A New Minimum Wage

November 20, 2018

by Steve Stofka

Several readers had questions about the minimum wage article a few days ago. Why did I suggest 40% of the average wage? Why not 80%? How much of a difference is there between the average and median wage?

In May 2017, the annual BLS occupational survey found the average wages of all workers was a third higher than the median (Note #1). This survey is conducted only once a year and published six months after completion. I suggested 40% of the average regional wage. That would equal 53% of the median wage. I am not saying that 40% is a livable wage. Only that it might be a practical benchmark that moderates of both parties could support.

In 2015, the BLS estimated that there were 870,000 people making minimum wage. Over one million earned below minimum wage because they were in occupations where tipping is customary, and they have their own lower minimum wage. 870,000 workers out of 150 million is ½ of one percent. So why all the brouhaha about the minimum wage?

Approximately 42% of all workers make less than $15 an hour (Note #2). The percentage is closer to half of workers when adding union workers whose contract wages, particularly starting wages, are pegged to the minimum wage. A 2015 Forbes article quotes the UFCW:
“But the United Food and Commercial Workers International Union says that pegging its wages to the federal minimum is commonplace. On its website, the UFCW notes that ‘oftentimes, union contracts are triggered to implement wage hikes in the case of minimum wage increases.’ ” (Note #3)

I like several aspects of the Raise the Wage Act (Note #4) put forth by Bernie Sanders and Patty Murray. I like the gradual nature of the increases and the indexing of the wage. This is something that economists have been suggesting for decades. The summary published on Bernie’s web site (Note #4) is an embarrassment of errors:

“The Raise the Wage Act is front loaded to provide the biggest impact to workers. Upon enactment, the federal minimum wage would be increased from $7.25 to $9.25. The following increases are: $10.10 (2018); $11 (2019); $12 (2020); $13 (2012); $13.50 (2013); $14.20 (2023); $15.00 (2024).” They can’t even get their date sequence correct. Their calculations of the aggregate raise in wages is half of my estimate using BLS and BEA data (Note #5). Large companies like Wal-Mart are sure to lobby against the 14% cut in profits.

As the Slate op-ed notes, a national minimum wage of $15 is an “economic gamble” in a global economy that beckons business owners with lower cost labor. I am suggesting a compromise between Bernie Sanders’ proposal and the current policy.

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Notes:
1. BLS Occupational Survey
2. Slate article on raising the minimum wage.
3. Forbes article
4. Summary  of the Raise the Wage Act
5. My estimate: The summary of the Raise the Wage Act says “Increasing the federal minimum wage to $15 an hour by 2024 would give workers $144 billion in additional wages by 2024.” The Bureau of Economic Analysis’ current estimate of wages and salaries is almost $9 trillion. Using a low estimate of 2% annual wage growth would equal $10 trillion in 2024. There are currently 150 million workers. Estimating low employment growth of just one million workers a year gives an average of $64,000 per year. Let’s say that the 42% of wage earners who will be affected by a higher minimum wage make only 40% of that average, or $25,600 a year. That averages $12.80 an hour. The total wages that will be affected equals almost $1.7 trillion. The Raise the Wage Act is estimating that the average effect will be 8.5%. Using the estimates above gives us an effect twice that size, or 17.2% – close to $300 billion annually. That only includes the wages. Add in 25% in taxes and mandatory employer insurance costs equals $375 billion. Corporate profits after tax are currently $2 trillion. Estimating that they increase by 5% per year produces an estimate of $2.7 trillion in profits. $370 billion in additional costs is 14% of profits. Large companies like Wal-Mart are sure to lobby against such a bill.

Inflation Measures

“Everyone is entitled to his own opinion but not to his own facts.” – Sen. Daniel Patrick Moynihan

September 30, 2018

by Steve Stofka

The above quote has been attributed to the former Senate Majority Leader. People repeat the quote when discussing a contentious subject. We are often convinced that we have the facts when our facts may indeed be arbitrary. Let’s take the case of real or inflation-adjusted income. Has the average real wage declined or risen in the past decades? The calculation depends on which measure of inflation we choose.

