Home > Uncategorized > The $26 an Hour Minimum Wage

The $26 an Hour Minimum Wage

from Dean Baker

That may sound pretty crazy, but that’s roughly what the minimum wage in the United States would be today if it had kept pace with productivity growth since its value peaked in 1968. And, having the minimum wage track productivity growth is not a crazy idea. The national minimum wage did in fact keep pace with productivity growth for the first 30 years after a national minimum wage first came into existence in 1938.

Dean Aug 2021

Furthermore, a minimum wage that grew in step with the rapid rises in productivity in these decades did not lead to mass unemployment. The year-round average for the unemployment rate in 1968 was 3.6 percent, a lower average than for any year in the last half century. 

The $26 an Hour World

Think of what the country would look like if the lowest paying jobs, think of dishwashers or custodians, paid $26 an hour. That would mean someone who worked a 2000 hour year would have an annual income of $52,000. This income would put a single mother with two kids at well over twice the poverty level.

And, this is just for starting wages. Presumably workers would see their pay increase above the minimum as they stayed at their job for a number of years and ideally were promoted to better paying positions. If we assume that after 10 or 15 years their pay had risen by 20 percent, then these workers at the bottom of the pay ladder would be getting more than $60,000 a year.

While that is hardly a luxurious standard of living, it is certainly enough to support a middle-class lifestyle. For a two-earner couple this would be $120,000 a year. Imagine this is what people at the very bottom of the labor force could reasonably expect when they are in their thirties and forties.

Don’t Try This at Home

The $26 an hour is useful as a thought experiment for envisioning what the world might look like today, but it would not be realistic as policy for local, state, or even national minimum wage without many other changes to the economy. A minimum wage this high would almost certainly lead to large-scale unemployment, and that would be true even if it were phased in over five or six years.

The problem is that we have made many changes to the economy that shifted huge amounts of income upward, so that we cannot support a pay structure that gives workers at the bottom $52,000 a year. This is the whole point of my book, Rigged [it’s free], we have restructured the economy in ways that ensure a disproportionate share of income goes to those at the top. If the bottom half or 80 percent of the workforce got the same share they got 50 years ago, we would have an enormous problem with inflation.

Just to quickly run through the short list, we can start with my favorites, government-granted patent and copyright monopolies. Items like drugs, medical equipment, and computer software, which would all be relatively cheap in a free market, instead cost us huge amounts of money because of these monopolies. In the case of prescription drugs alone, patent monopolies and related protections may add more than $400 billion a year (roughly $3,000 per family) to our annual bill. In total, the cost from these protections can easily exceed $1 trillion a year (almost $8,000 per family).

And the beneficiaries from patent and copyright monopolies are overwhelming those at the top end of the income distribution. Many workers in the tech sector make high six or even seven figure salaries. Lucky winners can walk away with tens or even hundreds of millions of dollars because of these government-granted monopolies. Bill Gates would probably still be working for a living if the government was not prepared to arrest anyone who made copies of Microsoft software without his permission.

And yes, there are other ways to finance creative work and innovation. We can pay people, sort of like we do with just about every other task in the economy. (Read chapter 5 of Rigged.)

Next, we have corporate governance. The story here is that we have tens, or ever hundreds, of millions of dollars going to CEOs, who don’t produce value anywhere close to this amount. This is not a moral judgement about the worth of the CEO. The point is that in almost all cases it would be possible to pay a person $2 or $3 million who would produce as much shareholder value as a CEO getting $20 million.

The reason we don’t see downward pressure on CEO pay is that the corporate boards that most immediately determine CEO pay are largely selected by the CEO and other top management. They have no incentive to lower CEO pay. From their vantage point, there is no downside to grossly inflated CEO pay (it’s not their money), and there is no reason to risk antagonizing other board members by suggesting that their friend the CEO gets too much money.

