Productivity Growth and the Minimum Wage

[Michael Hardner]

http://www.cepr.net/index.php/blogs/beat-the-press/auto-workers-and-the-minimum-wage?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+beat_the_press+%28Beat+the+Press%29

The Washington Post had a piece noting the rapid growth of automobile production in Mexico that raised the possibility that it would come at the expense of production in the United States. The piece points out that the auto companies now hire new workers in the United States at wages between $14 and $18 an hour.

It is worth noting that if the minimum wage had kept pace with productivity growth over the last 45 years it would be ...

Before you click on the link - ask yourself what you think the answer will be.

1963 seems like a high water mark for the North American economy so should we be tying the minimum wage to a productivity-growth indexed number ?

[Michael Hardner]

http://www.econbrowser.com/archives/2013/02/minimum_wage_an.html

The BLS notes that ~ 5% of hourly wage earners, earn at or below the minimum wage. Thus, it's unlikely that a change in the minimum wage will have a large impact on aggregate unemployment.

[Michael Hardner]

https://en.wikipedia.org/wiki/Minimum_wage

More here:

Although strongly opposed by both the business community and the Conservative Party when introduced in 1999, the minimum wage introduced in the UK is no longer controversial and the Conservatives reversed their opposition in 2000.^[79] A review of its effects found no discernible impact on employment levels.^[80] However, prices in the minimum wage sector were found to have risen significantly faster than prices in non-minimum wage sectors, most notably in the four years following the implementation of the minimum wage.^[81]

Britain introduced a minimum wage in 1999.

[Pliny]

I haven't clicked on the link yet but I imagine it would be around $28/hr.

[Pliny]

Ok. I clicked on the link. I won't spoil it for others and say whether or not I was right or close or way off.

How did Britain ever survive without a minimum wage until 1999?

As with any great innovation from government there is an initial benefit to a few without any consideration of effects on the overall economy in the long term. And of course, the ill effects of a minimum wage have to constantly be countered wit inflationary monetary policies.

So you see why the minimum wage never seems to keep pace. The correction necessary to counter its overall effect on the economy of having a minimum wage is greater than it can be increased itself.

[Pliny]

Although strongly opposed by both the business community and the Conservative Party when introduced in 1999, the minimum wage introduced in the UK is no longer controversial and the Conservatives reversed their opposition in 2000.^[79] A review of its effects found no discernible impact on employment levels.^[80] However, prices in the minimum wage sector were found to have risen significantly faster than prices in non-minimum wage sectors, most notably in the four years following the implementation of the minimum wage.^[81]

Progressivism in action.

[Topaz]

I do believe some report came out and said that the minimum wage should be $20 because the cost of hydro, water. gasoline, food, and rent have all gone up. Besides that, many companies are only working workers part time to save themselves from paying out benefits. I also believe that owning a house may become a burden with the raising cost of owning.

[dre]

The thing is, allowing employers to pay full time workers less than the cost to live is corporate welfare, because those employees end up qualifying for all kinds of handouts. So allround, minimum wages are a good thing, and necessary.

If employers do not pay workers enough to live, then the government has to tax those employers, and use that money to provide food stamps, medicare, etc etc. I would rather just pay more for products, and have companies pay workers a living wage - as opposed to being sold artificially cheap products, then paying more later on once the government has to subsidize a companies workers because they were paid enough to buy food and shelter.

[Bonam]

The thing is, allowing employers to pay full time workers less than the cost to live is corporate welfare, because those employees end up qualifying for all kinds of handouts. So allround, minimum wages are a good thing, and necessary.

If employers do not pay workers enough to live, then the government has to tax those employers, and use that money to provide food stamps, medicare, etc etc. I would rather just pay more for products, and have companies pay workers a living wage - as opposed to being sold artificially cheap products, then paying more later on once the government has to subsidize a companies workers because they were paid enough to buy food and shelter.

This argument makes sense, if one assumes that a minimum wage job is a job that someone is intended to sustain their family on.

