So, About This Minimum Wage Thing...

As you may be aware, the Federal minimum wage was scheduled to increase to $6.55 yesterday. Today I had a Facebox e-debate of sorts which I think has helped me refine my position on the issue of income support for poor workers. I am very interested in other people’s take on my position on the issue.

Standard neoclassical economic theory tells us that a legally mandated minimum wage, if it is above the market clearing wage, will reduce employment, especially for the most marginally employable workers. The microeconomic rationale for this is pretty straightforward; if you forbid employers to pay any wage under $X/hr., they will fire or not hire employees who are worth any amount less than $X/hr. So the guy who is worth only $7/hr. loses (or never gets) his job when the minimum wage is increased to $7.50/hr. As always, the standard economic theory is plausible. But, also as always, it must be empirically supported to form the basis of informed policy-making. The magical curves and lines don't always get it right.

When I took a labor economics class in college, this study was relatively new and represented kind of a coup d'etat. The Krueger and Card study compared the effect of an increase in the minimum wage on employment in the fast food industry in one state with the level of employment in the fast food industry in an adjacent state that did not increase its minimum wage. Surprisingly, the study found that employment had actually slightly increased (relatively) in the state that had increased its minimum wage. Naturally, this sparked a great gnashing of teeth and back-and-forth debate within the economics profession

So today, a right-wing Facebox-friend of mine posted something to the effect that any increase in the minimum wage is an "inane" policy. In response, I drew his attention to the Krueger and Card study. He, in turn, posted a link to this study, which provides a pretty comprehensive survey of the minimum wage literature. The study found that almost 2/3 of the studies it surveyed, and 85% of the studies it found "most credible," showed a negative, "but not always statistically significant" effect of minimum wage laws on the number of people employed and/or hours of employment. The majority of the studies appear to have found that a 10% increase in the minimum wage leads to a roughly 1% to 3% reduction in the employment of low-skill workers, with significantly stronger negative effects on teenagers and young adults and much weaker negative effects on adults 25 and older.

The study appears pretty thorough and I think I buy its conclusion – i.e., there’s generally a small, negative effect of a minimum wage increase on the employment of low-skill workers. But it's important to bear these results in perspective. A 1% to 3% reduction in low-income employment is not the end of the world, particularly if we had an adequate social welfare state to provide for the subsistence of the unlucky 1%-3% (which, unfortunately we don't, but many other countries do). But it is a significant downside effect that we should take into account when thinking about income support issues. Interestingly, left-leaning economist Paul Krugman appears to share this concern ("...the centrist view is probably that minimum wages 'do,' in fact, reduce employment, but that the effects are small and swamped by other forces.").

I have proposed a fairly radical solution to all of these employment and income support issues (see #'s 1 and 6). But it's probably safe to assume that that's not going to happen any time soon. In the meantime, I think it's helpful to look at the issue the way right-of-center Harvard economist Gregory Mankiw does: as a tax on employers of low skill workers which directly funds a subsidy to low skill workers. Looking at it this way raises the obvious question - why should the employers of low skill workers bear the whole burden of this subsidy? Surely, income support of poor workers is more of a general social responsibility than the exclusive responsibility of poor workers' private employers, just as medical insurance and care is a general public and social responsibility (even if, in this country, it is an abdicated one) and should not be regarded as the particular responsibility of workers’ employers. Therefore it would be fairer and more efficient to simply increase taxes (disproportionately on high earners and very disproportionately on very high earners, of course), and then to use the proceeds to significantly increase the Earned Income Tax Credit (the EITC, or "negative income tax") for poor workers.

With respect to the relative efficiency of using a negative income tax policy instead of a minimum wage policy, consider this CBO report which found that a hypothetical increase in the minimum wage in 2005 from $5.15 to $7.25/hr. would have given an additional $11 billion overall to workers making somewhere between $5.15 - $7.24/hr. (of which, startlingly, only 18% were actually members of poor families in 2005, at least according to the notoriously low Federal poverty guidelines), only $1.6 billion of which (or about 15%) would have gone to workers in poor families. On the other hand, an increase in the EITC with the same overall income effect as the minimum wage increase would have cost the Federal government a total of $2.4 billion, $1.4 billion of which would have gone to poor families. If these estimates are reliable, the minimum wage is a very blunt instrument for supporting the incomes of poor workers.

