tests in their research, we cannot know if their results do in fact represent a serious challenge to the emerging consensus on the employment effects of increases in the minimum wage.

 

*I want to acknowledge the work of Michael Reich et al. and John Schmidt and Ben Zipperer for the analysis of “Minimum Wage Increases, Wages, and Low-Wage Employment: Evidence from Seattle.”

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Mainstream economists have been taking quite a beating in recent years. They failed, in the first instance, with respect to the spectacular crash of 2007-08. Not only did they not predict the crash, they didn’t even include the possibility of such an event in their models. Nor, of course, did they have much to offer in terms of explanations of why it occurred or appropriate policies once it did happen.

More recently, the advice of mainstream economists has been questioned and subsequently ignored—for example, in the Brexit vote and the support for Donald Trump’s attacks on free trade during the U.S. presidential campaign. And, of course, mainstream economists’ commitment to free markets has been held responsible for delaying effective solutions to a wide variety of other economic and social problems, from climate change and healthcare to minimum wages and inequality.

All of those criticisms—and more—are richly deserved.

So, I am generally sympathetic to John Rapley’s attack on the “economic priesthood.”

Although Britain has an established church, few of us today pay it much mind. We follow an even more powerful religion, around which we have oriented our lives: economics. Think about it. Economics offers a comprehensive doctrine with a moral code promising adherents salvation in this world; an ideology so compelling that the faithful remake whole societies to conform to its demands. It has its gnostics, mystics and magicians who conjure money out of thin air, using spells such as “derivative” or “structured investment vehicle”. And, like the old religions it has displaced, it has its prophets, reformists, moralists and above all, its high priests who uphold orthodoxy in the face of heresy.

Over time, successive economists slid into the role we had removed from the churchmen: giving us guidance on how to reach a promised land of material abundance and endless contentment.

However, in my view, there are three problems in Rapley’s discussion of contemporary economics.

First, Rapley refers to economics as if there were only one approach. Much of what he writes does in fact pertain to mainstream economics. But there are many other approaches and theories within economics that cannot be accused of the same problems and mistakes.

Rapley’s not alone in this. Many commentators, both inside and outside the discipline of economics, refer to economics in the singular—as if it comprised only one set of approaches and theories. What they overlook or forget it about are all the ways of doing and thinking about economics—Marxian, radical, feminist, post Keynesian, ecological, institutionalist, and so on—that represent significant criticisms of and departures from mainstream economics.

In Rapley’s language, mainstream neoclassical and Keynesian economists have long served as the high priests of economists but there are many others—heretics of one sort or another—who have degrees in economics and work as economists but whose views, methods, and policies diverge substantially from the teachings of mainstream economics.

Second, Rapley counterposes the religion of mainstream economics from what he considers to be “real” science—of the sort practiced in physics, chemistry, biology, and so on. But here we encounter a second problem: a fantasy of how those other sciences work.

The progress of science is generally linear. As new research confirms or replaces existing theories, one generation builds upon the next.

That’s certainly the positivist view of science, perhaps best represented in Paul Samuelson’s declaration that “Funeral by funeral, economics does make progress.” But in recent decades, the history and philosophy of science have moved on—both challenging the linear view of science and providing alternative narratives. I’m thinking, for example, of Thomas Kuhn’s “scientific revolutions,” Paul Feyerabend’s critique of falsificationism, Michel Foucault’s “epistemes,” and Richard Rorty’s antifoundationalism. All of them, in different ways, disrupt the idea that the natural sciences develop in a smooth, linear manner.

So, it’s not that science is science and economics falls short. It’s that science itself does not fit the mold that traditionally had been cast for it.

My third and final point is that Rapley, with a powerful metaphor of a priesthood, doesn’t do enough with it. Yes, he correctly understands that mainstream economists often behave like priests, by “deducing laws from premises deemed eternal and beyond question” and so on. But historically priests served another role—by celebrating and sanctifying the existing social order.

Religious priests occupied exactly that role under feudalism: they developed and disseminated a discourse according to which the natural order consisted of lords at the top and serfs at the bottom, each of whom received their just deserts. Much the same was true under slavery, which was deemed acceptable within church teachings and perhaps even an opportunity to liberate slaves from their savage-like ways. (And, in both cases, if those at the bottom were dissatisfied with their lot in life, they would have to exercise patience and await the afterlife.)

Economic priests operate in which the same way today, celebrating an economic system based on private property and free markets as the natural order, in which everyone benefits when the masses of people are forced to have the freedom to sell their ability to work to a small group of employers at the top. And there simply is no alternative, at least in this world.

So, on that score, contemporary mainstream economists do operate like a priesthood, producing and disseminating a narrative—in the classroom, research journals, and the public sphere—according to which the existing economic system is the only effective way of solving the problem of scarcity. The continued existence of that economic system then serves to justify the priesthood and its teachings.

However, just as with other priesthoods and economic systems, today there are plenty of economic heretics, who hold beliefs that run counter to established dogma. Their goal is not to take over the existing religion, or even set up an alternative religion, but to create the economic and social conditions within which their own preferred theories no longer have any relevance.