There are two measures of inflation, the Consumer Price Index (CPI) and the Personal Consumption Expenditure Price Index (PCE). The CPI relies on surveys of what consumers buy. The PCE is based on surveys of what businesses sell (Note #1). The CPI uses a fixed basket of goods, regardless of changes in the prices of items in a basket. If the weekly basket of goods includes two pounds of ground beef, that two pounds never changes in response to lower prices. It is static. The PCE does adjust for price changes. If the price of a pound of ground beef went down thirty cents, the PCE calculates that a family bought a bit more ground beef and a little bit less chicken, for example. It is a dynamic measure.

People drive fewer miles and buy more fuel-efficient cars as the price of gas increases BUT only after a certain dollar amount. Our purchasing patterns are both static and dynamic. Because we are creatures of habit, our buying patterns are resistant to change. Within a certain price range, we will continue to buy the same items. Outside of that range, we do make changes because we want to optimize our choices.

In the past forty years the CPI has calculated an annual rate of inflation that is over ½% higher than the PCE rate. That small difference compounded over forty years amounts to 23%. That large difference tells two very different stories. Using the CPI, the average worker has lost a few percent in inflation adjusted hourly wages. Using the PCE, on the other hand, the average worker has enjoyed real gains of 20% in the past forty years (Note #2).

Our most volatile disagreements are in areas where facts are difficult to observe. The household survey data that underlies the CPI is unreliable because people living busy lives are not accurate journal keepers of their daily purchases. On the other hand, surveys based on business sales are inaccurate because people stock up on items whose prices decline.

Even when facts are readily verifiable, the interpretation of those facts varies with context. In arriving at our version of the meaning of those facts and their context, we subtract a lot of observable data.  We must filter reality because we cannot manage such a large amount of information. Because we filter our perceptions, eyewitness testimony is unreliable. Although our perceptions are inaccurate, we must act on those perceptions and hope that they are accurate enough. That same reasoning guides economists, politicians, and those in the social and physical sciences. We would all have more constructive discussions if we understood the imperfection of our perceptions.

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Notes:

1. The Difference between CPI and PCE {Federal Reserve}

2. Using the average hourly wage for production and non-supervisory employees.

Pickup Purchasing Power

April 24, 2016

Relatively stagnant wages and income inequality have become a frequent theme on the campaign trail.  Let’s look at what I’ll call pickup purchasing power to understand the problem.  Sorry.  No graph from the Federal Reserve on this one.

A favorite vehicle among construction workers is the F-150 pickup, a reliable vehicle with room for a toolbox and a trip to the local lumberyard for supplies.  The MSRP of a standard bed 1998 model, available to the public in September 1997, was $14,835 (Source ) In 2016, the MSRP of that same model is $26,430 (Source), a 78% increase, about 3.2% per year.  There have certainly been improvements in that truck model in the past two decades but customers can not order the model without the improvements.  The basic model is the basic model.

Let’s look now at the wages needed to buy that pickup.  In May 1997, shortly before the 1998 F-150 was released to the public, the BLS survey reported average carpenters’ wages of $30,800.  At that time, wages and salaries were about 70.5% of total compensation, or about $43,700 (BLS report).  In the decade before that, wages as a percent of total compensation had declined from 73.3% in 1988 to 70.5% in 1997.  Rising insurance costs and other direct benefits to employees were slowly eating into the net compensation of the average carpenter.

In 2015, the average wage for carpenters was $43,530.  The BLS reported that wages were now 67.7% of the total employment cost, or about $64,300.  In that 18 year period, carpenters’ wages grew 41% but total compensation grew 47%, or 2.1% per year.  The price of that pickup truck, though, grew at 3.2% per year.  That seemingly small difference of 1% per year adds up to a big difference over the years.  That’s the sense of anger that underlies the current election season.  The growth in price of that pickup is only slightly above the average post WW2 inflation rate of 3%.  It is the wages that have fallen behind.