So it seems to me getting rid of the minimum wage and drastically increasing the EITC (along with providing payments at least on a bi-weekly basis and not in one lump sum at the end of the year so the whole thing doesn't end up going to H&R Block or payday lenders) is the way to go, at least before we can push for anything more ambitious. The effect of this would be to allow employers to hire whomever they want at whatever price the employee will agree to, but to use the additional public revenues raised by a big progressive tax increase to bring everyone up to (at least) the poverty level. This way we fund the income support subsidy through the proceeds of a broad based progressive tax system rather than specifically punishing employers who happen to operate in low-skill industries by forcing them to pay for the whole burden, and a much higher percentage of the proceeds will go to workers who are actually in low income families. And of course then we would avoid the whole negative employment effect of the minimum wage (especially since, as we know, increases in tax rates generally have negligible effects on labor supply).

The bottom line for me is that the income support of the poor (ideally to the point where they are no longer “poor”) is a fundamental social responsibility, but that this responsibility would be fulfilled in a much fairer and more effective manner if the government (relying on high, progressive tax revenues) were to provide direct subsidies to poor workers rather than forcing private employers to serve as surrogate welfare agencies.

Looser Workplace Saftey Regulations: $100. Higher Productivity Through Violent Supervisors: $45. Avoiding USJD Prosecution: Priceless.

NYTimes article about increase in "deferred prosecution" during Bush Administration.

Seems to be nothing more than: pay off the government and we'll overlook imposing criminal charges.

I sure hope the government uses that money wisely!

http://www.nytimes.com/2008/04/09/washington/09justice.html?ex=1365480000&en=58c28f6ae10c2e4a&ei=5124&partner=permalink&exprod=permalink

Unemployment Adjustments

Take a look at this on the deteriorating U.S. labor market.

Highlights:

If you include the underemployed (those who want full time jobs but can only get part-time work) and people not currently search for a job, the unemployment rate is 8.9%. I'm not sure how our European brethren reflect these concepts in their numbers but it's very possible that our unemployment figures are simply not comparable to other countries' figures, and that our relative labor market situation is not nearly as strong as official unemployment numbers would suggest.

Also, as a former professor of mine noted, we should incorporate the number of people we incarcerate into the unemployment figures. This would noticeably increase our relative unemployment rate, since we are so incarceration-crazed.

The bottom line: Be skeptical when economic right-wingers point to our relatively low unemployment figures as a way of justifying right-wing style capitalism.

Union Density and Productivity Growth

Apparently there is no reason to think that high rates of unionization will suppress productivity growth.

Of course, by increasing the prevailing wage, high rates of unionization could theoretically lead to higher unemployment. But I have previously suggested my solution to that problem (#6 of the original 40).

"World's Most Prosperous Nation"?

I would like to point out a few more statistics that I believe shed light on the failures of right-wing economic policy and ideology. Specifically, they pertain to international and historical comparisons regarding our labor productivity.

First, we like to tout ourselves as the "world's most prosperous nation." http://www.whitehouse.gov/news/releases/2007/05/20070531-9.html. Even if we ignore the massive asterisk of our unparalleled economic inequality ("first you must ignore that which is unignorable"), this is not necessarily true. Actually, in 2006 Norway had the highest GDP per capita, but we were number 2 so I guess that's close enough. (Note: now Ireland has a higher GDP per capita, and if you want to include Luxembourg as a country, so do they.) See http://www.bls.gov/fls/flsgdp.pdf, Table 1. But scroll down to Table 4. Turns out for 2006 we were behind 4 other countries in GDP per hour worked (after Norway, which was by far the highest, Belgium, the Netherlands, and France; I'm sure now we are behind Ireland as well). Not that #5 or 6 is so bad, but I think this seriously calls into question the idea that we are the "world's most prosperous nation." After all, leisure has significant value as well, and obviously we have way less of it here.

