I think I’ve mentioned that I’m not a labor economist. I’m a financial economist. However, it’s hard to get through any econ program with out learning something about the labor markets given that it’s one of the most basic of all markets. I wanted to talk about the increased minimum wage proposal in the President’s SOTU address.
You’ll probably hear quite a bit about how minimum wages create unemployment. This is true under specific conditions. The minimum wage must be below the going wage or what we call the equilibrium or clearing wage so that it is ‘binding’ or actually creating an excess supply of job seekers for that wage and less jobs than would be available at the clearing wage. You can look at the graph of the US below and see that in many states, the proposed Obama increase to the minimum wage is lower than the going wage in many states. The poorest states–mostly in the south and middle of the country–are the ones with the lower wages.
However, the basic 101 econ labor market conditions, assumptions and model are very simplistic. All of these things impact the outcome and can determine if the minimum wage increase creates any excess workers. Labor economists that look at the real world have found some additional things about minimum wages that suggest that minimum wage can benefit the economy at large and unemployment at large. They can also help create efficiencies in unexpected places, which is always good for markets.
I’m going to try to give you some background from the popular press, scholarly articles, and a conservative magazine where economists explain why increasing the minimum wage can be good for the economy. Actually, there’s so much good rationale that even Walmart lobbies congress for increases. That probably will surprise you, but it’s pretty simple. Minimum wage workers are Walmart shoppers. Giving them more income turns them into customers. They don’t have any leftover money so they basically spend all they get. This is good for Walmart. This isn’t true for richer folks. They tend to sit on their money and it goes to places that can take time to work through our economy if it actually goes to our economy and not some place else entirely.
So, let me first start with a New Yorker article called “The Case for a Higher Minimum Wage”. This is, of course, not the scholarly arguments. However, there’s some good background information in the article to get us situated with the stylized facts. Unlike House Republicans and Joe Scarborough, people that actually want to know abut things rather than opine through their bungholes love them some stylized facts.
While the labor economists and econometricians are still arguing about which of their many studies can be relied upon, there are quite a few things about minimum wages, and their impact on the economy, that we know for sure. Taken together, these things amply justify raising the minimum wage, as President Obama called for in his State of the Union address.
The first statement we can make without fear of contradiction is that, at $7.25 an hour, the current minimum wage is pretty low. In nominal dollars, it’s gone up quite a bit over the past twenty-five years. In 1978, it was $2.65; in 1991, it was $4.25. But these figures don’t take into account rising prices, which eat away at purchasing power. After adjusting for inflation, the minimum wage is about $3.30 less than it was in 1968. Back then—forty-five years ago—the minimum wage was $10.56 an hour, according to a very useful chart from CNNMoney.
We also know that the U.S. minimum wage is low compared to its counterparts in other advanced countries. In France and Ireland, for example, the minimum remuneration level is more than eleven dollars an hour. Even in Great Britain, which is usually regarded as a country with a flexible, U.S.-style labor market, it is close to ten dollars an hour. Another informative chart, this one from Business Insider, shows that the U.S. minimum wage is comparable to ones in places like Greece, Spain, and Slovenia—countries where G.D.P. per capita and labor productivity are markedly lower than here in the United States. We have an advanced economy but a middle-level minimum wage.
A second important and (largely) undisputed finding is that there is no obvious link between the minimum wage and the unemployment rate. During the nineteen sixties, when the minimum wage was raised sharply, unemployment rates were sharply lower than they were in the nineteen eighties, when the real value of the minimum wage fell dramatically. If you look across the states, some of which set a minimum wage above the federal minimum, you can’t see any sign of higher rates leading to higher unemployment. In Nevada, where the national minimum of $7.25 an hour applies, the jobless rate is 10.2 per cent. In Vermont, where the minimum wage is $8.60 an hour, the unemployment rate is 5.1 per cent. What these figures tell us is that other factors, such as the overall state of the economy and how local industries are doing, matter a lot more for employment than the level of the minimum wage does.
There are, in fact, many things that impact how the level of the minimum wage will impact an economy. Some economists have found that a “properly functioning minimum wage” can actually improve labor flows in a market. Lee & Saez (2010) show under which conditions this can happen. This link goes to a theoretical paper so if calculus is not you’re thing, you may want to take my word for it. I’m going to show you the technical result as well as the authors’ story that is much more intuitive so you get an idea of how economists look at these things. This is from the paper’s introduction and conclusion which are the parts without the calculus!!