Today’s economic heretics are thus the ultimate grave-diggers.

OOR_2017_Min-Wage-Map_County-Metro

A minimum-wage job should be enough to satisfy workers’ minimum needs, which of course includes putting a roof over their heads.

In reality, it doesn’t. A person working a full-time minimum-wage job will find it virtually impossible to rent an affordable home anywhere in the United States, according to a new study by the National Low Income Housing Coalition.

The report reveals that in fact there is not a single county or metropolitan area in which a minimum-wage worker can afford a two-bedroom home, which the federal government defines as paying less than 30 percent of a household’s income for rent and utilities. And in only 12 counties in the entire country is a one-bedroom rental home affordable.

OOR_2017_Min-Wage-Map

On average, a full-time worker in the United States must earn $21.21 per hour to afford a modest two-bedroom apartment and $17.14 to afford a one-bedroom apartment—figures that roughly correspond to the mean and median hourly wages in the country. As for everyone who earns less than that—the millions of low-wage workers, seniors and people with disabilities living on fixed incomes, and other low-income households—housing costs are simply “out of reach.”

Another way of seeing the problem is to calculate how many hours a minimum-wage employee would have to work to afford a one-bedroom rental home. Even Puerto Rico, which would require the fewest number of hours (45), exceeds the normal 40-hour workweek. At the other end, a minimum-wage worker in New Jersey would have toil more than two and a half times the normal week (106 hours) to afford a one-bedroom rental home.

It’s clear that private markets—in labor and housing—have failed American workers. They can provide neither decent-paying jobs nor the affordable housing for millions of members of the U.S. working-class to put a roof over their heads.

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There doesn’t seem to be anything remarkable about mainstream economists’ rejection of the new populism.

Lest we forget, mainstream economists in the United States and Europe (and, of course, around the world) mostly celebrated current economic arrangements. As far as they were concerned, everyone benefits from contemporary globalization (the more trade the better) and from the distribution of income created by market forces (since everyone gets what they deserve).

To be sure, those who identify with different wings of mainstream economics debate the extent to which there are market imperfections and therefore how much interference there should be in markets. Conservative mainstream economists tend to argue in favor of less regulation, their liberal counterparts for more government intervention. But they share the same general economic vision—that capitalism is characterized by “just deserts,” stable growth, and rising standards of living.

Except of course in recent decades it hasn’t. Not by a long shot.

Inequality has skyrocketed to obscene levels (and continues to rise), leaving many people behind. The crash of 2007-08 shattered the illusion of stability—and now there’s a deepening worry of “secular stagnation” moving forward. And, while the conspicuous consumption of the tiny group at the top continues unabated, only rising debt keeps everyone else from falling down the ladder.

No wonder, then, that economic populists, especially those on the Right, are rejecting the status quo—and winning campaigns and elections (often in the form of protest votes).

For the most part, to judge by Brigitte Granville’s survey of a variety of Project Syndicate commentators’ responses to populism, mainstream economists remain blind as to “why so many voters have embraced facile policies and populist politics.”

That’s pretty much what one would expect, given mainstream economists’ general commitment to the status quo.

But even when they admit that “much has gone wrong for a great many people,” as Margaret MacMillan does (“Globalization and automation are eliminating jobs in developed countries; powerful corporations and wealthy individuals in too many countries are getting a greater share of the wealth and paying fewer taxes; and living conditions continue to deteriorate for people in the US Rust Belt or Northeast England and Wales”), we read the spectacular claim that today’s populists—these “new, outsider political forces”—are wrong because they “claim to have a monopoly on truth.”

Now, I understand, MacMillian is a historian, not an economist. But the idea that populists are somehow the only ones who claim to have a monopoly on truth is an extraordinary diagnosis of the problem.

Think of the legions of mainstream economists who have lined up over the years to claim a monopoly on the truth concerning a wide variety of policies, from restricting minimum wages and approving NAFTA to deregulating finance and voting no on Brexit. They are the ones who have aligned themselves with the interests of economic and political elites and who, in the name of expertise, have attempted to trump democratic, public discussion of important economic issues.

It should come as no surprise, then, that mainstream economists—such as Harvard’s Sendhil Mullainathan—are so concerned that economists have been demoted within the new Trump administration. The horror! The chairperson of the Council of Economic Advisers is not going to be a member of the Cabinet.

Yes, it is true, business acumen is not the same as economic analytics. (I teach economics in a College of Arts and Letters, not in a business school—and, as I remind my students on a regular basis, I’m the last person they should turn to for investment or business advice.) But that’s a far cry from claiming a monopoly on the truth, which is only available to those who speak and write in the language of mainstream economics.*

If mainstream economists finally relinquished that claim—and, as a result, spent more time both learning the languages of other traditions within the discipline of economics and listening to the grievances and desires of those who have been sacrificed at the altar of the status quo—perhaps then they’d have something useful to contribute to the larger debate about where the world is headed right now.

 

*According to Andrea Brandolini, the late Tony Atkinson understood this: “‘Economists are too often prisoners within the theoretical walls they have erected’, he recently wrote discussing austerity policies, ‘and fail to see that important considerations are missing”