Another way to see the fact that our economic prosperity indicators are inflated due to relative overworking is to compare median household income growth since the beginning of the Reagan era to the increase in hours worked over the same period. Our median household GDP increased 14.5% from 1980-2002, from $45,647 to $52,285. See http://www.epi.org/datazone/06/median_income.pdf. But the average hours worked for middle-income married couples with children age 25-54 has increased 17.1% over the same period, from 3,046 to 3,567. See http://www.epi.org/datazone/06/wrk_hrs_hus_wif.pdf. So for the typical middle-income family, it would appear that all of the increase in income over the Reagan & post-Reagan era is a mere reflection of an increase in hours worked.

But as we know, the real problem with our economy isn't that it's not productive. Our recent productivity growth has been strong, and classical economic theory tells us that increases in productivity should lead to proportional increases in wages. But it hasn't. U.S. manufacturing productivity has increased 182% since 1980, but manufacturing wages have only increased 32% over the same period. See ftp://ftp.bls.gov/pub/special.requests/ForeignLabor/prodsuppt01.txt and ftp://ftp.bls.gov/pub/special.requests/ForeignLabor/prodsuppt13.txt. So I guess the bottom line is that we cannot try to justify our immoral economic system on the grounds that it produces wealth on a scale unheard of elsewhere. It produces great wealth, no question, but not necessarily any more wealth than social democratic economies produce. And recent productivity growth has served to swell corporate profits instead of increasing wages or hour-adjusted average household income.

Two Retorts

I generally want to use this blog mostly to focus on affirmative policy suggestions rather than rebuttals of conservative views. But two factual claims came up in a class of mine today that I can't resist responding to.

I. Most poor people do not work and the U.S. is more or less a "meritocracy."

Whether the first part of this is strictly true or not depends on how exactly you define "poor." But I think it's hard to look at all the facts and say it's really true in any meaningful sense.

Most low income families in the U.S., or families making less than 200% of the federal poverty guideline (which is not regionally adjusted), do work (where a "family" is a couple or a single parent with at least one child under 18, and a "working family" is a family where each family member 15 and older either has a combined work effort of 39 weeks or more in the prior 12 months OR all family members age 15 and over each has a combined work effort of 26 to 39 weeks in the prior twelve months and one currently unemployed parent looked for work in the prior 4 weeks). 71%, in fact (9,658,195 out of 13,622,425; this means 29% of all U.S. familes are "low income") See http://www.workingpoorfamilies.org/xls/WPFP_Conditions_Low-Income_Working_Families.xls Table 1.A.1a. The people who did the study obviously have an agenda (http://www.workingpoorfamilies.org/) but they base their data on Census and BLS data. I think that their definitions are reasonable and their figures are legit.

Bear in mind that 200% of the poverty rate was only $38,700 for a family of four in 2005 (the poverty threshold was an unbelievably paltry $19,350 for a family of four - sounds way too low to me). See http://aspe.hhs.gov/poverty/05poverty.shtml. 200% of the poverty threshold is not much at all, but it's too much to qualify for Medicaid in Illinois and most other states. See http://www.illinois.gov/PressReleases/ShowPressRelease.cfm?RecNum=3355&SubjectID=47.

On the other hand, a narrow majority of families that make less than 100% of the federal poverty threshold are not "working families" (2,825,230 out of 5,982,095, or 47% do work). See http://www.workingpoorfamilies.org/xls/WPFP_Conditions_Low-Income_Working_Families.xls. But in 2004, a majority of all individuals living below the poverty line (37 million people, or about 12.5% of the population) were either children (13.5 million) or working adults (7.8 million people). See http://www.nccp.org/publications/pdf/text_672.pdf p. 3 and http://www.bls.gov/cps/cpswp2004.pdf p. 1. And of course all of this is to say nothing of mental illness, crippling drug addiction, other medical disability, the lack of employment opportunities in economically depressed regions, simple faultless unemployability, or a whole host of other really good reasons why a poor person may not be able to work.