We show that a binding minimum wage is desirable as long as the government values redistribution from high-to low-wage workers, the demand elasticity of low-skilled labor is finite, the supply elasticity of low-skilled labor is positive, and most importantly, that the unemployment induced by the minimum wage is efficient, i.e. unemployment hits workers with the lowest surplus first. The intuition is extremely simple: starting from the competitive equilibrium, a small binding minimum wage has a first order effect on distribution but only a second order effect on efficiency as only marginal workers initially lose their job.
This is from the employer’s view point. It basically says they let go of their worst employees first so they really don’t lose much. Also, it implies it’s probably not a large number that are released. The problem is that this doesn’t really look at the increased number of people that might enter the work force to get at the higher wage. This is part of the excess worker phenomenon as people that wouldn’t be in the market for the lower wage will enter the market if the wage is higher. Therefore, more people will be looking for jobs than there will be jobs available. However, this isn’t as big of a problem as job losers for society as a general rule. It just makes the numbers appear worse.
The second part of the paper considers the more realistic case where the government also uses taxes and transfers for redistribution. In our model, we abstract from the hours of work decision and focus only on the job choice and work participation decisions. Such a model can capture both participation decisions (the extensive margin) as well as decisions whereby individuals can choose higher paying occupations by exerting more effort (the intensive margin). In that context, the government observes only earnings, but not the utility work costs incurred by individuals.1
In such a model, we show that a minimum wage is desirable if unemployment induced by the minimum wage is efficient and the government values redistribution toward low-skilled workers. The intuition for this result is the following. A binding minimum wage enhances the effectiveness of transfers to low-skilled workers as it prevents low-skilled wages from falling through incidence effects. Theoretically, the minimum wage under efficient rationing sorts individuals into employment and unemployment based on their unobservable cost of work. Thus, the minimum wage partially reveals costs of work in a way that the tax system cannot.
This is an interesting result since it basically says that it’s a more efficient way of giving poorer folks incomes by keeping the most efficient ones in the labor force instead of being unemployed and relying on government programs. Their model argues that a minimum wage efficiently rations ‘out of work’ benefits. So, in this case, yes it creates some unemployment, but generally this means the workers who are the most ‘deserving’ of the job stay in the job and those that aren’t can fall into the safety net and be retrained or schooled to improve their prospects.
One of the primary results of a paper by Dube et al (2o12) is estimating the decrease of what we call “churning” or what you probably know as job-hopping. This behavior costs employers a lot of money since the initial employment and training periods can be expensive for even the lowest wager earners. Reducing churning means less of these expenses overall and basically coverage of the increased wage. So, in this case, the minimum wage makes the employer think about the total wage bill and not just the portion related to hourly work.
Here’s one of the more interesting set of arguments from the conservative point of view. This is the idea that by providing a good working wage at the bottom wage earners, you stop the problem of a potential ‘college graduate’ bubble. Since the majority of jobs in this country still don’t require a college degree, people will be more likely to work jobs and not over-educate themselves. The author also argues that the kinds of jobs that tend to be minimum wage jobs are not out-sourceable so improving the lot of these folks improves a lot more than just the people in the jobs. Minimum wage jobs tend to be service jobs and the benefits of the incomes and the jobs themselves will stay in the country regardless of the higher wage. We again see the argument that most economists make about ‘trickle-up’ economics. Giving more income to the lowest wage earners actually creates a stimulus because they spend their money and there are a lot of them.
Although the direct financial benefits to working-class Americans and our economy as a whole are the primary justifications for the proposal, there are a number of subsidiary benefits as well, ranging across both economic and non-economic areas.
First, the net dollar transfers through the labor market in this proposal would generally be from higher to lower income strata, and lower-income individuals tend to pay a much larger fraction of their income in payroll and sales taxes. Thus, a large boost in working-class wages would obviously have a very positive impact on the financial health of Social Security, Medicare and other government programs funded directly from the paycheck. Meanwhile, increased sales tax collections would improve the dismal fiscal picture for state and local governments, and the public school systems they finance.
