Home > Uncategorized > The $24 an hour minimum wage

The $24 an hour minimum wage

from Dean Baker

The push for a $15 an hour minimum wage has developed considerable political momentum over the last decade. It is a very real possibility that we will see legislation imposing a national minimum wage of $15 an hour by 2024 if Joe Biden wins the election this fall.

That would be a great thing, it would mean a large increase in pay for tens of millions of workers, but it is still very modest compared to what the minimum wage would be if it had kept pace with productivity growth. As is often mentioned, the purchasing power of the minimum wage hit its peak in 1968, at roughly $12 an hour in today’s dollars. However, productivity (output per hour work) has more than doubled over the last 52 years.[1]

This means that if the minimum wage had kept pace with productivity growth it would be over $24 an hour today. Furthermore, if we go out four years to 2024, and we see normal inflation and productivity growth, a productivity adjusted minimum wage in that year would be almost $27 an hour, nearly twice the $15 an hour target.

The idea that the minimum wage would keep pace with productivity should not seem far-fetched. It actually did follow productivity growth fairly closely in the first three decades in which we had a national minimum wage, from 1938 to 1968. This did not lead to soaring unemployment. In 1968 the unemployment rate averaged 3.5 percent. So, the idea that the minimum wage track productivity growth should not be far-fetched.

Nonetheless, I would not advocate a $27 an hour minimum wage for 2024 or even phased in over a longer period of time. The reason is that we have restructured the economy in ways that it likely could not support a $24 an hour minimum wage in 2020. Raising the minimum wage to this level would almost certainly result in spiraling inflation.

We would then have to take steps to counter this inflation, such as interest rate hikes by the Fed or tax increases by the federal government. The result would be higher unemployment, and quite possibly a situation that left workers in the middle and bottom worse off than if we left the minimum wage at its current level. The key to allowing workers at the middle and bottom to get their fair share of the economic pay is to reverse the policies that redistributed so much income upward.

Reversing Upward Redistribution

I realize I must sound like a broken record on this stuff to regular readers, but the point is important. If workers at the middle and bottom are going to have more, people at the top have to get less. This is straightforward. If we could tell a story whereby the high pay for those at the top leads to more rapid economic growth so that their higher pay in effect paid for itself, then cutting pay for those at the top would not be freeing up resources for the middle and bottom. But this is not the case. By every measure, productivity growth has been slower in the period of inequality (from 1979 onward) then it was in the period of equally distributed growth, from 1947 to 1973. While it may not be the case that growing inequality is the reason for slower growth, it takes quite an imagination to claim that it led to faster growth.

It is also worth remembering that the gains were at the top end of the wage distribution, not corporate profits. The before-tax profit share of net income was 23.4 percent in 1968. In 2018 (the last year for which full data are available) it was 24.7 percent.[2] With the data to date showing a drop in the capital share of roughly 0.7 percentage points from 2018 to 2019, the final figure on profit share for 2019 is likely to be a little different from the figure for 1968. This means that the redistribution from workers at the middle and bottom did not go to any significant extent to corporate profits.

The big winners were instead high-end wage earners, people like CEOs and other top-level corporate executives, hedge fund managers and other Wall Street types, higher-paid tech workers, and highly paid professionals, like doctors and dentists. If we want to make it possible for the minimum wage to rise back to its productivity-adjusted 1968 level, then we have to take back the big pay going to those at the top.

I know I harp endlessly on this issue, but reversing the big paychecks for those at the top (this is the whole point of Rigged [it’s free]) is essential for improving living standards for those at the middle and the bottom. We can envision various ways to make the economy more productive, and some may actually work, but as a practical matter, if we want to see large gains in living standards for those at the middle and bottom, it will have to come at the expense of those at the top.

There are many on the left who would agree with this view, but then say that they would just tax away the high and very incomes earned at the top. That is an alternative route, but I would argue there are both serious political and practical obstacles to reducing high-end consumption through this channel.