As to the second (implicit) part of the claim, I'd like to throw out a few more references to give some broader perspective. The U.S. has the lowest rate of social mobility (as measured by how strongly your parents income determines your own) in the First World. See http://www.suttontrust.com/reports/IntergenerationalMobility.pdf p. 6 Table 2. We have a very poor UN Human Poverty Index (HPI) rating compare to our peers (17th out of 19 among "highly developed" countries). See http://hdr.undp.org/en/media/hdr_20072008_table_4.pdf. We have the worst income and wealth inequality in the First World. See https://www.cia.gov/library/publications/the-world-factbook/fields/2172.html and http://multinationalmonitor.org/mm2003/03may/may03interviewswolff.html. And of course we have the third to lowest tax as a share of GDP percentage of all OECD countries (a close third behind Mexico and South Korea). See http://www.oecd.org/dataoecd/44/41/39494985.pdf p.1. I see these facts as part of a pretty clear story. Others may disagree.

Additional Note: While I'm pointing out things we're not very good at, I might as well round out the set:

1. We have a ridiculously high homicide rate and gun homicide rate.

http://www.guncite.com/gun_control_gcgvinco.html

Note that these figures are from the late '90's when our crime rates were historically low.

2. We have the highest infant mortality rate in the First World.

https://www.cia.gov/library/publications/the-world-factbook/rankorder/2091rank.html

Note that we have a higher infant mortality rate than Cuba.

3. We have the highest per capita incarceration rate in the world (the entire world, that is).

http://www.cnn.com/2008/CRIME/02/28/prison.population.ap/

4. We have the highest per capital spending on health care in the world but the 37th ranked health care system in the world.

http://www.who.int/entity/whr/2000/en/annex01_en.pdf

These figures are for 2000, the last time the rankings we're done. I'm sure we wouldn't be doing any better now.

Perhaps it is no coincidence that, in a addition to being a very low tax country, we have extremely low private sector unionization rates.

http://www.nber.org/papers/w3342.pdf?new_window=1 p. 43, Table 2.

The figures are somewhat dated but I'm sure things haven't changed very much.

II. The U.S. is at the point on the "Laffer Curve" where lower tax rates will produce higher government revenues.

In a rare moment of clarity, George Bush Sr. called this theory "voodoo economics." Obviously, at some unbelievably extreme tax rate (say 95%), government revenues would go up if you decreased the tax rate. But we are nowhere near this point. Remember that ~$860 billion in Bush tax cuts (that went disproportionately to the very wealthy, I might add)? They have significantly decreased federal government revenues and increased gross national debt. See http://www.washingtonpost.com/wp-dyn/content/article/2006/10/16/AR2006101601121_pf.html; http://en.wikipedia.org/wiki/Image:USDebt.png; and http://www.treasurydirect.gov/govt/reports/pd/histdebt/histdebt_histo5.htm. So, no, tax cuts do not pay for themselves.

Work and Effort

There are a couple of specific arguments regarding my proposed labor system that I’d like to address. I’d basically like to defend my proposals against suggestions/criticisms from the radical left and the center-right, both of which concern the murky concept of "effort."

The first thing I’d like to respond to is the idea, which several readers have referred to, that we should use an effort-based reward system (and implicitly, a lack-of-effort based “punishment” system in the sense that the reward given to those who give the appropriate level of effort will be withheld from those who do not). The idea obviously has philosophical appeal. It sounds fair. Ultimately, however, it strikes me as too vague in theory and unworkable in practice.

First of all, what is effort, and does it really form a coherent moral basis for reward? Is effort the amount of subjective pain or hardship one experiences while he or she performs a productive activity? Is it the amount of concentration, focus, or consistency with which someone attends his or her task? Or is it the amount of calories someone burns in the process of doing something? Think of the problem of the talented individual for whom anything is easy – should we deny an effort-based reward to this person who, though he or she meets every reasonable expectation regarding his or her performance, finds the job relatively easy? Or should we just give the effort-based reward to anyone who meets certain minimum standards of diligence and responsibility? I personally have no idea how to answer these questions. Perhaps one of you does.

There is also the abstract problem that the willingness to expend effort, like any personal characteristic, is something that is largely inherited and/or absorbed by social influences over which the individual has little control. So in a sense, society “owns” the amount of effort that an individual is willing to put forth just as much as it “owns” their other inherited/socially acquired abilities. If this is the case, as a purely abstract matter, no individual reward is appropriate for extra effort.

