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

"Where has the vanishing labor force gone?"

So where have they gone? How are they supporting themselves? Well, the above linked study published by Princeton last week gives us an inkling about what’s become of them. They’re living in despair. And they’re dying.

Recommended reading: Where has the vanishing labor force gone? Now we have a clue. at "Five Short Blasts" Forum.

Williamson versus the world

The World:

The Queen of England was standing in a hall at the London School of Economics looking a little perplexed. The date was Novem­ber 4, 2008, and she had arrived to open a new building on campus...

The event was supposed to be a celebration of academic achievement, but the timing was poignant. Two months earlier, the financial crisis had erupted in London and many other parts of the West, leaving hordes of economists and pundits scurrying to provide analysis. As the Queen toured the build­ing, Luis Garicano, one highly regarded economist, pre­sented her with some charts that purported to show what was going on in finance.

The Queen peered at the brightly colored lines. “It’s awful!” she declared, in her clipped, upper-­class vowels. “Why did nobody see the crisis coming?”

- Gillian Tett in The Atlantic

The Queen asked the question everyone was asking. And hordes of economists were trying to figure out what happened. Meanwhile, Steve Keen pointed to two studies that between them found a total of 16 economists who saw the crisis coming:

A majority of the 16 individuals identified in Bezemer (2009) and (Fullbrook (2010)) as having anticipated the Global Financial Crisis followed non-mainstream approaches ...

- Steve Keen

And not even Alan Greenspan anticipated the crisis, though Congress thought he ought to have:

Committee Chairman Henry Waxman, (California Democrat) said to those present: The reasons why we set up your agencies and gave you budget authority to hire people is so you can see problems developing before they become a crisis. To say you just didn't see it, that just doesn't satisfy me. Finally, Greenspan told the lawmakers that regulators could not predict the future ...

- Nabil Abu el Ata, Maurice J. Perks

 

Stephen Williamson, however, sees things differently. He sees not only "the" future, but all possible futures -- and he knows what is likely, and what is not:

In principle, the current state of the economy determines the likelihood of all potential future states of the economy.

- Stephen Williamson

Remarkable.

Antonio Fatas and the Chain of Causality

From GDP growth is not exogenous by Antonio Fatas:

Ken Rogoff in the Financial Times argues that the world economy is suffering from a debt hangover rather than deficient demand. The argument and the evidence are partly there: financial crises tend to be more persistent. However, there is still an open question whether this is the fundamental reason why growth has been so anemic and whether other potential reasons (deficient demand, secular stagnation,…) matter as much or even more.

The Ken Rogoff opening is an attention-grabber. I'm sure you remember Reinhart and Rogoff and the 90% threshold -- when public debt reaches 90% of GDP, they said, bad things happen to economic growth. You remember.

But I remember something else Rogoff said, after that, in Debt supercycle, not secular stagnation at VOX:

I will argue that the financial crisis/debt supercycle view provides a much more accurate and useful framework for understanding what has transpired and what is likely to come next...

The evidence in favour of the debt supercycle view ... includes the magnitude of the housing boom and bust, the huge leverage that accompanied the bubble, the behaviour of equity prices before and after the Crisis, and certainly the fact that rises in unemployment were far more persistent than after an ordinary recession that is not accompanied by a systemic financial crisis. Even the dramatic rises in public debt that occurred after the Crisis are quite characteristic.

See it? Even the dramatic increases in public debt, he says. This time Rogoff is clearly not saying the big increases in public debt are the cause of our troubles. Those increases "occurred after the Crisis", he says. Consequence, he says, not cause.


The Rogoff article linked by Antonio Fatas is dated 9 October 2015. From the opening:

What is the right diagnosis of the ailing global economy? ...

Some argue that we are living in a world of deficient demand, doomed to decades of secular stagnation. Maybe. But another possibility is that the global economy is in the later stages of a debt “super cycle”, crushed under a burden accumulated over years of lax regulation and financial excess.

I had to look. Fatas says Rogoff "argues that the world economy is suffering from a debt hangover rather than deficient demand." I had to check that. When I read Fatas, I thought he might be misinterpreting Rogoff. He's not. He's right. Rogoff sees secular stagnation as one possibility, and crushing debt as "another possibility".

Rogoff sees the excessive debt explanation as an alternative to the deficient demand explanation.

That's just plain silly. Excessive debt is not an alternative to the "deficient demand" explanation. Excessive debt is the cause of deficient demand. First, the growing cost of growing debt consumes a growing portion of income. So demand atrophies gradually at first. Then, people suddenly come to think of their debt as excessive, and they suddenly cut their borrowing and spending. Demand falls suddenly -- economists call that a "shock" -- and we have "deficient demand".