On the political side, in addition to facing the full-fledged opposition of the rich, efforts at highly progressive taxation often also face opposition by many people who would not be affected by high top-end rates. Part of this is just confusion — almost no one understand the concept of a marginal tax, which is why many middle-income families are terrified their estate may fall one dollar over the taxation cutoff – but part of it stems from concepts of fairness. Some people consider it unfair to tax someone’s income at 80 or 90 percent, even if they do understand that this only applies to income over some high threshold.

But even if we overcome the political obstacles, there are still practical obstacles. Rich people will not sit there and politely hand over whatever amount we tax them under the law. They will use every tool at their disposal, both legal and often illegal, to avoid paying the legislated tax rate. Remember, if we have a 90 percent marginal tax rate, we are effectively paying rich people 90 cents to hide a dollar of income, or to be closer to the mark, we are paying them 9 million dollars to hide 10 million dollars of income.

I know every progressive committed to high marginal tax rates is convinced that under a progressive regime we will have super-sleuth tax auditors at the I.R.S. who will crack down on avoidance/evasion schemes, but we have never seen the required levels of diligence here or anywhere else. My expectation is that if we have very high levels of progressive taxation is that we won’t see the money, but we will see an explosive growth of the tax shelter industry, another major source of inequality. (Hiding rich people’s money pays very well.)

This is why I want to change rules of corporate governance so CEOs cannot rip off the companies for which they work. (Their $20 million paychecks are not explained by returns to shareholders, which have been historically low for the last two decades.) If CEOs got $2-$3 million, and we saw corresponding pay cuts for others at the top of the pecking order, there would be much more money for everyone else.

In the same vein, the government can make patent and copyright monopolies shorter and weaker, and in some cases, like prescription drugs and medical equipment, not rely on them at all for financing research and development. This would reduce the money going to the top by several hundred billion dollars annually (2-4 percent of GDP).

We should also crackdown on the massive waste, and associated high salaries, in the financial sector. The place to start here is a financial transactions tax and cracking down on the abuses by private equity companies and hedge funds. And, we should subject our most highly paid professionals, in particular doctors and dentists, to the same sort of international competition that autoworkers and textile workers now face.

If we made these sorts of changes, we could realistically talk about a $24 an hour minimum wage in 2020. With an economy that was not structured so as to redistribute so much income upward, there is no reason that the minimum wage could not track economywide productivity.

And think of what a difference it would make if the lowest-paid worker, say a custodian or dishwasher in a restaurant earned $24 an hour, or $48,000 a year for a full-time full-year job. That comes to $96,000 a year for a two-earner couple.

If this is the floor, presumably someone working for 15 to 20 years can expect to earn at least 15 to 20 percent more, which would be putting them over $55,000 a year for a full-time job. In this world, we could really imagine that everyone had a comfortable and secure standard of living, especially if we had national health insurance (which would likely mean higher taxes on our low-wage earners) and free or low-cost child care.

The idea of a $24 an hour minimum wage is also worth thinking about in the context of racial inequality, where we have disproportionately relegated Blacks to the lowest paying jobs. It is not acceptable that Blacks are so much more likely than whites to work as custodians or housekeepers, and so much less likely to work as doctors or lawyers, but that is the reality we have today.

While still far from fair, the situation would be quite different if custodians and housekeepers earned $24 an hour, and doctors and lawyers earned on average something close to half of their current pay. And in that situation, the children of custodians and housekeepers would likely have much better prospects of becoming doctors and lawyers than is the case today.

But to allow for more pay at the bottom, we have to do something about pay at the top. And that means changing the way we structure the market. And, if we aren’t paying attention to restructuring the market, we aren’t serious about addressing inequality, including racial inequality.

[1] This calculation uses a very conservative measure of productivity that adjusts for the difference in gross and net output and the difference between inflation as measured by the Consumer Price Index and the GDP deflator. These issues are discussed here and here.

[2] These data are taken from National Income and Product Accounts, Table 1.13, Line 7 plus Line 8, divided by Line 5, plus Line 6, plus Line 7, plus Line 8.

