The Minimum Wage In Context(s)

Note: This post is not about whether there should or should not be a minimum wage or, if there should, whether the federal government should set one. This is a quick examination of some facts.

The U.S. federal minimum wage has been $7.25/hr since July 2009. Working 40 hr/wk, 50 wk/hr results in an annual pre-tax income of $14,500. Working 50 hour weeks every week provides $18,850.

(You can skip the description of the metrics and jump to the bottom if you already understand the pros and cons of various normalizing methods.)

There are several ways to think about about today’s minimum wage vs. historical values.

  • Adjusted for inflation. This view adjusts to a constant standard of living, only accounting for the loss of purchasing power of a dollar over time. In other words, if today’s value were the same as 50 years ago, then the minimum wage worker today would have the about the same standard of living as one 50 years ago.
  • Adjusted for productivity growth. This view shows what a previous value in the minimum wage would be today if minimum wage workers enjoyed wage increases equal to inflation plus the economy-wide increase in worker productivity. This view shows the wages necessary to increase the standard of living of minimum wage workers at about the same rate as economic growth.
  • Compared to the median wage. We can compare the annual earnings of a minimum wage worker to the median worker’s annual pay. Since the median pay is the point at which 50% of workers earn more and 50% earn less, it provides a reference vs. the “middle” of the income distribution.
  • Compared to the average wage. This is similar to the median wage comparison, but instead of using the income distribution, it compares against the average wage that includes all wage income from janitors to doctors and investment bankers.

Pros and Cons of these views:

  • Adjusted for inflation. This is easy to calculate against data with a long historical record (inflation). It is a good measure of the absolute changes in the standard of living a minimum wage job would afford. The downside is that it implies to the casual reader that the minimum wage should freeze standards of living. In other words, a flat line may appear to indicate that the minimum wage is unchanged, but in fact it would indicate that minimum wage workers are falling further and further behind other workers.
  • Adjusted for productivity growth. This has the advantage of showing what minimum wages would be like if all workers shared in the benefits of higher productivity. Unfortunately, it necessarily relies on a given start date and implies that both the minimum wage and the income split between capital and labor at that initial time is \ appropriate. The curve may change substantially based on the choice of start date. Also, this method combines issues that effect workers broadly (income distribution and labor-capital split) and embeds them in the presentation of the minimum wage.
  • Compared to the median wage. The median wage is probably a good reference for the minimum wage worker, since the median wage may be a good indicator of a worker’s aspiration and social comparison. By accounting for changes in the income distribution over time it avoids including the large concentration in income going to the Top 10% of wage earners. Median wage data are reliable, but may not fully capture all forms of compensation and the middle.
  • Compared to the average wage.  Like the median wage approach, this has the advantage of using the economy’s actual split of income between capital and labor each year instead of implicitly fixing it like the productivity method. However, this method is not influenced by changes in distribution of wage income. So we can better see how a minimum wage worker’s income has changed vs wages in the economy as a whole.

Note: All of these methods are properly per-capita.

OK, here are some links, charts and comments

Inflation Adjusted View. The linked chart shows the real federal minimum wage since it was first enacted in 1938. We can see that it was basically flat during WWII and the inflationary 5-year period following the war. Then the real minimum wage rose steadily for 20 years. After peaking around 1970 it declined as increases failed to match high inflation during the 1970s and early 1980s. It has been flat for the past 25+ years and today is at the same level as the mid-1950s.  (Shadowstats conspiracy theorists would calculate a huge collapse in the real minimum wage that would put today’s levels much lower.)

Productivity Adjusted View. Using 1947 as the base year the linked chart and article shows that the minimum wage would currently be $17/hr if minimum wage workers shared received gains from productivity growth. This is 135% higher than the current value of $7.25/hr.

Median Income Comparison View. The graph below (click to enlarge) compares annual minimum wage earnings with median household income since 1984. I was unable to find reliable median per worker pay data and the household series was only available back to 1984. The relationship today is about where it was 30 years ago, though there was some volatility within a band.

min wg inc vs hh median

Average Income Comparison View. The graph below (click to enlarge) compares annual minimum wage earnings with median household income since 1951. The relationship was in a band centered on 50% for about three decades and then rapidly and steadily declined through the 1980s and 1990s before leveling out around 30%. So compared to the average worker’s annual compensation, minimum wage workers have seen a large drop in income. (The average wage data come from the Social Security Administration’s AWI data and represent average per worker compensation.

min wg inc vs ave wg

Considering the charts together

By looking at the charts against one another we can see a couple of things. First, the widening gap between minimum wage pay increases and productivity increases is not an issue specific to the minimum wage per se, but rather captures a) more income flowing to capital and b) more wage income concentrated at the upper income levels. Both changes are required to explain the large gap in the productivity-based view vs. the average wage view. Comparing the median and average wage view shows that the decline in minimum wage pay vs. overall wages is really about the broader issue of income distribution rather than the minimum wage taken in isolation.