A final argument for using a minimum wage is that even though it tends to be less efficient and more costly than just supplementing the incomes of low income earners, it tends to be politically easier to get an increase through congress than a subsidy.
Does raising it improve the plight of the worst off, at a reasonable price?
A lot depends on your definitions, but economist Adam Ozimek makes a smart point. According to a 2007 study by the CBO, an increase in the minimum wage to $7.25, like that eventually passed that year, would increase wages by $11 billion, of which $1.6 billion went to poor families.
By contrast, increasing the Earned Income Tax Credit for large families (as happened in the stimulus bill) and for single people would cost $2.4 billion, of which $1.4 billion would go to poor families. The EITC option costs one fifth as much to society but does about as much good for poor families. That suggests that if you want to help families escape poverty, wage subsidies are a more cost-effective option than the minimum wage.
Oddly enough, the conservatives are less interested in the net savings, than the process of doing this, so they prefer minimum wage increases to the EITC option. This means Boehner should be happier than he is with this proposal.
Furthermore, as large portions of the working-poor became much less poor, the payout of the existing Federal Earned Income Tax Credit (EITC) would be sharply reduced. Although popular among politicians, the EITC is a classic example of economic special interests privatizing profits while socializing costs: employers receive the full benefits of their low-wage workforce while a substantial fraction of the wage expense is pushed onto the taxpayers. Private companies should fund their own payrolls rather than rely upon substantial government subsidies, which produce major distortions in market signals.
So, I hopefully didn’t overwhelm you with too much stuff over coffee, but I would like to remind you that this is basically the mornings read post. So, since I’ve run out of space, it’s now your turn to share the other things. Oh, and it’s okay to ask questions or tell me that something confuses you. I’m assuming you’re not a labor economist either. Again, there’s a lot of controversy and a lot of different circumstances and assumptions around all these models. But, it should let you know that increasing the minimum wage can be good policy for a variety of reasons even though it might impact the number of people looking for or working at those jobs.
What’s on your reading and blogging list today?
Good morning, news junkies! It’s been a helluva week in current events. Grab a cuppa whatever gets you up and warm this morning and let’s dig in.
Restate of the Union
For the source on that, see VL’s latest webcomic: “Restate of the Union“? Once again, Vast Left hits it out of the park. And, Glen Ford at BAR hits it back out there again (emphasis in bold is mine): “The Obama/GOP Consensus… With whole communities in a state of economic dislocation, Obama burns the rescue boats and poisons the water, all the while promising that the necessary budgetary savings will not be achieved ‘on the backs of our most vulnerable citizens’ – as if Wall Street’s bankers will shield the helpless with their well-bonused bodies… No dollar signs to give meaning to the president’s mystical and misleading rhetoric on jobs, which will somehow be made to appear through a uniquely American process of ‘innovation’ and ‘self-invention’ inaccessible to lesser peoples. This aspect of exceptionalism will out-‘green’ China and overtake South Korean Internet speeds, without costing the Treasury an extra dime. ‘Thousands’ of jobs will result, to take the place of the hundreds of thousands that will be lost in the public sector, alone, as government implodes at all levels. ”
Also: Bostonboomer came up with an excellent list of words that were missing from the president’s address (see last section of this post for my list), and over at the CSM Global News Blog, Stephen Kurczy has a roundup of “World reactions to Obama’s 2011 State of the Union address.”
Power to the People: Tunisia, Lebanon, Egypt, Yemen, and the Palestine Papers
The REAL story this week is the one going on in the Middle East. I collected more links and excerpts than I could fit here, so I’ve put up a separate Saturday reads just for the Middle East at my place. Please click on the link above or the image to the left to get the scoop! To the left, description by Mona Eltahawy: “..a photo of a man and a woman standing in Mahalla, posted on the citizen journalists’ Web site Rassd News Network, instantly conveys why Egyptians have taken to the streets. The woman holds a loaf of bread and a Tunisian flag. The man next to her holds a loaf of bread and a sign that reads ‘Yesterday Tunisia. Today Egypt. Jan. 25 the day we began to take our rights back.’”
