Home > upward income redistribution > US minimum wage: Who decided workers should fall behind?

US minimum wage: Who decided workers should fall behind?

from Dean Baker

It was encouraging to see President Obama propose an increase in the minimum wage in his State of the Union Address, even if the $9.00 target did not seem especially ambitious. If the $9.00 minimum wage were in effect this year, the inflation-adjusted value of the minimum wage would still be more than 2.0 percent lower than it had been in the late 1960s. And this proposed target would not even be reached until 2015, when inflation is predicted to lower the value by another 6 percent.

While giving a raise worth more than $3,000 a year to the country’s lowest paid workers is definitely a good thing, it is hard to get too excited about a situation in which these workers will still be earning less than their counterparts did almost 50 years ago.By targeting wage levels that roughly move in step with inflation we have implemented a policy that workers at the bottom will receive none of the benefits of economic growth through time. In other words, if we hold the purchasing power of the minimum wage fixed through time, as the country as a whole gets richer, minimum wage workers will fall ever further behind.

It is important to realize that this was not always the case. The federal minimum wage was first put in place in 1938. From that year until 1968 when its value peaked, the purchasing power of the minimum wage increased by more than 140 percent. As a result, minimum wage workers saw a sharp increase in their living standards. Over this 30 year period, low wage workers shared in the gains of the economy as a whole as the minimum wage rose in step with productivity growth.

If workers at the bottom had continued to share in the economy’s growth in the years since 1968 as they had in the three decades before 1968, we would be looking at a very different economy and society. If the minimum wage had risen in step with productivity growth it would be over $16.50 an hour today.That is higher than the hourly wages earned by 40 percent of men and half of women.

It shouldn’t seem strange that the wages of workers at the bottom rise in step with productivity, after all they do for many other workers even when the work has not in any direct way become more complex. For example, when a realtor is selling a $400,000 home rather than a $200,000 home it does not necessarily require any greater effort or skills. In fact, if we were talking about the years of the housing bubble, it may just be the case that the same home had doubled in price. Yet, the commission will be twice as much.

There would be similar stories in many other occupations where the growth of the economy by itself would tend to make wages rise. It is not obviously more difficult or time-consuming to sell 1000 shares of stock or credit default swaps at prices that are twice as high, yet the commissions going to the brokers are likely to be twice as large.

Doctors, lawyers, and other highly educated professionals have also been positioned to benefit from the growth in the economy. We have left those at the bottom out. This has been by design and nowhere is that more clearly the wage with a minimum wage that has been set at level that has not even kept pace with the cost of living.

As a practical matter we couldn’t possibly raise the minimum wage any time soon to $16.50 without serious disruptions to the economy. One result would also be higher prices in the economy. Of course this is also the result of having doctors who average $250,000 a year and Wall Street bankers who can pocket many millions of dollars a year. Their income is a cost to everyone else.

Somehow the issue of higher prices and inflation is an important point when we discuss the wages of people getting $7.25 an hour to wash dishes but it is not supposed to enter into polite conversations when we talk about the most highly paid workers. That is a political choice, not an economic one.

We have structured our economy so that we can get cheap restaurant meals because of low-paid workers. Hotel stays cost less because we ensure a plentiful supply of workers at near the minimum wage. And convenience stores stay open 24 hours because the people working the midnight shift get paid almost nothing.

There is no economic reason why those at the bottom should not share in the gains from economic growth. And there is no economic reason, why those at the top should be such disproportionate beneficiaries. We rigged the deck this way more than three decades ago. We can restructure the rules so that money no longer flows upwards. A minimum wage that again follows in step with productivity growth would be a large part of this reversal.

See article on original website

  1. February 20, 2013 at 9:51 pm

    Right all the way, Dean. May I offer for discussion an explanation of why this so largely passes unnoticed (percentage increases), and suggest a change in the way of justifying rewards which would largely resolve it?

    Claude Shannon based his measure of information content not on the amount of information but on the logarithm of that, i.e. the number of bits or digits which would generate that number of differences. Thus 1,000,000 has a logarithm of 6 and generates a million differences; if an income of $10,000 p.a restricts one’s buying choice to say the 1000 cheapest commodities, an income of $20,000 would widen one’s choice not to 2000 but to nearer 1,000,000 different commodities. In the past, companies have worked very harmoniously on the basis of a 7:1 differential between top and bottom, the bosses being more than satisfied with going on ten million times as many choices as their minions.