Let me start again. Antonio Fatas:

Ken Rogoff in the Financial Times argues that the world economy is suffering from a debt hangover rather than deficient demand... However, there is still an open question whether this [debt hangover] is the fundamental reason why growth has been so anemic and whether other potential reasons (deficient demand, secular stagnation,…) matter as much or even more.

No. It's not an open question. Excessive debt is the cause of deficient demand. Secular stagnation is the result.

Thoughtless

Brad DeLong:

Indeed, back in 2000 it was Ben Bernanke who had written that central banks with sufficient will and drive could always, in the medium-run at least, restore full prosperity by themselves via quantitative easing. Simply print money and buy financial assets. Do so on a large-enough scale. People would expect that not all of the quantitative easing would be unwound. Thus people would have an incentive to use the extra money that had been printed to step up their spending.

The goal, see, was to get people to "step up their spending". But, as DeLong says, the result "has been unexpectedly disappointing".

I think that's why central banks these days are thinking about going cashless. It's the next logical step in the plan to get people to step up their spending.

The trouble is, it's not a good plan. It's a major change to life as we know it -- to life as we've known it for millennia, I guess, since cash money was first invented.

It's a major change, tacked on as an afterthought to a plan that didn't work, the plan to get us to step up our spending. It's an afterthought tacked on to a plan that didn't work.

If we're going to abandon cash, shouldn't we put a little more thought into it than that?

Say "OOF"

Here's what I'm looking at:

Part of this page as of 31 October at six in the morning, my time.

I'm there because of the post. Dillow points out "the general public's lack of understanding of economics" and says: "people underestimate the tendency of emergent processes to produce benign outcomes".

Snort. Maybe people lowball the economy's tendency to produce benign outcomes because the outcomes are generally not benign.

But that's not what got me writing this morning. What got me writing was that I read those two links in his sidebar, the ones in red boxes.

The Search for Yield

"Search for Yield" links to Rational and Behavioural Drivers of Financial Markets: the case of ‘search for yield’ by Silvia Pepino:

The ‘search for yield’ (or ‘reach for yield’) observed in financial markets in recent years is a striking manifestation of the interaction of rational and behavioural factors. During an extended period of low interest rates and volatility, market participants have displayed a tendency to seek higher returns by investing in securities that carry higher credit, liquidity or duration risk.

... financial market practitioners and policy makers generally refer to ‘search for yield’ as the tendency of investors to take on higher risk in exchange for higher expected returns when interest rates are low...

In recent years, against the backdrop of very low interest rates and quantitative easing, a tendency has developed among investors to accept higher duration, credit and liquidity risk in order to boost returns.

... a tendency to ‘search for yield’ in financial markets can become a reason for concern, particularly when it is perceived to become excessive and lead to under-pricing of risk.

The article is about rational and behavioral "drivers" of the search for yield. I'm ignoring drivers. I'm focusing on the tendency of investors to take on higher risk in exchange for higher expected returns when interest rates are low.

Okay.


Everyday stagnation

"Everyday stagnation" links to Chris Dillow's post at Investor's Chronicle. (You may have to register to read it.)

One of the few drawbacks of working from home is that one is bombarded with annoying phone calls from time-wasters...

All those cold callers give us a daily - well, hourly - reminder that the economy isn't dynamic enough to create sufficient productive and rewarding jobs. In other words, we are in an era of secular stagnation. This phrase has many meanings; it refers to the combination of slow productivity growth, weak investment and low innovation that have given us negative real interest rates...

Stagnation, though, hasn't only given us poor returns on cash. It has also depressed equity returns.

A recent paper by Gianluca Benigno at the LSE and Luca Fornaro at Barcelona's University of Pompeu Fabra points out that economies can fall in a stagnation trap. If people expect low growth they won't invest or innovate and this will cause low profits for other companies, thus exacerbating disincentives to invest. In this way, pessimism can be self-fulfilling.

The problem is that such pessimism might be justified.

One reason for this is that profit rates have fallen. The economics blogger Michael Roberts estimates that returns on capital in G20 countries have steadily fallen since the early 1970s.

Production is the source of profits, the source of "yield". The yield to financial markets pulls yield away from productive markets.

Growing financial profits reduce productive sector profits. Falling profits in the productive sector reduce growth, productivity, investment, and innovation. This leads to lower interest rates and depressed equity returns.

Growing financial profits undermine the source of profits. Let finance gain at the expense of the productive sector, and you set the stage for reduced yield in financial markets.

The problem is not "pessimism". The problem is "OOF": Onerous overgrown finance.