Trump blames the politicians who have given away American jobs with badly negotiated trade agreements that disadvantage Americans.  Trump’s promise to bring those manufacturing jobs back home wins him popular appeal in those communities impacted by the decline in manufacturing.  The loss of manufacturing jobs has left a larger pool of job applicants for construction jobs.  Some of those displaced workers did not have the carpentry skills needed but some were able to work in roles supervised by an experienced carpenter.  The more the supply of job applicants the less upward pressure on wages. If – a big if – some manufacturing jobs do come back to the U.S., it will help spur more growth in carpenter’s wages.

Bernie Sanders blames the fat cats and proposes taxing all but the poorest Americans to distribute income more evenly. His remedies to promote his programs of fairness are far ranging.  Employers who are currently providing health insurance for their employees will probably welcome a 6.2% payroll tax.  On a forty year old employee making $50,000 a year, the $3100 tax is far less cost than an HMO plan. Employers who do not provide such coverage will resent the imposition of more taxes but at least it will be across the board, affecting all competitors within an industry or local market.  Sanders’ healthcare plan also relies on 10% cuts in payments to doctors and hospitals, who are projected to save at least that much in reduced billing costs.

While Trump addresses a specific demographic, a particular segment of the labor market, Sanders proposes broad remedies to a number of problems.  Trump’s appeal will be to those who want a specific fix.  Bring back jobs to our community.  We’ll figure out the rest.  Sanders’ proposals will appeal to voters who have more confidence in government as a problem solver.

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Oil Stocks

Readers who put some money to work in oil stocks (XLE, VDE for example) in late February, when I noted the historical bargain pricing, might have noticed the almost 20% increase in prices since then.  There are a number of reasons for the surge in price but the buying opportunity has faded with that surge.  Inventories are still high relative to demand.  Recent comprehensive market reports from the IEA require a subscription but last year’s report is available to those interested in a historical snapshot of the supply and demand trends throughout the world.  Until 2014, total demand had slightly exceeded supply.  A glance at the chart shows just how tightly coordinated supply and demand are in this global market. A “glut”in supply may be less than 1% of daily worldwide consumption and it is why prices can shift rather dramatically as traders try to guess both short and long term trends in demand and supply.

Post War Productivity

July 26, 2015

Each year, the Council of Economic Advisors (CEA) submits the Economic Report of the President  to the Congress.  They compile a number of data series to show some long term trends in household income, wages, productivity and labor participation.  Readers should understand that the report, coming from a committee acting under a Democratic President, filters the data to express a political point of view that is skewed to the left.  When the President is from the Republican Party, the filters express a conservative viewpoint.  Has there ever been a neutral economic viewpoint?

In this year’s report the Council identifies three distinct periods since the end of WW2: 1948-1973, 1973-1995, and 1995-2013.  In hindsight, this last period may not be a single bloc, as the report acknowledges (p. 32).

The most common measure of productivity growth is Labor Productivity, which is the increase in output divided by the number of hours to get that increase.  Total Factor Productivity, sometimes called Multi-Factor Productivity (BLS page), measures all inputs to production – labor, material, and capital.  As we can see in the chart below (page source), total factor productivity has declined substantially since the two decade period following WW2.

In the first period 1948-1973, average household income grew at a rate that was 50% greater than total productivity growth, an unsustainable situation.  This post war period, when the factories of Europe had been destroyed and America was the workshop of the world, may have been a singular time never to be repeated.  What can’t go on forever, won’t.  In the period 1973-1995, real median household income that included employer benefits grew by .4% per year, the same growth rate as total productivity.

The decline in the growth rate of productivity hinders income growth which prompts voters to pressure politicians to “fix” the slower wage growth.  If households enjoyed almost 3% income growth in the 1950s and 1960s, they want the same in subsequent decades.  If the rest of the world has become more competitive, voters don’t care.  “Fix it,” they – er, we – tell politicians, who craft social benefit programs and tax programs which shift income gains so that households can once again enjoy an unsustainable situation: income growth that is greater than total productivity growth.

“Where Have All The Flowers Gone?” was a song written by legendary folk singer Pete Seeger in the 1950s. It was  a song about the folly of war but the sentiment applies just as well to politicians who think that they can overcome some of the fundamental forces of economics.  Seeger asked: “When will they ever learn?”

CPI and Wages

Dec. 24th, 2012

Merry Christmas, Everyone!