However, MH's proposal of tying minimum wage to a productivity index doesn't necessarily make much sense. The productivity of all sectors does not rise equally. For example, has productivity of cashiers increased as much as productivity of car factory workers? Additionally, if business owners knew that raising productivity would raise their labour costs, that would reduce their incentive to improve productivity.

Your argument would suggest instead tying minimum wage to some kind of index of cost of living. But that would suggest that minimum wage needs to be set to wildly different values for different areas, a lot more than the 10-15% variance you see right now between the highest and lowest minimum wage jurisdictions in Canada right now.

However, my view on this is that instead of raising minimum wage, we should instead be looking at minimum wage jobs as the sort of jobs people take when they need a quick job for a few months, jobs taken by college students in their spare time, jobs taken by people who just move to a new area while looking for a more permanent job, etc. What we really need to focus on is how to ensure that the economy pumps out more better, higher paying jobs, jobs that pay 2-10x minimum wage, that is, middle class jobs. No one with any sort of useful skill, motivation, or intelligence should have to spend their life working a minimum wage job. And the minimum wage can and should be set with that in mind, not as a wage that is meant to be a career, but one that is meant to be a source of a bit of income while one looks for something better.

[Pliny]

The thing is, allowing employers to pay full time workers less than the cost to live is corporate welfare, because those employees end up qualifying for all kinds of handouts. So allround, minimum wages are a good thing, and necessary.

If employers do not pay workers enough to live, then the government has to tax those employers, and use that money to provide food stamps, medicare, etc etc. I would rather just pay more for products, and have companies pay workers a living wage - as opposed to being sold artificially cheap products, then paying more later on once the government has to subsidize a companies workers because they were paid enough to buy food and shelter.

That's the reasoning behind the adoption of a minimum wage and it sounds logical but only if in the economy all other factors remain constant. It would then be a good idea theoretically but isn't in the practical world. We see that the minimum wage should be at $17/hr. today. Obviously, it has not kept up with inflation and has surpassed quite a few other people's wages as well.

[Pliny]

However, my view on this is that instead of raising minimum wage, we should instead be looking at minimum wage jobs as the sort of jobs people take when they need a quick job for a few months, jobs taken by college students in their spare time, jobs taken by people who just move to a new area while looking for a more permanent job, etc. What we really need to focus on is how to ensure that the economy pumps out more better, higher paying jobs, jobs that pay 2-10x minimum wage, that is, middle class jobs. No one with any sort of useful skill, motivation, or intelligence should have to spend their life working a minimum wage job. And the minimum wage can and should be set with that in mind, not as a wage that is meant to be a career, but one that is meant to be a source of a bit of income while one looks for something better.

This is the best purpose for a minimum wage. These jobs are also learning experiences for people that need to learn a work ethic or attain work experience.

I would contend though that no minimum wage be set as it is an intervention and thus distortion in the market. As you say they are not careers but resume building and/or transitional jobs.

Of course, proponents of a minimum wage will argue that the price of labour will drop to $1/hr. or even lower. A rather illogical argument since they would never work for that and nor would anyone else. Better to spend your time picking bottles or looking for something else. A person could shine shoes or cut grass and make more than that being self-employed; which is not a bad thing to encourage.

[jacee]

This is the best purpose for a minimum wage. These jobs are also learning experiences for people that need to learn a work ethic or attain work experience.

I would contend though that no minimum wage be set as it is an intervention and thus distortion in the market. As you say they are not careers but resume building and/or transitional jobs.

Training costs money. Good, reliable workers are worth money.I think employers of minimum wage workers might prefer a more stable workforce, but they'd have to pay a living wage for that.

I think there are more complexities to the market than you are considering. A living wage is not an "intervention". It's a cost of doing business.

Try telling your suppliers you're not going to pay for them to have a living wage.

Edited July 4, 2013 by jacee

[Pliny]

Training costs money. Good, reliable workers are worth money.I think employers of minimum wage workers might prefer a more stable workforce, but they'd have to pay a living wage for that.

Minimum wage jobs usually take only a day or two to learn essentials. It might take a week to get good at it. Minimum wage employers are not looking for reliable workers per the definition which implies some expected longevity. They want someone to do a task. If they want reliable they will have to pay more.