The Neutral Zone

As I write this, it is 9:32 AM on Sunday morning. Would have been 10:32, but we sprung back while I was sleeping. Scheduled for 4 AM Monday I have "Are we tight yet?" where I review an article about the Fed's problem in finding the neutral rate of interest. Therein I say:

If we define "the neutral rate" as the article does:

"the borrowing cost -- adjusted for inflation -- that keeps the economy at full employment with stable prices"

then I'm not even sure the neutral rate exists. Since the crisis, I mean.

At Marginal Revolution: What’s the natural rate of interest? Tyler Cowen writes:

Whether a given rate of interest both maintains full employment and stable inflation depends on the rate of productivity growth, for one thing. It can be that no single rate of interest can perform both functions.

Pretty much what I said.

I like the whole Marginal Revolution article. Lots of links that look most interesting. And a very good quote from Milton Friedman (of all people!).

"Are we tight yet?"

RockyMcNuts at Reddit links to Are We Tight Yet? The Fed's Problem in Finding the Neutral Rate at Bloomberg Business. I like it.

When the topic is cast as We should raise interest rates immediately! or No, we shouldn't! it seems to get a lot of attention. Cast as a discussion of the Fed's difficulty in deciding whether to raise interest rates, and when, it gets very little interest even after 14 hours on Reddit. 

That's part of the problem. Everybody already has an opinion. Everybody thinks they know the answer. Everyone is satisfied with their answer. (And yet, we disagree.)

What I liked about the Bloomberg article was that it focused on not knowing the answer. For me, that opens a door.


From the article:

“The one thing you know is that you don’t know,” said James Hamilton.... “People in the Federal Reserve and everywhere else are trying to figure out: What’s the permanent change, and what’s just the overhang from the episode we’ve been through?”

...

If the natural rate is well above the current near-zero rate, as Chair Janet Yellen and many of her colleagues suggest, then policy will still be accommodative well after the central bank begins to raise rates, encouraging further investment and hiring.

If the gap is smaller -- or if the natural rate has fallen so much that it’s at or under zero, as some suggest -- the early stages of tightening could restrain the U.S. economy more than Fed officials expect.

“There’s a lot of uncertainty about what the appropriate level is,” said Laura Rosner.... Such discord “is going to heighten the disagreement about what to do with rates.”

Even among economists, evidently, most of them think they know the answer. And, like the rest of us, they disagree with each other. This disagreement apparently leads to uncertainty at the policy level. The article says a new study "emphasized that a lack of conviction 'in turn creates uncertainty about the appropriate level of the short-term interest rate'." Or again:

There’s also disagreement about how the Fed should respond to the uncertainty surrounding the level of the natural rate.

By "how the Fed should respond" they mean "raising the benchmark rate sooner rather than later" or "the opposite." This gives the impression that the lack of consensus is the source of trouble -- that if economists could only manage to agree, then their answer (whatever that answer happened to be) would be the right answer, and the Fed would go with it.

It seems they are saying the neutral interest rate is determined by consensus opinion. I don't buy it.

I think it bizarre that a lack of consensus in the private sector could lead to uncertainty at the Fed. It is as if policy-makers think a policy is wrong if opinion-makers think it is wrong. This is bullshit. Given economic conditions at any point in time, there is one general direction that points to the best choice for policy. This is true, regardless of what anybody thinks.

That's what I think.

Trouble is, policy-makers don't know which is the right direction.


If we define "the neutral rate" as the article does:

"the borrowing cost -- adjusted for inflation -- that keeps the economy at full employment with stable prices"

then I'm not even sure the neutral rate exists. Since the crisis, I mean.

Maybe the loss of our ability to achieve "full employment with stable prices" is the permanent change that James Hamilton was wondering about. ("Permanent" here does not mean "from now till the end of time". It means long-lasting or highly persistent.)

Loss of our ability to achieve "full employment with stable prices" or, say, to achieve full employment, period. If that was the permanent change, then disagreement over the level of interest rates is pointless.

That would explain why the disagreement cannot be resolved: Because both sides are right when they say the other side is wrong. Both sides are wrong, because setting the level of interest rates can no longer get us to full employment. The focus on interest rates is the wrong focus. We need instead to ask why achieving full employment is no longer possible.

See what I'm getting at here? We need to re-think economics. We need to re-think premises. We need to do something smarter and more honest than redefining "full employment" to a higher number (again) or changing who we count as unemployed to get that number down. Again.

We need to re-think the premises. This has been said many times, in many ways, since the crisis. But nothing has changed. We still think we can get back to "full employment with stable prices" by fiddling with interest rates while Rome burns.

Spring Ahead... Fall Back