Comparison with the Obama proposal of $10.10/hr:

Inflation-adjusted view: The proposed rate would be very close (about 5% less) to the 1968 peak.

Productivity-adjusted view: The proposed rate would be more than 40% below the productivity-adjusted figure.

Median-income view: The proposed rate would increase the minimum wage level relative to median income above any level seen in the past 30 years. In fact the minimum wage income would be about 30% higher than it’s been relative to median income.

Average-income view: The effect of the proposed rate vs. average wages would be similar in magnitude to the median wage impact. However, the data series allows us to see that the level would remain below the level in the 1950s through the 1970s.

Final Comments

I will leave it to the reader to consider the knock-on impacts of leaving the minimum wage at its current level (ongoing real decreases), increasing with inflation, or increasing aggressively to a real level and income share not seen in decades.

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Statistician, Heal Thyself – Beacon Economics

Statistician, Heal Thyself – Beacon Economics.

Figured I’d try using one of those “share” links at the bottom of an article. So here it is.

Chris Thornberg shows why he probably doesn’t have any friends, at least politically partisan ones. He’s alienated the local landed gentry with pointed criticisms of their tax privileges. Now he’s calling out bogus data used to support a higher minimum wage for City of Los Angeles hotel workers. Is nothing sacred? Has he reverence for neither the working class hero nor the puffed up self-proclaimed Makers? Who’s side is this guy on?

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Making An Honest Profit Is Not Easy

The little publishing house that gave us advice on decorative gourd season is changing its corporate form to non-profit.

Most businesses operate in competitive markets subject to all kinds of uncertainties, risks, and grinding challenges. Book publishing has been under particular stress due to changes in technology and consumer habits.

In this case the top managers appear to be the owners. Changing to a a non-profit corporate structure makes lots of sense for them personally. As a for-profit company, any injection of capital into the enterprise must use after-tax money.  Changing to a non-profit means the company can now reverse the flow between investors/donors, the company, and the government. Since donations are tax-deductible, the effect of going non-profit is to take tax dollars and cycle them through your enterprise to pay salaries, partners, and suppliers. Taxes that a donor would have paid are now available to the firm and thus to its payees!

The managers no longer need to focus on producing and harvesting more value than the firm consumes, but instead can focus on just a handful of relationships involving individual donors and funding from other non-profits and government agencies. Trying to grind out net profit and pay your taxes is not easy. It’s conceivable that the non-profit form will provide more secure income to the managers while allowing them to spend their time more pleasurably.

But if it results in more freely shared pieces like decorative gourd season, I’d say they are producing plenty of external benefit.

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Update on the Bolivarian Revolution

Even without their Dear Leader, Venezuela continues the slide into poverty, chaos, political suppression, and violence.  And, of course, their inept rulers are blaming anyone but themselves. This time it’s a couple of academics.

Venezuela is a major oil-exporting economy that is so badly mismanaged that real (inflation-adjusted) per capita GDP today is 2% lower than it was in 1970, despite a ten-fold increase in oil prices.

Perhaps Sean Penn and Oliver Stone could help them kick-start their film industry. Maybe move down there, invest their fortunes and join the crusade against the neoliberal consensus.

As an aside / kind of non-sequitur, here’s Paul Krugman earlier this year criticizing Argentina’s refusal to tackle their deficits and inflation. He goes on to say “…a few years ago one would have said that only Venezuela was making the old mistakes…” But, of course, all the reactionaries know Krugman always wants higher deficits, higher inflation and, well, derp <inaudible sounds… getting louder>, he’s a commie!

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Hey Ladies! …The Lord Will Provide

No, that title isn’t a snippet from a Beastie Boys revival.

It’s paraphrasing the CEO of Microsoft.

“It’s not really about asking for a raise, but knowing and having faith that the system will give you the right raise… That, I think, might be one of the additional superpowers that, quite frankly, women who don’t ask for a raise have. Because that’s good karma. It’ll come back because somebody’s going to know that’s the kind of person that I want to trust.

