Financial Mathematics Text

Monday, February 24, 2014

Minimum Wage and Inequality

One topic that is an interest of mine is the topic of growing income inequality. Over the last 30 years or so, a small fraction of the population in the US has increased its share of income (and even more wealth) while the middle class has been gradually gutted and those on the bottom have been stepped on. Ultimately I don't think it's a sustainable situation and something needs to be done to address those issues.

Today I want to look at a hot topic in politics: the minimum wage. President Barrack Obama has been pushing an increase of the Federal minimum wage to $10.10. And there's plenty of resistance to that but I don't want to focus on that too much. We can really consider two issues:

(1) Is raising the Federal minimum wage a good way to alleviate income inequality?
(2) Assuming (1), where should the Federal minimum wage be?

It's the latter question I'd like to take a look at today.

Poverty: Drawing Lines in the Sand

One issue at stake here is whether or not an increase in the minimum wage can help families get out of poverty. But there are two important questions here:

(1) Is $10.10 sufficient to get a family out of poverty?
(2) Where should the poverty lines be drawn?

Yves Smith (of naked capitalism) posted a video raising these two questions: Will a $10 Minimum Wage Get All Working Americans Out of Poverty?

So what is poverty anyway? The US has guidelines for what it considers the poverty level (taken from here). If we pay someone $10.10 per hour and they work 50 weeks out of the year, how many hours would they have to work each week to meet the poverty thresholds?

As the video points out, some who are working low wage jobs may not be able to get much more than 30 hours a week. So that would only be sufficient to cover a household size of 2.

But why are the lines drawn there? What do those numbers actually tell us? Can someone reasonably live on those incomes?

For example, poverty guidelines fail to account for cost of living by geography. In some cities, you'd be lucky to find a studio apartment for the poverty guideline. Glancing at New York apartments on Craigslist, the cheapest I found was $800 to rent a room which comes out to $9,600  per year. That doesn't begin to take into account all the other costs such as payroll taxes, food, energy, transportation and health care.

As the video points out, there's good reason to be skeptical of the guidelines as being indicative of what it actually costs to meet basic living needs.

Minimum Wage and Productivity

Minimum wage in the US is actually determined by votes in Congress. As a result, increases in minimum wage have been very jumpy. You might think they'd at least tie it to some index such as CPI and evaluate it on a year over year basis. But that's not exactly what happens. In fact, the minimum remained the same from September 1, 1997 to July 23, 2007 when it was increased to $5.85 per hour.

Some states have their own minimum wage laws which put the figure higher than Federal law.

In the Real News video, Professor William Spriggs suggested that minimum wage ought to be tied to productivity increases. I take this to mean both real productivity increases and nominal increases due to inflation. He recommends fixing it at $15 to start and then adjusting for productivity thereafter.

I was curious what minimum wage would look like if we had done so from the beginning. Using Nominal Gross Domestic Product per Capita as a measure of productivity and inflation, we can see how minimum would have grown had it kept up with productivity increases:

 If you're curious, it would suggest that minimum wage should be around $19.75, a bit higher than Prof. Spriggs' suggestion.

Addressing Inequality

As I noted in a previous blog - Income Inequality in the US - I noted that those at the top income wise have been taken a disproportionately large share of productivity gains over the last 30 years or so. See this chart, for example:

Tying minimum wage to productivity gains may very well help alleviate that problem. The question, however, is should it be tied to productivity gains and how?

I have a hard time believing that unskilled labor, for example, has been a substantial contributor to productivity gains. Typically productivity is a result of improvements in things like engineering which requires skills, intelligence and capital. There's room to argue that a large share of productivity improvements should go to those who played important role in bringing those improvements about.

On the other hand, historically there was much talk of things like 20 hour work weeks. The idea here is that productivity improvements would put us in a position to need to work less. I'm still wondering what happened to that!

And we've seen that to some extent with the significant amount of unemployment still present, now over 5 years after the start of the Great Recession. But what has actually happened is that people still need to work 40 hour weeks to get by (or more in some cases). The productivity benefits have largely been reaped by those at the top.

Tying minimum wage to productivity may very well help improve conditions for those at the bottom but also provide some incentive for those on the bottom to contribute to productivity improvements.

Other Concerns

Obviously there are other concerns here. We could very well ask what will happen to unskilled labor if minimum wage was raised significantly. Companies may look for alternatives such as  introducing new technologies to replace workers or moving more plants to countries with cheaper labor.

Ultimately I think there needs to be greater focus with making education and training more available so that those who are working such jobs may have better opportunities. Of course, that means there need to be such opportunities available.

No comments:

Post a Comment

Some common OpenID URLs (no change to URL required):