Bloated CEO pay matters not only for the relatively small number of people who run major companies, but also for its impact on pay scales for those near the top. If the CEO gets $20 million, the chief financial officer may get $10-$12 million. And third tier execs may get $1-$2 million. [1]

The picture would look very different if CEOs got paid $2-$3 million, as would be the case if we had the same pay ratios between CEOs and ordinary workers as in the 1960s.  In that case, the third-tier executives would probably be looking at mid or high six figure salaries, not millions of dollars a year.

The financial sector is another place where we structure the economy to give large sums to a small number of rich people. We have created a tax and regulatory structure that allows some people to get incredibly rich by making little or no contribution to the productive economy. For example, it would be hugely more efficient if we all had digital bank accounts with the Fed, from which we could make all our payments and where we could receive our monthly paycheck and other income, at virtually zero cost.

The most obvious reason that we don’t have such a system is that it would deprive the banking industry of tens of billions in annual fees. There is no reason that we should not have a modest financial transactions tax along the lines of the 0.1 percent tax proposed by Senator Schatz. (Most other sectors have sales taxes, which are far higher.)  We can also make it difficult for public pension funds to hand billions in fees to private equity partners who do not produce higher returns. The same applies to private universities who seem to like having friends make millions off their endowments while losing the university money.

And, we have our doctors and other highly paid professionals, who make more than twice as much as their counterparts in other wealthy countries because we protect them from competition, both foreign and domestic. If we paid our doctors the same as doctors in Germany or France, it would save us close to $100 billion annually, or roughly $750 per family. If we subjected all our highly paid professions to the same sort of competition as our auto and textile workers, the savings could be twice as high.

Bottom Line: These Huge Welfare Checks Make a $26 an Hour Minimum Wage Impossible

To see how the bloated incomes for those at the top, make it impossible for those in the middle and bottom to get decent pay, imagine that the high-end incomes came in the form of government checks. Instead of Bill Gates getting his billions from Microsoft’s patent and copyright monopolies, suppose their software sold at free market prices, but the government sent him billions of dollars each year to allow him to accumulate his current fortune.

Suppose we did the same with the pharmaceutical industry, sending top executives tens of billions annually, as all drugs were now being sold as cheap generics. And, the government paid out tens or hundreds of millions of dollars each year to private equity and hedge fund partners and other big winners in finance.

If we added this up, we would be increasing government spending on the order of $1-2 trillion annually, or $10 to $20 trillion over a 10-year budget horizon. If we did not offset this burst of spending on the country’s richest people with some serious tax increases, we would be looking at very real problems with inflation — too much money chasing too few goods and services, to take the classic storyline.

But, we did effectively have tax increases. We made the government’s labor policy far more hostile to unions, radically reducing the unionized share of the workforce, as well as reducing the power of those who are organized. We also subjected our manufacturing workers to direct competition with the lowest paid workers around the world, putting serious downward pressure on what had been a relatively privileged segment of the labor market.

And, we removed the link between productivity and the minimum wage. Not only did the federal minimum wage not keep pace with productivity growth, it did not even keep pace with inflation. A person working at the minimum wage today is getting substantial lower pay than a worker did 53 years ago in 1968.

It would be a great story if we could reestablish the link between the minimum wage and productivity and make up the ground lost over the last half century. But we have to make many other changes in the economy to make this possible. These changes are well worth making.

[1] It’s amazing that many people can complain about share buybacks being used to manipulate the markets and thereby increase the value of top management’s options, without recognizing that this is a story of management ripping off shareholders. If shareholders want top management to have more money, they could just pay them more money, they don’t have to force them to commit stock fraud to increase their pay checks.

  1. August 24, 2021 at 1:46 pm

    As usual, thank you Dean Baker for giving us a tantalizing view of what might have been, raising our hopes that now that many are for $15 an hour, but not yet quite the Democratic Party in the breach, you were going to raise the ante – and call – at $26 per hour.