  1. Michelle
    July 23, 2020 at 2:52 pm

    Wise and sensible.

  2. bunnyt61
    July 23, 2020 at 3:32 pm

    Finally someone makes sense. Good article.

  3. Ed Zimmer
    July 23, 2020 at 4:21 pm

    How would a financial transactions tax affect index funds?

    • Ed Zimmer
      July 24, 2020 at 9:12 pm

      Dean Baker,
      Can I get an answer to this question?

  4. Mr.T
    July 24, 2020 at 10:26 am

    There are many thought-provoking points by Dean Baker’s text. The text is doubtlessly worth reading! However, there is one point I do struggle with: I am afraid that here again a typical economic perspective is taken, which ignores the purpose of a minimum wage. The minimum wage stands for the right to live from one’s own work. It must therefore provide the means that enable me to exist. In other words, a minimum wage must prevent me from slipping into the ‘subsistence crisis zone’ or even below the ‘minimum disaster level’ (James C. Scott). Productivity can play a role then – and only then – when existence is secured. In this case ‘productivity’ provides orientation for the second function of a minimum wage: for a fair share of real value creation.
    If a minimum wage is to be more than just a lower wage limit, it must fulfil the functions mentioned, otherwise it will lack acceptance. And in the latter case it would be very difficult to address inequality in a proper way.

    • July 24, 2020 at 4:25 pm

      Right.

    • Ed Zimmer
      July 24, 2020 at 5:30 pm

      In my view, a minimum wage must compromise between adequately fulfilling people’s needs without providing their wants, because once their wants are fulfilled, the impetus for employment to produce the goods/services to satisfy their needs is lost (& I don’t buy that people’s wants are unlimited). That strikes me as a compromise impossible to fairly implement. I’d rather see a bare subsistence UBI supplemented by a locally-administered JG.

      • Craig
        July 24, 2020 at 6:46 pm

        I can’t think of a better incentive for employment than a doubling of the purchasing power of one’s income. As for a JG, fine, that fits seamlessly within the new monetary paradigm. Why not create a new WPA or CCC and have an army of young people plant a buzillion trees, tradesman build highways, bridges and charging stations and retrofit every building in sight?

      • July 24, 2020 at 8:07 pm

        Ed, the problem here is everyone still thinking in terms of a minimum wage rather than an adequate income. Think of people too disabled to work. An income adequate for needs can be provided with a credit card, providing hire purchase for reasonable personal needs to be repaid by the community doing work which doing, and by the person who wants more also doing work that is worth doing. Incentive doesn’t have to take the form of offering higher wages: it can offer challenges and prizes. To some extent this is what happens anyway. So far as I can see, the only reason it isn’t normal is that having others work for us is seen in terms of costs and enforcement rather than benefits and earning gratitude for providing work worth doing. An interesting example of the latter in action is provided by the Mondragon cooperative chain in Spain.

      • July 24, 2020 at 8:09 pm

        Typo again! Should read “to be repaid by the community doing work which needs doing …”.

      • Ed Zimmer
        July 24, 2020 at 9:08 pm

        davetaylor1,
        If the community could afford to pay for that work, they’d be doing so. But they can’t. But the national government can. What you describe is the way I’d envision a UBI and/or JG working: Federal government credits regular amount and/or earned amount to payee’s debit card. (This could also be done by Fed funding state or locality & trust them to do the distribution of people but this just seems more complicated & open to fraud.)

        Craig,
        When one has no earnings, doubling it does nothing. So you still need a system for meeting their needs. And with today’s technology, designing & implementing the system is the important part. Once the system exists, if designed properly, the number of people serviced is a “don’t care’.

      • Craig
        July 24, 2020 at 9:48 pm

        Ed, See my post at 4:57PM. Paired with a universal dividend of $1000/mo. gives everyone 18 and older $2000/mo. worth of purchasing power and opens up many other beneficial cost saving and commerce encouraging effects for all economic agents.

