## Saturday, November 14, 2015

### What would the new minimum wage be?

From Marx & MMT, Part 1 at heteconomist:
Labor of an ordinary or basic kind is called ‘simple labor’. Skilled labor is called ‘complex labor’ and is treated as a multiple of simple labor. The easiest way to make this reduction is to compare the wages (defined to include non-wage pecuniary benefits) of different types of labor. If the average wage is three times the minimum wage, society is behaving as if an hour of average labor is worth three hours of simple labor. In this way, all labor can be reduced to simple labor. The reduction is social, made by society itself, rather than necessarily natural or technical.

I'd rather think in terms of the average wage, not the minimum wage and multiples of the minimum wage. Much simpler. Beside the point.

I thought the ratio was an interesting idea -- the average wage relative to the minimum wage. So I went to FRED looking for it. To get a long-term view I ended up using average hourly earnings for production and non-supervisory employees in manufacturing.

Manufacturing has been in decline in the U.S. So any uptrend on the graph is probably muted because of my choice of data. And it looks like the average wage would be higher in general if supervisors' wages were added in. So, what Graph #1 shows is likely lower and flatter than we'd see if better numbers were used. (Oh, well.)

 Graph #1: The Average Hourly Wage as a Multiple of the Minimum Wage
We see a sawtooth pattern because the minimum wage changes only occasionally. When the minimum wage is raised, the average wage is suddenly a smaller multiple of it, so the blue line drops sharply. Then the minimum wage stays the same while the average wage gradually climbs, and the blue line goes up for a while. This explains the sawtooth pattern.

The graph shows that from 1950 to 1970 the average wage was roughly twice the minimum wage -- in the neighborhood of 2.0 on the vertical axis. Then in the 1970s the average wage was a little higher, around 2.3 times the minimum wage. And since the mid-1980s, the average wage has been higher yet -- near 3 times the minimum.

Okay. So during the "Golden Age" the average wage was about 2 times the minimum wage, and during the "Great Moderation" the average wage was about 3 times the minimum wage. Call it 2.8 times the minimum wage. Just about where it is now.

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I took the minimum wage, the average wage (the same one as in Graph #1) and the Consumer Price Index and put 'em all on a graph together. I "indexed" them so they're all equal in January 1952. Each has the value 100 in January 1952. Why January 1952? Because at that time the average wage was almost exactly two times the minimum wage. I set them equal in order to see which went up faster and which went up slower.

 Graph #2: A Comparison of Increase -- the Average Wage, the Minimum Wage, and the CPI

The blue line went up faster. That's the average wage. It went up faster than the red line (the minimum wage) since around 1970, definitely.

The two government statistics -- the minimum wage and the CPI -- follow each other pretty closely, and both of them are well below the average wage since the 1980s. Among other things, this tells me that yeah, the CPI understates inflation.

(Remember, the blue line excludes supervisors' wages and considers only the wages of the manufacturing sector, not a strong growth sector in the U.S. economy. So the blue line understates the average wage. And the green line is even less. The minimum wage runs with the understated inflation number.)

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We know from Graph #1 that the average wage went from two times the minimum wage to 2.8 times the minimum wage.

We know from Graph #2 that the average wage went up faster than the minimum wage.

Suppose we wanted to raise the minimum wage so the average was only 2 times the minimum again, like in the 1950s and '60s. What would the new minimum wage be?

Well, in September 2015 the minimum wage was \$7.25. The average wage was \$20.06. To make the average wage twice the minimum wage, the minimum wage would have to go up to \$10.03.

\$10.03 of Graph #2 would bring the red line straight up to where it just touches the blue line. Then the red line would run flat again until the next increase (if ever). So probably we would want to make the red line go a little higher than the blue. We might want to raise the minimum wage to \$12 or so.

Maybe that's where the \$12 number comes from.