Holy shit!

Don’t worry about the money honey, ’cause karma’s gonna take care of ya.

If there’s a feminist Piketty out there, this is your moment.

My prediction: A sincere head bow, apology, and the hiring of some consultants and that should be it. I’ll leave it to the reader to imagine his future if he were a different type – a type for whom something other than “karma” would have been the guiding force that came to mind…

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A Call For Profiling, Martyrdom Prevention Edition

CNN brings us the tale of four young UK citizens, three brothers and a friend, who went off to Syria to fight for the “Muslim nation”. One brother and the friend are already dead.

The article describes the mother of one as “flabbergasted that three Muslim teenagers, including one traveling on a stolen 15-year-old’s passport, were able to make it out of Britain so easily.” She asks “How did he travel how did he go through the airport? How can a bunch of kids travel like that and nobody even suspected? This isn’t about a religious thing, it’s about all of us being responsible” Well, teenagers from the UK travel the world and Turkey is a popular destination. What exactly would the mother say should be “suspected”?

The father of one of the brothers, who years ago came to the UK as a political refugee, laments his son’s death saying “You feel he died a good death as a Muslim. As a martyr, he goes to paradise. But at the same time you feel sad for the loss.”

[Bush!]

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New Vulnerabilities

Societies change. Sometimes slowly over centuries, sometimes quickly over a period of decades. When we view the net result of the changes favorably, we are apt to it call it progress.

Prior to the Secret Service Director’s resignation over a series of alarming lapses (the events are listed here) I was thinking about a rule I’d first come across reading Charlie Munger. In the U.S. Navy if a ship runs aground, the Captain is dismissed. Period. There are no mitigating factors to consider. It doesn’t matter who was at the helm. This rule can sometimes seem unfair to the dismissed captain, but there is a very good moral reason for it: to protect system integrity. In some situations tolerating some unfairness ensures the promotion of the greater good. In this case the system is protected by ensuring that all captains who make poor decisions are fired. The only way to be 100% sure this happens is to fire all of the captains who run aground. Thus, excellent captains with the best skills are sometimes dismissed to make sure a bad captain doesn’t slip by.

What does this have to do with change and progress? Well, nothing (unless you consider it relevant that the former Director was a woman, which is indicative of changes in the U.S. over the past few decades). But it did get me searching for that Charlie Munger rule. And that led me to this opinion piece by a retired U.S. Navy Captain. In this piece, the captain describes an increase in captain firings and his views on the consequences of a mixed gender navy [emphasis added].

…ship captains get relieved for two primary reasons: operational misconduct and personal misconduct. … Operational misconduct should be thought of as (almost exclusively) collision or grounding… captains have been getting relieved for this sort of misadventure for as long as ships have been at sea… [and is] considered to be the cost of doing business on the high seas… This brings us to “personal misconduct,” and the cause of the dramatic rise in firings in the past decade.

…you cannot put young, healthy men and women into a small box, send them away for extended periods of isolation, and not expect them to interact dynamically…After all, this is the instinctual behavior that has kept our species going for 250,000 years. Greatly compounding this phenomenon is our growing interconnectedness. …with unlimited access resulting from unlimited communications, everybody can know [about on-board activities]. Accusations can be instant and anonymous.

Not only are captains expected, as throughout history, to be excellent in terms of their ability to command a ship, but now they are on the front line of making a fully integrated crew work in seamless, sexless harmony.

Until some sort of equilibrium is reached, our captains will continue to live in positions of exquisite vulnerability. … Rather than be upset, best to simply accept this new reality. …we simply need to accept these firings as a new cost of doing business.

And that is why I emphasized that progress is usually about net result of changes.

I’m sure some readers will reflexively classify the captain’s views as defense of the “boys will be boys and can’t help themselves” attitude. I don’t read it that way. (Perhaps the captain is sexist or has other traits that some readers would find imperfect and intolerable, but this article is all I know of him.)

Instead, I see the captain discussing the net result of changes. Women can serve alongside men in the armed forces. He claims this changes crew dynamics and interactions, which in turn requires new skills for captains. His opinion is that unless those dynamics – some deeply rooted in biology – change, a higher rate of captain firings will continue. Thus, in the world that exists, for some period of time a change in gender opportunity will be accompanied by a change in captain behavior and higher leadership turnover. There is a net, at least for now.

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