  5. July 24, 2020 at 4:04 pm

    Great article. Sensible and reasonable arguments. Thanks for sharing!

  6. Craig
    July 24, 2020 at 4:57 pm

    Doubling the minimum wage incurs a doubling of labor costs for enterprise. A 50% discount/rebate price and monetary policy at the point of retail sale not only doubles the purchasing power of the consumer it incurs no additional costs to enterprise as their discount is fully rebated back to them by the monetary authority. Furthermore, paired with a universal dividend it opens up numerous cost reduction possibilities for both individuals and enterprise like the elimination of transfer taxes for various aspects of welfare, for unemployment insurance and for social security. All one has to do to see the efficacy of this is simply and actually look at it.

  7. Benjamin
    July 24, 2020 at 8:25 pm

    An income of 4’000.- Sfr. in the 80′ should today be 12’000.- Sfr. if it had risen according to the broader rises of cost of living in Switzerland. Mind you that the 4’000 was earned even with simple jobs incl. social security and health insurance was possible for about 35.- Sfr. per month. Renting an appartment was possible for 550.- Sfr. per month and so on… . By an hourly rate the 4000.- mentioned before was around 20.- Sfr. which today is difficult to get for qualified jobs. So earnings are not even half of what they were then yet the cost of living has at a minimum tripled and some sectors lime health insurance have risen 10 fold… food costs much more as well even more considering the degraded quality of what we are allowed to buy as food. Cheap consumer goods are probably the only exceptions but not even they have the quality and durability of yesteryears solid products so we are all cheated there as well. Todays mainly neoliberal economy is a solid criminal undertaking…

  8. Ken Zimmerman
    August 10, 2020 at 11:53 am

    I suggest we return to the purpose of the minimum wage, as it was originally conceived in 1938. That purpose is expressed in these words from the International Labour Organization.

    “The purpose of minimum wages is to protect workers against unduly low pay. They help ensure a just and equitable share of the fruits of progress to all, and a minimum living wage to all who are employed and in need of such protection. Minimum wages can also be one element of a policy to overcome poverty and reduce inequality, including those between men and women, by promoting the right to equal remuneration for work of equal value.

    Minimum wage systems should not be seen or used in isolation, but should be designed in a way to supplement and reinforce other social and employment policies. Several types of measures can be used to tackle income and labour market inequality, including pro-employment policies, social transfers, and creating an enabling environment for sustainable enterprises.

    The purpose of a minimum wage, which sets a floor, should also be distinguished from collective bargaining, which can be used to set wages above an existing floor. Figure 1 shows a hypothetical wage distribution with a ‘minimum wage zone’ and a ‘collective bargaining zone’ which can be used to establish minimum standards and to set wages above an existing floor.” (here). The original focus of minimum wage was the worker. Only later did ‘economists’ come up with the notion that increasing minimum wage might create damaging inflation. The original question to be answered was whether a wage paid was a ‘living wage” for a worker and their family. That is still the question we need to answer.

    A two-earner family of 4 needs between $50,000 and $80,000 per year to have a living wage, depending on the State where the family lives. A minimum wage of $15 per hour provides about $62,400 for the family. This is sufficient for about half the US States. Mostly in the Midwest and South. This is not sufficient for any of the large urban areas or for states in the Western US or Northeastern States. A minimum wage of $20 per hour provides $83,200 annually for this family. Sufficient for all the States except California, New York, Massachusetts, New Jersey, Delaware, Maryland, and Washington, DC. It would also be insufficient in all the large urban areas such as Los Angeles, San Francisco, Houston, Chicago, New York City, and Miami. A $24 per hour minimum wage provides $99,840 for this family. This is sufficient for all the states and the urban areas. Any sustained layoffs or reduction in working hours would, of course reduce the chances of the family’s survivability. Or, more directly, the current COVID-19 economic collapse is a grim threat for such families. (All annual income numbers are before taxes. And assume no accrual of large savings.)

  1. No trackbacks yet.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.