I think there are more complexities to the market than you are considering. A living wage is not an "intervention". It's a cost of doing business.

Indeed. A living wage is not an intervention but imposing a living wage is an intervention.

It is not any more complex than supply and demand. It's Say's Law. What government, tries to do, according to Keynesian theory, is work everything from aggregate demand. It attempts to ignore the existence of supply. Thus we get things like a minimum wage, a constant, irregardless of the supply of the labour force.

Try telling your suppliers you're not going to pay for them to have a living wage.

Do you think it advisable that government make a law for this to be possible? That's what a minimum wage law is, after all.

Edited July 4, 2013 by Pliny

[Bryan]

Try telling your suppliers you're not going to pay for them to have a living wage.

Happens all the time. "This is what we are willing to pay, take it or leave it". Some take it, some let the work go overseas for even less. Work still gets done.

[jacee]

Minimum wage jobs usually take only a day or two to learn essentials. It might take a week to get good at it. Minimum wage employers are not looking for reliable workers per the definition which implies some expected longevity. They want someone to do a task. If they want reliable they will have to pay more.

Indeed. A living wage is not an intervention but imposing a living wage is an intervention.

It is not any more complex than supply and demand. It's Say's Law. What government, tries to do, according to Keynesian theory, is work everything from aggregate demand. It attempts to ignore the existence of supply. Thus we get things like a minimum wage, a constant, irregardless of the supply of the labour force.

Do you think it advisable that government make a law for this to be possible? That's what a minimum wage law is, after all.

I think a living wage is necessary for employees, regardless of supply of labour.

Skilled and reliable costs more.

[Pliny]

I think a living wage is necessary for employees, regardless of supply of labour.

Skilled and reliable costs more.

Then you are happy with the status quo. And a managed, engineered economy is a better economy. Well, it lasts for awhile anyway.

[dre]

This is the best purpose for a minimum wage. These jobs are also learning experiences for people that need to learn a work ethic or attain work experience.

I would contend though that no minimum wage be set as it is an intervention and thus distortion in the market. As you say they are not careers but resume building and/or transitional jobs.

Of course, proponents of a minimum wage will argue that the price of labour will drop to $1/hr. or even lower. A rather illogical argument since they would never work for that and nor would anyone else. Better to spend your time picking bottles or looking for something else. A person could shine shoes or cut grass and make more than that being self-employed; which is not a bad thing to encourage.

Problem is thats not what all minimum wage jobs are. In the US theres more than 3 million minimum wage jobs where that job is the persons primary income. These people require government subsidies to work at that wage, and would require even more if they worked for less.

THAT is where the real manipulation of the market occurs. These companies should be paying these workers enough to live without subsidies, and rolling those costs into the price of their products and services. Otherwise the consumer doesnt really know how much things cost, because part of the price of these products and services is rolled into their tax bill.

Of course, proponents of a minimum wage will argue that the price of labour will drop to $1/hr. or even lower.

That entirely depends on how much the government intervenes. If they didnt intervene at all, then my guess is thats exactly what would happen. For example.... requiring VISAs for foreign workers is intervention in the labor market. If they stopped doing THAT then there would be millions of Mexicans added to the pool many of whom currently work for less than 5USD per day.

Whether you like it or not, consumers are voters, and the things they want their government to do are PART of the "market". If people want high wages and high prices, thats their perogative. If they want low wages and low prices, thats their perogative as well.

[dre]

Then you are happy with the status quo. And a managed, engineered economy is a better economy. Well, it lasts for awhile anyway.

Every large economy in history has been engineered and managed to a certain extent. And the current slate of liberal constitutional democracies has not only been relatively stable over the long term, it has resulted in an absolutely gigantic strides in improving standard of life, developing knowledge, technology etc.

And you expect people to reject this for a utopian minimalist ideology that has never worked ANYWHERE except for very short periods of time until the people living in it inevitably rejected it.

[Pliny]

Problem is thats not what all minimum wage jobs are. In the US theres more than 3 million minimum wage jobs where that job is the persons primary income. These people require government subsidies to work at that wage, and would require even more if they worked for less.