This is part two of a look at the CPI, comparing the price index to wage growth.  Part 1 is here

In the years 1947-1980, the average hourly earnings of production workers rose 6.08% annually while the CPI grew 4.03% (Source)  In effect, earnings rose 2% higher than prices.   Since 1980, earnings have risen 3.55% annually as the CPI rose 3.29%, giving workers a real growth rate of less that a 1/3rd of 1%.

The rise in worker productivity fueled gains in worker compensation until the past fifteen years.  Below is a chart of real, that is inflation-adjusted, compensation and productivity.

Increased Productivity means more profits.  For several decades in the post-WW2 economy, workers shared in those profits.  After the recession of 1982-1984, workers’ share of the increase in output slowly decreased.  As incomes barely kept up with inflation, workers tapped the equity in their houses.

Low interest rates, poor underwriting standards, lax regulations and a feeding frenzy by both home buyers and banks fueled a binge in home prices, followed by the hangover that started in 2007.  Only now is the housing market struggling up out of a torpor that has lasted for several years.

Before the housing bust, magical thinking led many to believe that the rise in home equity was a sure fire way to riches.  Over a century’s worth of data shows that housing prices tend to rise about the same as the CPI.  Housing prices have finally bottomed out at about the same level as the long term trend line of CPI growth.

The boom and bust upended the lives of a lot of people and the repercussions of that “hump” will continue as banks continue to foreclose on home owners whose incomes have flattened or declined. The recovery in the housing market will help some home owners but the real problem is unemployment, underemployment and the decreasing share of workers’ share of the profits from productivity gains.  Until the labor market heals, the housing market will not fully heal.

Those who do have savings have become cautious.  Since 2006, investors have taken $572 billion out of stocks and put $767 billion in bonds, a move to safety – or so many retail investors think.  For decades, home prices never fell – until they did.  For over thirty years, bond prices have been rising, giving many retail investors the feeling that bonds are safe – until they are not.

Companies have been selling record amounts of corporate bonds into this cheap – for companies – bond market.  As this three decade long upward trend in bond prices begins to turn, bond prices can fall sharply as investors turn from bonds to stocks and other investments.  We are approaching the lows of interest yields on corporate bonds not seen since WW2.  Investors are loaning companies money at record low rates and companies are sucking up all that they can while they can.  Sounds a lot like home buying in the middle of the last decade, doesn’t it?

Y’all be careful out there, ya hear?

We Are Young

There are many conflicting opinions and studies regarding the effect that the minimum wage (MW) has on employment, particularly the employment of teens who often work at jobs that pay MW.  Some studies show an increase in employment of teenage workers after the MW is increased.  Some show a decrease, some show no change.  A 2006 paper by two economists at the University of California reviewed early studies of MW prior to 1982 and those after 1990.  Methodologies, correlations and conclusions in one study are criticized in another study.  Reading just the first six pages of the 150 page paper will give you a sense of the arguments.

How many people does the MW affect?  Is it only those making the MW or does it also include those making just above MW?  What is the effect on the local economy as well as local employment?  Whatever you want to claim about MW, you can probably find a study in this area that will backup your claim.  What we can know for certain is that the MW has declined in real dollars over the past 50 years.  Using MW data  from the Dept of Labor and a CPI calculator from the Bureau of Labor Statistics, I have graphed the minimum wage in both current dollars and real inflation-adjusted dollars.

From 1963 to 2012, the MW has fallen 17%.  The unemployment rate for teens aged 16 – 19 stays stubbornly near 25%.

The unemployment rate for those aged 20 – 24 years has been steadily declining since late 2010 but has ticked up in the past few months.

Low wages and high unemployment breed a sense of futility in young people entering the work force.  During the late sixties and early seventies, the prospect of being drafted into the Vietnam War prompted many high school male graduates to go to college to gain a student deferment from the war.  Almost fifty years later, this generation of high school graduates – both men and women – feel the pressure of having to go to college to escape the bleak job prospects of this labor market.  As I wrote last week, older people are continuing to hold onto jobs, making it doubly difficult for young people entering the labor market supply chain.  Few young people can comprehend the multi-decade generational employment mechanism.  In our late teens and early twenties, we first step on the slow moving employment escalator, gaining experience, knowledge and judgment as we work for relatively low wages.  During our working years we build our skills and the amount of money our labor can command.  For too many young people waiting to step on this job escalator, the escalator is broken.  Each year more young people gather at the base of the escalator and wait. 