    Looking at this the other way round, allowing that selling $400,000 houses is harder than selling $200,000 houses, this shouldn’t – as it does now – double the percentage takes by banks and realtors. Using Shannon’s logarithmic measure, one might multiply a basic charge by (1 + log x), where x is the ratio of a basic house price last year to the house being considered. A price differential of 10:1 would be needed to double the charge. Likewise with other earnings differentials related to responsibility for monetary value.

    The alternative, of course, is to go back to nationalised currencies and progressive taxation, in particular of unearned incomes. The psychological issue here is whether people will accept what is fair more easily than giving up what they have acquired.

  2. February 20, 2013 at 10:37 pm

    @davetaylor1, “The alternative, of course, is to go back to nationalized currencies and progressive taxation, in particular of unearned incomes. The psychological issue here is whether people will accept what is fair more easily than giving up what they have acquired.
    A/k/a “Justaluckyfool” would ask,”How could ‘progressive taxation of unearned income be fair? Taxation of the issuance of sovereign currency would have a better chance at being “both fair and equitable”
    Ben Bernanke should receive the Noble. He has proven the Fed can issue trillions in new money w/o inflation or deficit spending while at the same time have the sovereignty get back twice as much via an equitable taxation. He has proven there is a way to avoid the ‘bust’ after a credit expansion boom. QE can be the solution. But he must “QE 4 The People” instead of QE 2 gain Profits for the private for profit banks.
    “QE 4 The People”-
    QE $100 trillion, the purchase of residential Real Estate loans,commercial real estate loans, and student loans. Modify these loans at 2% for 36 years. A simple change that woud allow ‘we the people’ to have an income stream (revenue to the US Treasury) of $5.5 trillion a year for the next 36 years. End federal income taxes, end FICA while at the same time increase spending “for the general welfare”.
    The Fed has the option to mandate 100% margin capitalization requirements for all private for profit banks(PFPB). The only way to do that without “pricking the bubble” would be to make $200 trillion available for the PFPB to borrow at 2% for 36 years. How would making the banks solvent work for prosperity and equality while at the same time giving back to the people $400 trillion at $11 trillion per year to the US Treasury for 36 years?

    Where is the challenge?
    Where is the improvement?
    Why do you not wish prosperity for yourselves and your children?
    If all currency is issued two ways, i.e.,
    1. Directly by the sovereignty with no interest cost.
    2. By issuance of Bonds that have a cost -interest.
    Why not end the stupid practice of paying compound interest to another party ?
    justaluckyfool @ aol Read more:

    • February 23, 2013 at 12:40 pm

      Lucky, my argument here was an attempt to answer Dean Baker’s “who decided” question about income differentials, in terms of naive mathematics dictating the wrong answer, and how a deeper understanding of differentials provided a scientific basis for reduction of excessive incomes. The alternative to limiting incomes was the more familiar Keynesian solution of taxing the excess, which those with naive understandings of money and fairness don’t like.

      Since we agree on the way money is created, the psychology was an attempt to sway the argument in your favour. My problem with merely limiting earned incomes is allowing for the fact that pensions, endowments of institutions etc are unearned income. Progressive taxation wouldn’t affect them so much as bankers, speculators, financiers and corporate CEO’s. These object to heavier taxation on the grounds that they have a right to what they have earned. My answer to that is that they haven’t earned most of it. At best they have “won” (often by bending the rules of the game) the excess over what they actually consume. However, the problem goes away altogether if one defines money honestly in terms of what it does, given how it was created. A credit balance in a banking account functions exactly like the credit limit in a credit card account: it indicates what we can buy with it. Only when we actually buy something with it do we become indebted, and then, not to those who set our limit but to those who supply real goods.

      You may remember that my own preferred solution abolishes the problem of taxation and government expenditure by honest interpretations: of money as effectively a credit limit and of wealth as our indebtedness to society: the limit to be determined partly by statute, partly by investment needs and partly as reward for good work, and the debt to by repaid by doing with others what is necessary to maintain, improve or regenerate the wealth our society already has. With more than adequate statuary credit authorised for everyday living and prizes for good work as incentives, there would be no need for pensions and wages and the monetary interests, rents, profits and taxes now providing for them. The dominant ethos of the economy could become responsibly volunteering for work worth doing and doing one’s share of what else needs doing.