In South Florida, via the Miami Herald: “Modern-day slaves’ story repeats daily in plain sight… The case of dozens of Filipino workers held captive spotlights a widespread human- trafficking problem.” And, from Nikki Junker at RH Reality Check: “Moldova, A Hot Bed for Human Trafficking… So when I think of Human Trafficking, I think of the places where poverty is most rampant and in the European Union, the poorest country is little Moldova whose people are bought and sold as commodities to be used by the richer nations of the world.”
This Saturday in Women’s and Children’s Health
For the extended version, please click here or on the image to the left. Topics covered: Breakthroughs, Cancer Research, January: Cervical Health Awareness, February 4: Official Wear Red Day, Abortion Rights Awareness Month?, Obstetric Fistula, Chemicals and the Rise in Childhood Cancers, Demography trends in India, Stupakistan: An Interactive Map, Anti-Abortion Myths, Catholic hospitals, Abortion showdown in Texas, Stem Cell Research, Siddhartha Mukherjee’s The Emperor of All Maladies: A Biography of Cancer.
I wrote this back in November, but after hearing Obama’s SOTU remarks on education, I thought I would revisit it. It’s chock full of links–I basically recorded everything of interest I could dig up on the charter school debate. If you want to read the entire piece, click on the link/image or bookmark for later. Otherwise, here are the three must-read links you ought to familiarize yourself with if nothing else:
Bringing it altogether: Populism vs. the Pseudo-Pragmatism of Barack Obama
The president’s speech on Tuesday failed to put people first and then added insult to injury by championing the false pragmatism of “[spending] cuts to things I care deeply about, like community action programs.” Talk about “suckered into stupid” !
Remember O’s “Dumb” war comment? “I don’t oppose all wars…what I am opposed to is a dumb war.” Well, I’m not against all budgetary cuts. I’m just against the stuck-on-stupid ones that would further erode underfunded social safety nets that I care deeply about–especially at precisely the moment where the margins of society need those social safety nets the most. By all means, cut back spending on unnecessary things. I don’t know about you, but war+untruth and military aid toward a sham peace process all sound pretty darn unnecessary to me.
The president paid lipservice to “ordinary people” before he closed, but here are some more words missing from Obama’s speech: Egypt, the Palestine Papers, Citizens United ruling, Modern day slavery, Mental health, Childhood cancer, Hexavalent chromium, NASA privatization/layoffs (though Obama sure Sputnik’d us in a way that is a most unfortunate turn of that phrase), Atheist (yet for no discernible reason, he tacked Christian, Jewish, Hindu, and Muslim in front of his two-second mention of the DADT repeal), Texas School Board of Education and textbooks, CREDO study on charter schools, Peterson/Lastra-Anadón (their study gave Race to the Top winners poor marks), Smith-Lipinski, Paycheck Fairness Act (not the same thing as the Lilly Ledbetter Act), Income inequality, Rise in Multi-generational American households due to unemployment and foreclosure, Food stamps, Stem cell research, Dickey-Wicker, Public option/Medicare for All, Elizabeth Edwards.
I miss Elizabeth’s voice (from an August 2007 interview): “It’s the continuing inequity. We still have a middle class that lives on a razor blade. So sometimes when you say poverty, you neglect a large portion of the population about whom he’s deeply concerned. It’s the two-income trap. It’s more likely in America that your parents will file for bankruptcy than divorce. We think of divorce as so prevalent, but we all know that happens because somebody moves out of the house. But when bankruptcy happens, they stay there, they close up, and you don’t feel what’s going on. But what that means is we have all these families under stress, constantly. And then we have the people who are trying to get out of dire distress. You hear that thirty-seven million people in this country live in poverty, and fifteen million people—fifteen million— live in deep poverty, which is $7,800 for a family of three.”
Now, that’s a State-of-the-Union-as-inherited-from-Bush-and-the-GOP speech!
I miss so many voices on the domestic policy front. Like Bobby Kennedy: “It is not realistic or hardheaded to solve problems and take action unguided by ultimate moral aims and values, although we all know some who claim that it is so. In my judgment, it is thoughtless folly. For it ignores the realities of human faith and of passion and of belief — forces ultimately more powerful than all of the calculations of our economists or of our generals.”