    But no, always sober and responsible Dean Baker walks us back through the minefield of why $26 under current structural situations, including “the greatest transfer of wealth in human history” of some $49-$51 trillion dollars upwards since 1975″ makes that an impossibility. Baker is citing the same trend as that dramatic declaration which came, in the fall of the Presidential election year in the US, 2020, from a Time magazine article here https://time.com/5888024/50-trillion-income-inequality-america/ and a study conducted through the RAND organization. One would have that thought that with a headline like that it would have…but no, I never heard anyone talk about it during our Presidential “campaign.”

    Now the interesting thing Dean is that the two authors of this Time magazine article, and of the study, are respectively an entrepreneur-philanthropist and a former Union leader. It does tell us a lot though that neither’s fields camps of colleagues seemed to jump on the train which was crying “greatest crime of the century” to anticipate Mr. Trump’s later appropriation of the claim.

    Ok, let’s descend into the economic trenches to where Mr. Baker claims that $26 per hour would lead to unemployment and inflation. Is that a slam dunk put down, Dean? I’m not so sure. It’s sure conventional wisdom, buttressed by the fact that $50 trillion went upwards, but there’s a little difference in the propensity to consume, isn’t there, between the upper 10% and the bottom 80%? Also following conventional wisdom, business would automate go the AI route wherever possible given those wage pressures, but wait, didn’t some rival economists over at MMT land also call for a job guarantee (L. Randall Wray, most prominently) which became part of the Green New Deal Resolution in Feb. 2019?

    I think it’s obvious that such a major shift in purchasing power to the bottom 80% would be bound to change the demand for certain good, from apartments for housing to homes, more auto demand and travel…and so forth…but wouldn’t industry increase production in those areas – or just ride the higher price waves possible without lifting a finder to increase demand?

    In other words, our political economy could accommodate this vast $50 trillion “transfer” of wealth and income upwards between 1975-2018 (the boundaries of the study) but would fall apart if the transfer were reversed?

    And I’m still scratching my head over how the AFL-CIO did not jump on this article (the facts of which have been apparent for so long) instead of plodding along in the same inexplicable “business” as usual mode for them…their terrible history and the fate of the working class in America never being able to generate a leader with appropriate fire…until AOC came along…

    And I’ve always been intrigued with the AFL-CIO framing of “class”: for them, I conclude from years of boring speeches, working class is something they help you escape from, to get to the promised land of “middle class” – “Unions built the middle class, brought you the ‘Weekend'”…
    Not much pride or dignity in being working class then…kind of banks the fires so that the indignities of 1975-2018 wouldn’t set off an explosion in the boiler room.

    I think the explosion in the boiler room did occur; however, it occurred under Neoliberal guidance in the rise of the Republican Right, not in the Democratic Party of the AFL-CIO.

    If only half the condescension and contempt which the populist right authors accuse our liberal, secular coastal elites as having visited upon American workers and rural residents, that would be enough in itself to explode the boilers in our democracy. That and the fundamentalist Religious Right belief that success is measured by one’s moral worth – a premise so intensely held that it could survive even the most prominent public refutation of its logic: Donald Trump himself.

  2. August 24, 2021 at 2:30 pm

    Dean Baker keeps nailing the “theses” to the church door, here and linked articles. He nails the financial industry as the key. Yet there is no political will to tackle the issue.

    Similarly those in the academics have littered the journals with similar assessments of their “industry”, particularly economics. Yet there is also no political will, here.

    Who will speak truth to power? who will bell the cat?

    sapere aude!

  3. Craig
    August 24, 2021 at 5:08 pm

    There is much to agree with and attempt to implement in your article Dean. The only two things working against it are the fact that finance with its monopolistic monetary paradigm “owns and controls the joint” and too much of the corporate structure sees no alternative to it and thus is happy to go along with it.

    The trick is to find policies to facilitate the end of “the roving cavaliers of credit” that yet and immediately benefits enterprise and 95-99% of the populace. The policy trinity of a $1000/mo. universal dividend and twin 50% Discount/Rebate policies at retail sale and the point of note signing (and a tax and regulatory framework that encouraged abiding by the concept behind the new paradigm and severely punished not abiding by it) would accomplish that.