      Your version here – the government nationalising the money-lending business, using its money-creation and interest to write off debt and thereafter to allow people to invest it themselves – doesn’t get over all the deceits, complications and vicious circles involved in needing resources or paid employment to sustain oneself, so one tends to see money as valuable when in fact you and your employers are being paid in IOU’s created out of nothing by banks, for which you are having to pay by doing work determined by what an employer can sell rather than what (like social maintenance) needs doing. Basing the economy on competitive monetarised exchange inevitably leads to discovery of systematic unfairness. Basing it on a “household” discipline of generous provision, expectation of reciprocity, doing what one can and looking out for what needs doing is much more likely to generate mutual appreciation and the satisfaction of necessary work being done and done well. (If that is visionary, so is imagining justice for “losers”).

      • February 23, 2013 at 9:44 pm

        Thank you for your reply as well as sharing your knowledge. As I am really “Just a lucky fool”, I need to ask questions because I need the profound answers for ‘due examination’.

        Quote,”Since we agree on the way money is created, the psychology was an attempt to sway the argument in your favour…Progressive taxation wouldn’t affect them so much …”

        This to me feels like a misdirection because ‘all taxation of personal income is not only unfair but also because of its being inequitable is a “flaw” in capitalism. Taxation is a ways and means to control the quality and quantity of the base money and therefore to appropriate from the entire group any portion of that base money , a fair and equitable base must be used.

        Quote,”Your version here – the government nationalising the money-lending business,..”
        NOT SO. It would call for ‘separation of banking from government’,making the private for profit banks operate within 100% capitalization. Just like any other business-use what you have or borrow; not counterfeit.The government would not be nationalizing the money- lending business. It would make it true and honest lending: a lender must turn over and give up to the borrower not only the concept of money but also the ‘right to redemption’ of that money thereby not creating to owners for the same goods and services..It would make “legal tender” available with a taxation attached which would control the quality and quantity of the currency.
        Most important of all-it would take back for the entire social community the wealth that is theirs and put it back into ‘storage’ for them to exchange for anything they individually wish.
        Please let me repeat , Thank You for your challenge and improvement. And thanks to RWER for this platform.
        May we all try ” to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defense, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity “

      • February 24, 2013 at 2:36 pm

        “All taxation of personal income is … unfair. … Taxation is a ways and means to control the quality of the base money …”.

        Well, I don’t agree with this. Is it unfair for government to return to the public what has been taken from it dishonestly or by mistake, i.e. misunderstanding? And while taxation has been used as a monetary control, that is secondary to its providing revenue for public activities. Do you understand PROGRESSIVE taxation? Even the UK government has learned that people can’t pay what they haven’t got, so our starting point for income tax is raised by tax allowances and (so far) food is zero rated for VAT sales tax. The nearest Britain came to revolution was when Thatcher tried to provide for local government with a non-progressive Poll Tax, and we are in trouble now because progression has been capped at the top end so the unreasonably rich pay no bigger proportion of their income than the comfortably off, and with fuel prices and thus percentage fuel taxes so high, considerably less than most.

        In any case, you seem to have completely missed the point of my argument: essentially that (with a real understanding of money) we don’t NEED tax, but if naive governments INSIST on it then (as Keynes understood) it needs to be progressive.

        We seem to be at cross-purposes about “nationalising money-lending”. My fault. I had understood by that what you rightly said at #2: “Taxation of the issuance of sovereign currency would have a better chance at being ‘both fair and equitable’ ”.

        If one sees others like one sees oneself in a mirror, the picture may be true but your instinctive advice on how to act on it will be reversed. “Your version” now amounts to a conventional ‘Positive Money’ agenda, mine to a ‘Negative Money’ system in which banks do not lend even other people’s money but manage and account for borrowing in real terms from the community. So inverted, money represents – but is not itself – debt, and currency units are tokens of authorised credit, attributable on return to account of the payee. 100% capitalisation is achieved in that one cannot sell what one hasn’t got, but the “right of redemption” belongs neither to the seller nor the bank but to the community, whose government has a right to insist that people do what they can to maintain and replenish any capital consumed, i.e. to look after themselves, their community and the national infrastructure, and to “restock the shelves” for the next round of buying.

        “Amen” to your “thank you’s” and exhortation. Keep lucky!

      • February 24, 2013 at 4:40 pm

        ““All taxation of personal income is … unfair. … Taxation is a ways and means to control the quality of the base money …”, Justaluckyfool.

        “Well, I don’t agree with this. Is it unfair for government to return to the public what has been taken from it dishonestly or by mistake, i.e. misunderstanding? And while taxation has been used as a monetary control, that is secondary to its providing revenue for public activities.”,davetaylor1.