We are witnessing the power of those forces in the Middle East. Not in a glossy Shepard Fairey poster, but out in the streets. Genuine conviction. Genuine passion. The hope of a people demanding policies that put the interests of the public trust ahead of the pseudo-pragmatic. As Hillary said in her 2009 Human Rights speech at Georgetown: “Of course, people must be free from the oppression of tyranny, from torture, from discrimination, from the fear of leaders who will imprison or ‘disappear’ them. But they also must be free from the oppression of want – want of food, want of health, want of education, and want of equality in law and in fact.“
There is nothing more pragmatic or more “innovative” than a domestic and foreign policy agenda driven by a human rights agenda to free people from the oppression not just of tyranny but also of want. It is the only agenda that pays lasting progress forward.
We need a freeze on the idiocracy that suggests otherwise.
So, what stories are you following today? And, what’s on *your* list of words missing from the SOTU? Have at it in the comments!
After Obama’s pro-corporate, cliche-ridden SOTU speech filled with right wing talking points, I think anyone with a brain has to admit that the mask is off. This man is Ronald Reagan without the folksy anecdotes and charisma (I never saw it, but supposedly he had it).
The speech last night demonstrated once and for all that Obama is heartless, self-involved, and narcissistic. He cares nothing about the fate of ordinary Americans, or what will become of this country once he has eliminated the middle class. The only thing he cares about is making sure he has a soft life giving speeches and serving on boards of directors after he leaves the White House.
To accomplish that Obama needs to try not to piss off too many rich people and he has to finish the job that Reagan, Bush I and Bush II started–handing over the U.S. treasury to the wealthiest 1% and in the process destroying the country.
I read the SOTU speech carefully, and there are quite a number of important topics that President Obama completely failed to address. Here are some relevant words that were never even mentioned in Obama’s 2011 SOTU address:
Gulf of Mexico
How could this man get up and address the country without once mentioning the rapidly ballooning poverty and homeless rates and the millions of unemployed Americans–many of whom have completely exhausted their benefits? How could he talk about our schools without mentioning the many children who are struggling to get an education while living on the streets or in families who can’t afford enough food?
How could he talk about the shootings in Tucson without discussing the need for some kind of rational gun control?
How could he freeze government salaries and ask Congress to freeze discretionary spending for five years while recommending more corporate giveaways and tax cuts for corporations?
How could he talk about cutting the deficit without getting us out of the two wars we’ve been fighting on borrowed money for longer than any other war in U.S. history?
How could he talk about competition for jobs without seriously addressing corporate outsourcing or the possibility of the government creating jobs as Roosevelt did during the last Great Depression?
I was sickened by Obama’s call for “sacrifice.”
The future is ours to win. But to get there, we can’t just stand still. As Robert Kennedy told us, “The future is not a gift. It is an achievement.” Sustaining the American Dream has never been about standing pat. It has required each generation to sacrifice, and struggle, and meet the demands of a new age.
And now it’s our turn. We know what it takes to compete for the jobs and industries of our time. We need to out-innovate, out-educate, and out-build the rest of the world. (Applause.) We have to make America the best place on Earth to do business. We need to take responsibility for our deficit and reform our government. That’s how our people will prosper. That’s how we’ll win the future.
Bullshit! What sacrifice are you going to make Mr. President? What sacrifice will you ask of your corporate masters, of Goldman Sachs, JP Morgan Chase, and Bank of America? Do tell. No, the sacrifice you talk about is to be borne by public employees (who, btw, are “disproportionately Black”), the citizens of states that will go bankrupt, the poor, the elderly, and the shrinking middle class.
I was nauseated by Obama’s call for universities to
open their doors to our military recruiters and ROTC. It is time to leave behind the divisive battles of the past. It is time to move forward as one nation.
The “divisive battles of the past?” Meaning the fight to end the Vietnam War? The endless war that has now been exceeded in length by the mess in Afghanistan?
I was also disturbed by Obama’s claim that Americans “share common hopes and a common creed.” Really? What hopes do I share in common with John Boehner or Michelle Bachmann? What “creed” is he referring to? If it’s Christianity, many of us don’t share that either.
There was so much wrong with Obama’s speech last night. But worst of all was the President’s complete lack of compassion for those who are suffering while bankers and CEOs get bailouts and tax cuts. Much of the corporate media has either praised Obama’s speech or made excuses for it. Here’s an antidote from Patrick Martin at the World Socialist website:
Obama displayed utter callousness and indifference toward the social distress of tens of millions of Americans. There was virtually no reference to unemployment or the staggering growth of economic inequality, and no proposals for creating jobs for the 17 million workers who are jobless or forced to subsist on part-time and temporary work.