But most fundamentally, the attempt to objectively measure and reward effort strikes me as a utopian undertaking. Whatever we think effort is, it is almost certainly something that is only truly known, if at all, by the specific individual concerned. Until we learn how to, and decide we are willing to, monitor people’s thoughts and feelings, this task strikes me as absolutely impossible.

Second, the use of effort as a basis for reward would totally eliminate the “market” aspect of the labor market. Some people consider this a positive thing, but I don't. My view is that some play for market forces can be a useful way to allocate resources towards making products and providing services that people actually want, and can help, to some extent and in conjunction with a whole lot of equally important factors, motivate additional effort. Perhaps some of you will see this position as “un-socialist.” But I think the philosophical basis of socialism is not the total rejection of any and all private property and market exchange, but the conviction that the “right” to private property is not a right at all. Rather, property rights are a social and economic expediency that society can and should (even “must”) modify to accomplish important social goals. This implies that some market exchange may be tolerable to the extent that it can further general welfare AND to the extent that the fruits of such exchange are equitably redistributed.

So for me, the labor market should represent a kind of revenue sharing agreement between society and the individual with respect to the surplus productivity created, where society’s cut should be generally quite large, and should get progressively larger as a percentage as the individual’s reward increases. Once again, the benefit of this arrangement is not its inherent moral superiority, but its ability to effectively allocate resources and to preserve some incentive (albeit a radically compressed one) for increased productivity, while simultaneously providing the economic means to give everyone a relatively high standard of living. So long as the means to be productive are open to all (through free higher education, etc.) and the economic surplus is redistributed to maintain a radically compressed income and wealth distribution, I think an olde-fashioned labor market can be a good thing.

...

The other concern that I would like to respond to comes from the right. The question/concern is: how can a system of guaranteed employment ensure that certain minimum standards of diligence are met (like just showing up, for instance) by the people who resort to guaranteed government employment? After all, if employment is guaranteed by the government in all cases, someone who works for the government can essentially never be fired. So what do we do with the person who couldn’t find a job anywhere else, works for the government, but just doesn’t show up half the time and doesn’t try to be productive while he or she is there?

Here are the possible solutions I can think of:

a.) suspend the offender, without pay, for a period of time based on the severity of the offense
b.) continue to pay them but assign them to increasingly more distasteful tasks as punishment
c.) provide some kind of other punishment, like a fine
d.) send cops to their house and make them show up, and supervise their work closely to make sure they do it
e.) make them attend some kind of intensive community service work program in order to earn their right to work back
f.) just ignore their misbehavior and pay them anyway

Personally, I am somewhat uncomfortable with the idea that we should use the threat of withdrawing someone’s basic subsistence (in this case, a minimum income), even for a short period, as leverage to get them to be productive. So I have some trouble with a. We could also give them the lousy jobs to do, as in b., but then they really wouldn’t show up. A fine runs into the same problem as a. – it imposes an extra financial burden on someone who is probably on the lower end of our (albeit compressed) income distribution. D. and e. seem somewhat authoritarian. And f. seems kind of like it amounts to an acceptance of failure. In short, I find all of these solutions at least somewhat distasteful.

I would probably accept some judicious combination of a. - e. as necessary, but undesirable, punishments (I realize this is a very mushy answer). But it probably wouldn’t be that big of a problem, really – I think it’s actually a very, very small percentage of the population that really wants to sit at home and do nothing and/or to go to work and accomplish nothing at all. And if we are going to err in one direction I’d rather err in favor of giving everyone a minimum (i.e., higher than the poverty rate) income and letting some people by without really contributing than to run the risk of denying deserving people the necessaries of life. And, after all, all economic systems have some inefficiency. Just look at the current internet-surfing, time-wasting juggernaut that is the capitalist office. Talk about total waste.

So I guess the upshot is I think we should try as hard as possible to get everyone to do their fair share of work by using some sensible combination of a. - e., depending on what works, while taking comfort in the fact that if this system is to suffer some inefficiency because of the employment guarantee, at least that inefficiency is incurred for a good cause. And in a society as rich as ours, we can certainly afford to sacrifice some productivity in order to satisfy overriding moral imperatives.