        Perhaps this may show just how much I require thoughtful and knowledgeable help, not only in MMT but also in communication.
        Where I have gone wrong. The statement should have conveyed the idea: Taxation of PERSONAL INCOME is unfair and not equitable. Taxation is a ways and means that the entire social group(US of A) allows for its governing body to appropriate part of their wealth “in order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defense, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity …”
        Based upon being a capitalistic society the government does not own the wealth of the total society, it is merely the caretaker of that wealth and the issuer of exchangeable receipts called “legal tender”. Taxation (appropriate of some of the wealth) should be a percentage
        of the wealth itself since it is used to exchange for goods and services for the entire group. What if the wealth of the US of A were to be set at $900 trillion, wouldn’t it be fair to have a taxation that would be say 2% of that wealth if that were to be decided to be the amount needed to “form a more perfect union…?
        So how do you create a fair and equitable revenue stream?
        In a real true capitalistic society the solution should not be taxation on PERSONAL INCOME.

        Please allow me to project a little further :
        Is a loan by a Private For Profit bank an issuance of currency (just like the governments issuance-giving the rights and privileges of the wealth of the members of the social group)
        for the borrower to use with the condition to repay at a set cost to do business (TAXATION)!?
        If $200 trillion in loans at an average of 4% for 36 years returns the $200 trillion to net out at zero those ‘rights’ which were taken, doesn’t that leave $700 trillion as a revenue (income) TAXATION(appropriation of some of the wealth). ?

        Please, as I have NO accreditation, I beg for a profound response so I can at least feel that there has been some “due examination.” Challenge, Improve.

      • February 24, 2013 at 11:54 pm

        Lucky, the issue is not one of accreditation, it is one of understanding. I myself have no accreditation as an economist, and very little from my in-house training as a scientist, but “a profound response” is exactly what I have been offering you. My dictionary defines ‘profound’ as “deep: deep-seated: far below the surface [i.e. not superficial]: intense [c.f. highly condensed]: abstruse [difficult to understand]: intellectually deep: penetrating deeply into knowledge”. In the sixty years since I was introduced to the mathematics of economics my interest as a scientist has been not “what we do” (superficial) but “how things work” (deep), starting from things, explanations and problems I didn’t understand and trying things out until I had a more adequate understanding and models which work. I hope the fact that I’ve been doing that with economics for forty five years assures you that I have given the problems of economics “due consideration”.

        I am very willing to answer questions, but in a blog all I can really do is to point you in the direction of the answer. Science is very like the “gestalt” experiments where you see one pattern and not another you are assured is there. Keep looking and suddenly one can see both patterns, so that it becomes possible to explore their implications and to chose between them.

        “So how do you create a fair and equitable revenue stream?” By giving individuals a stream of authorised credit to live on, so businesses and government departments do not have to provide this, though pricing would account for it. Revenue needed for resources can again be provided in the form of credit, vetted before authorisation much as it is now. The big difference would be that the money issued as credit would not be circulated at interest but written off when accounted for as debt. These debts would not be written off unless or until individuals earn their keep and businesses satisfactorily do the jobs they used resources for.

  3. ezra abrams
    February 21, 2013 at 3:24 pm

    includes changes in transfer payments like eic ?
    and decreases, like change in public housing expenditure ?
    (note source of url)

    ( i mean if it is fed mandated, does it matter if it is on your paycheck or a deduction on your rental ?)

  4. Pyrite
    February 21, 2013 at 7:50 pm

    200 Trillion? That would lower the value of minimum wage a bit.

    • February 21, 2013 at 9:14 pm

      Not really, as a matter of fact it could actually increase the value of the minimum wage because the $200 trillion as an asset (loans) would be very deflationary since it demands $400 trillion to come OUT of the economy. But the good news is that “we the people” get that money to redistribute, rather than the PFPB to distribute as profits to their chosen few.
      Then perhaps, just perhaps you could believe that ‘banks create counterfeit money’ and they do it by ‘Fictitious lending’ (lending money the create ‘out of thin air’ and create real profits by charging compound interest.(Soddy,’The Role of Money).
      Would you believe that if banks have residential and commercial loans on their books for an average of $10 trillion at an average of 6% for an average of 72 years they would create an income (profit) of more than THREE QUADRILLION DOLLARS?
      Just how dumb does one have to be to be an American citizen ?
      Just how dumb does one have to be to be an economist?
      Just…….to realize what the most powerful weapon for inequality is?
      One needs only to read “The Tale of The Impish Interest and his brother Compound”. Hudson: .economics-of-compound-rates-of-interest-a-four-thousand-year-overview-part-ii/

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