THAT is where the real manipulation of the market occurs. These companies should be paying these workers enough to live without subsidies, and rolling those costs into the price of their products and services. Otherwise the consumer doesnt really know how much things cost, because part of the price of these products and services is rolled into their tax bill.

The problem is the subsidies - a market distortion. Why pay a fair wage when taxpayers are anteing up to subsidize it.

It is a subsidy to employers, who can pay lower wages to have someone stick around, it only appears the subsidy is to the employees.

That entirely depends on how much the government intervenes. If they didnt intervene at all, then my guess is thats exactly what would happen. For example.... requiring VISAs for foreign workers is intervention in the labor market. If they stopped doing THAT then there would be millions of Mexicans added to the pool many of whom currently work for less than 5USD per day.

If someone can make more picking up pop bottles why would fall to that level? It will fall to the level where people are willing to work not to the level where employees set it. The millions of migrant illegal aliens in the US kept wages low for unskilled labour but it had to be above a level that attracted them.

Whether you like it or not, consumers are voters, and the things they want their government to do are PART of the "market". If people want high wages and high prices, thats their perogative. If they want low wages and low prices, thats their perogative as well.

They want high wages and low prices which is what government tries to bring them. Economically, it fails. There's a natural balance to wages and prices.

[Pliny]

Every large economy in history has been engineered and managed to a certain extent. And the current slate of liberal constitutional democracies has not only been relatively stable over the long term, it has resulted in an absolutely gigantic strides in improving standard of life, developing knowledge, technology etc.

And you expect people to reject this for a utopian minimalist ideology that has never worked ANYWHERE except for very short periods of time until the people living in it inevitably rejected it.

I would like the liberal constitutional democracies to continue but somehow you confuse today's leviathan State with the liberal constitutional democracy that was the promise at its inception. If you see no difference, no change in the State from then to now, then nothing can be said. If the liberal constitutional democracy you so cherish has not devolved into a pigsty of special political and social interests squealing for their privilege from the public purse then what is their to be said?

I don't get where this concept that libertarian minimalist ideology will create Utopia comes from? Utopia is the promise of the Statist, the politician, the central planner, the do-gooder.

[dre]

If someone can make more picking up pop bottles why would fall to that level? It will fall to the level where people are willing to work not to the level where employees set it.

They couldnt do THAT either, without government intervention in the markets that force softdrink companies to charge deposits and return them when bottles are recycled.

[Pliny]

They couldnt do THAT either, without government intervention in the markets that force softdrink companies to charge deposits and return them when bottles are recycled.

They never used to charge a deposit and softdrink companies bought them back. It wasn't government that started that program.

But it is just an example, not meant to be THE entrepreneurial enterprise of last resort. There are a hundred things someone can do for a little cash as long as cash still exists and that may be going the way of the horse and buggy too, thanks again to the leviathan state that needs to know where every one of its precious pennies nickels are.

[Mighty AC]

On a talk radio show today I heard that 1978 was the high point for household income in North America, when adjusted for inflation. At that time over 70% of households had 1 wage earner. Since that time we have experience massive gains in GDP but household incomes have steadily declined, despite the fact that over 70% of households now have 2 wage earners.

The wage depressing and primary industry destroying power of free trade between unequal nations simply decimates the working class.

[dre]

The wage depressing and primary industry destroying power of free trade between unequal nations simply decimates the working class.

Not in the countries that assume the role of producers. They have seen modest gains.

[Michael Hardner]

On a talk radio show today I heard that 1978 was the high point for household income in North America, when adjusted for inflation. At that time over 70% of households had 1 wage earner. Since that time we have experience massive gains in GDP but household incomes have steadily declined, despite the fact that over 70% of households now have 2 wage earners.

The wage depressing and primary industry destroying power of free trade between unequal nations simply decimates the working class.

Can you please offer a cite with those stats ? The last time I saw this discussed on here, we had a cite with static income levels for the "99%" with large increases for the "1%". Economic discussions are very difficult and fractious, and prone to basic fallacies such as the 'fixed pie' fallacy.