The words “poverty,” “foreclosures,” “hunger” and “homelessness” were not uttered, despite sharp increases in all four during the first two years of Obama’s tenure.
Listening to Obama’s desultory remarks, one would never have guessed that just 28 months ago the American financial-corporate elite brought the American and world economy to its knees, precipitating the worst economic crisis since the Great Depression. The speech was a paean to American capitalism and the very financial bandits who are chiefly responsible for the catastrophe facing the American people.
Obama boasted of the good fortune of corporate America, which is making more money than ever. “The stock market has come roaring back,” he declared. “Corporate profits are up. The economy is growing again.” Under conditions of near double-digit unemployment, he claimed to have “broken the back of this recession.”
The state of our union is not strong. Our society is sick and getting sicker by the day. We desperately need leadership, but it doesn’t seem like we’re going to get it soon. I don’t know what the answer is, but Barack Obama is not going to help us find it.
Okay, there is a lot going on and I thought I would post an update of sorts to the Wednesday Reads. There is a big storm on the way to the Northeast, the Olbermann has landed on his own FOK News Channel, and more…
One Democratic congressman says he was ready to hit the bottle after hearing the Republican response to President Obama’s State of the Union Tuesday night.
This is for Dak: It is written by Ross Douthat. The Politics of Evasion at the State of the Union – NYTimes.com
If you were a visitor from Mars, watching tonight’s State of the Union address and Paul Ryan’s Republican response, you would have no reason to think that the looming insolvency of our entitlement system lies at the heart of the economic challenges facing the United States over the next two decades. From President Obama, we heard a reasonably eloquent case for center-left technocracy and industrial policy, punctuated by a few bipartisan flourishes, in which the entitlement issue felt like an afterthought: He took note of the problem, thanked his own fiscal commission for their work without endorsing any of their recommendations, made general, detail-free pledges to keep Medicare and Social Security solvent (but “without slashing benefits for future generations”), and then moved swiftly on to the case for tax reform. Tax reform is important, of course, and so are education and technological innovation and infrastructure and all the other issues that the president touched on in this speech. But it was still striking that in an address organized around the theme of American competitiveness, which ran to almost 7,000 words and lasted for an hour, the president spent almost as much time talking about solar power as he did about the roots of the nation’s fiscal crisis.
This bit about the US deficit:
The weak economy and fresh tax cuts approved last month will help drive the federal budget deficit to nearly $1.5 trillion this year, the biggest budget gap in history and one of the largest as a share of the economy since World War II, congressional budget analysts said Wednesday.
Well, we all knew that he would be back:
Maybe you remember Keith Olbermann from the show Countdown, which ran for several years on cable news’ MSNBC? These days, of course, Olbermann’s perhaps best known as the “The Proprietor” of a new Twitter-based news organization called the “FOK News Channel. At least, he’s been billing himself that way since, well, yesterday.
Olbermann, boasting a loyal group of over 208,000 Twitter followers, is clearly showing every sign of leveraging his tweets.
The sidelined star added a second Twitter account ahead of Tuesday’s State of the Union address, dubbing it “FOKNewsChannel” and quickly attracting more than 18,000 followers (or “Friends of Keith,” hence FOK). According to the account’s bio line, FOKNews can be described this way: “Smokestacks Belching News On Twitter Since January 2011.”
Ah, more proof on Obama’s continued MO, copy crap from someone else and add your own cliches as an added touch.
If I were President Obama’s English professor, I would take points off for not footnoting his sources. These are guys Obama most certainly reads regularly.
Oh, and it looks like Egypt is becoming more intense:
Sharpening the U.S. response to massive demonstrations in the Middle East, Secretary of State Hillary Rodham Clinton said Wednesday that Egypt must adopt broad reforms and not crack down on the crowds demanding the end of the American-backed authoritarian government.
And here we go again, the weather channel is calling this a category 1 hurricane…with snow…is it another snowicane?
I know it is mostly links, and not much commentary, but I wanted to get this posted as quick as possible.
This is an open thread, have at it!