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Google turns up calls for a \$15 minimum wage. I had to go looking for \$12. First thing that turned up was Tim Worstall's A \$12 Minimum Wage Would Cost 777,000 Jobs And Wouldn't Reduce Poverty Much Either.

Worstall says a \$12 minimum wage "would cost some three quarters of a million jobs".

I was thinking...

\$12 puts the minimum wage back where it once was, running neck-and neck with half the average wage. (Yeah, yeah, the average wage has been lagging too; maybe that's where the call for a \$15 minimum comes from. But that's another story.)

\$12 puts the minimum wage back where it was during the "Golden Age" of the 1950s and '60s. But Tim Worst all says going back to the Golden Age standard would cost us jobs. I think he's full of opinion.

 Graph #3: The Minimum Wage, Neck-and-Neck with Half the Average Wage Until 1970

Gene Hayward said...

Your post is timely. I was one of the half-dozen people that watched the Dem Debate on Saturday and, oddly enough, Hillary proposed a \$12.00 minimum wage (Sander and O'Malley called for \$15). Made me pause. I have never heard that number bantied about buy the "elites".

Pundits later were taken aback by that and wondered where it came from. Hmmm.

Gene Hayward said...

"by" the elites, not "buy" (although they are for sale). Good thing I am not an English teacher. :)

Gene Hayward said...

I had an addtional thought. Maybe this is in your round-house for quantifying it in the way only you can do!

If you Google "Multiplier Minimum Wage " the first article that comes up, coincidently, is another one by Worstall on the same topic.

However, he makes the point (that I hear people make all the time) that, yes there is a positive multiplier effect on spending/GDP, so it has to all good, RIGHT?

But that increase in income has to come from somewhere. So if you have a multiplier effect going forward, is there not a contervailing negative effect as well?

Less savings or spending by the entreprenue and/or higher prices (assumed) are a contervailing effect.

Since he talks about the dynamic between income and savings I thought of you. I am not smart/savvy enough to do this type of analysis.

Just planting an idea.

Thanks.

The Arthurian said...

Hi Gene.

"... that increase in income has to come from somewhere. So if you have a multiplier effect going forward, is there not a countervailing negative effect as well?"

Let me look at this with metaphor. If you are camping and you have a campfire, you have to be careful. You don't want to start a forest fire [inflation]. But you don't want to be too careful, or the fire might go out before you are done cooking supper [deflation]. These things go without saying.

Let's say there is a safe range for the campfire size, small for marshmallows, bigger for trout. Maybe you've been roasting marshmallows with the kids, but the guys come back with trout, and now you need a bigger fire.

Instead of a two-log fire, you want a four-log fire. You know how to do it right [policy] and you get a bigger fire [a bigger economy] no problem.

But this bigger fire consumes logs [money] faster and you have to feed it logs [money] faster than before. There is nothing wrong with that at all.

Let me interrupt the metaphor:

If we use a higher minimum wage or any other fiscal policy to make the economy bigger by way of a multiplier, you are going to need more money circulating in the economy. Probably the Q of M should be proportional to the size of the economy (or, proportional to total spending, which is not really the same thing). There is nothing wrong with that at all.

The trick is, the money has to be circulating. The wood has to be burning. The wood that has already turned to ash and smoke does nothing for the fire. Money that has already been taken out of the spending stream and stashed away in savings (or in hoards) does nothing for the economy. Well, that's not quite right. To have a good fire you need a good bed of ashes. But too much ash chokes the fire.

I'm sure there are better ways to stimulate the economy, better ways than increasing the minimum wage. But if monetary balances are kept at viable levels (I have only a vague idea what those levels are) then there need not be countervailing negative effects.

Come to think of it, if you see negative effects, that's an indication that monetary balances are out of kilter. When there is too much ash in the fire, adding more logs is not the best solution.

The Arthurian said...

... so, if money has to come out of savings in order to boost spending and output, that is not a countervailing negative. It is simply what needs to happen, and that makes it a positive.