The Drifters

Matt brought up some good questions and comments yesterday.  I’ll look at one aspect that he brought up – the stagnation of wages for the past 35 years.

Over the past 3 to 4 decades, the U.S. economy has been transitioning to an almost entirely service based economy.  In 1953, manufacturing was 28% of the economy, a post WW2 high.  By 1995, it was only 16% of the economy, and by 2007 it had sunk to 12%.  How has this decades long shift affected the nation’s GDP?

Below is a graph of U.S. GDP 10 year averages since WW2 and the averages for the periods 1946 – 1972 and 1973 to 2009.  (Click to enlarge)

Source:  Bureau of Economic Analysis

As you can see, average GDP growth has declined in the last 35 years by 12% from the 25 year period after WW2. I have heard Ben Bernanke, chairman of the Federal Reserve, say that they like to see an overall 3.0% average growth of GDP for a healthy economy – not too hot, not too cold. For the past 35 years, we have been just shy of that.

In this next chart, I combined data from the Bureau of Economic Analysis and the Census Bureau to show real GDP per capita growth  in 2009 dollars. 

In this next chart, I’ve drawn trend lines to show the various “speeds” of real GDP per capita growth over the past 60 years.  As you can see, the growth trend of the last 30 years or so has been below the growth trend of the 1960s.  The data also reveals that the 60s was an anomaly – a decade of robust growth that was partially fueled by military spending.  Yet it is this decade that some use as a baseline of comparison – a golden age of increased productivity and increased wages.

Although the growth of the past 3 decades might not be what it was during the 60s, it still averages 2.8%.  Have workers seen any of those gains in growth?  According to the BLS, the 1987 average hourly cost, including benefits, for workers in private business was $13.25, or $26.37 in 2009 dollars.  In March 2010, the BLS reports the average hourly cost at $29.71.  Over the past 24 years, companies have seen their real employee costs rise by only 13%, or about 1/2 percent a year.

During that same period, benefits have risen from 27% of total employee cost to 30%. Despite a 50% increase in inflation adjusted costs for health care in the past decade, businesses have managed to hold their labor costs down.  How have businesses managed this?  By reducing average wages.  In 1973, average hourly earnings for employees in private business was $4.14 ($20.00 in 2009 dollars).  In 2009, average hourly earnings were $18.62.   In real inflation adjusted dollars, workers have gained a tiny bit in benefits and lost about 5% in wages over the past 35 years.  Workers have simply not enjoyed either the gains in GDP growth or the gains in productivity over the past 3 decades or more.

But the pain felt by hourly and salaried workers is aggravated by the decline in work hours.  The BLS reports  that average weekly hours was 36.9 in 1973.  In 2009 weekly hours averaged only 33.1.  The reduced hours has affected the average worker’s weekly total.  In 1973 it was $152.77, or $738 in 2009 dollars.  In 2009, it was $617, a real drop of 16%.

How have business owners been able to keep a lid on worker wages for these past 35 years?  Supply and demand.  As I noted above, GDP growth has lessened over the past three decades, reducing demand.  During that period, the supply of labor has increased. In 1973, the BLS reports that there were 64 million in the civilian workforce, 40 million men and 24 million women.  The civilian workforce was 30% of the population of 212 million.  In 2008,  the total civilian workforce had almost doubled to 125 million, 67 million men and 58 million women.  This workforce was 41% of the total population of 304 million.  Look at the ratio of men to women in the workforce.  In 1973, there were almost two men for each woman.  By 2008, the ratio approached a one-to-one ratio. As more women entered the workforce, they put downward pressure on wages, which induced more women to enter the workforce to make up for lost household income.  This cycle will continue for the next two decades unless this country decides to implement policies that will return some of the lost manufacturing capacity to this country.