  4. John Jensen
    August 24, 2021 at 8:44 pm

    The USA has a slightly higher GDP/capita than Denmark (who has virtually no natural resources) and yet the Danish minimum wage is over twice that in America. And to boot, Danes have free healthcare, next to free drugs and live a couple years longer, on average. Denmark also has 1/10th the crime and 1/20th of the criminals in jail per 100,000 population. And still, Denmark has just as many millionaires per million people as America. To be blunt, the American version of democracy sucks and I’m guessing that’s why so many of it’s misguided autocratic idiots stormed the Capitol on Jan. 6.

  5. August 25, 2021 at 2:43 pm

    Dean, thanks again for a provocative posting, which set my mind churning in response. And my apologies for the typos and missing phrase in my final paragraph (“were true) – the meaning I think was still clear; they’ve been corrected and I did a posting at the Daily Kos with only a slightly expanded version of my response here, and it is interesting to see in the range of comments from a supposedly left audience (actually, centrist dems are the majority there not the left) that political economy is not the strongest arm in the center-left arsenal, quite a few wanting to peg the federal minimum wage to the inflation rate not productivity gains. To answer the questions from readers I gave myself a quick online refresher course in the CPI and its merits and demerits and found a gem of President Biden having done just that in a campaign exchange, saying that if we tied the federal min. wage of 2009 (the last raise to $7.25 per hour) to inflation it would be $20 per hour in 2020 when the fact checking showed it would be only $8.95 or so…Biden was confusing, commentators said, Baker’s argument linked to productivity to the CPIers. Here’s my posting at the Daily Kos: https://www.dailykos.com/stories/2021/8/24/2047863/-What-if-the-math-trends-show-the-minimum-wage-should-be-26-per-hour-in-2021-not-15

    I’ll spare readers here the long list of reasons why we are not Denmark (thanks John Jensen) and limit the failure to having a fairer economy for wages and wealth distribution to the lack of ideological drive at the AFL-CIO, which is a problem of our age also so apparent in Western Europe. Social Democracy, the compromise between communism and capitalism, simply has been unable to generate the internal drive that fiercer beliefs did in the 1930’s formation of the CIO and its organization of the mass manufacturing industries. Personal charism is itself not enough; AOC has registered because she’s got more than a touch of each, but I have a hunch that there in her district in New York, the contrast between her struggling to survive constituents, working and lower middle class, and the upper West and East sides of Manhattan, home to the top 10%, keep the burning contradictions front and center. The AFL-CIO has been incapable of producing a leader that could break out of union concentric circles and reach the broader public with a union led vision for the whole society. That and the rise of identity politics within the Democratic party, taking the intensity and focus into race and gender, not political economy, has generated mostly a fragmentation effect, whatever the merits of the grievances within each camp. The gap between Dem. House Majority whip James Clyburn from South Carolina – and not only Bernie Sanders but Black Lives Matter and someone like Cornel West are indicators of the troubles. In South Carolina, the harsh history of black lives there has not led to a driving radical vision, but the very cautious conservatism of Jim Clyburn. (I’ve read some sustained commentary of his on economics and cringed.) He successfully created something called the 10-20-30 system to get 10% of annual Dept. of Ag expenditures spent in the nation’s poorest counties, but it’s the Capitol’s best kept secret and has never been expanded into a broader model, serving to help only the most desperate counties…which qualify by having Great Depression levels of unemployment and poverty over 30 years…who told me about it? A glancing reference in a Bernie Sanders speech. Even Maryland’s poorest counties are not poor enough to qualify and I was unable to ease the standards.

    Right now the US political system has failed once again to read a distant culture well enough to prevent a foreign policy disaster, can’t cope with Covid, nor even begin to seriously address climate chaos. We’re in a downward spiral and not clear we can pull ourselves out of the dive.

  6. Ken Zimmerman
    August 26, 2021 at 10:10 am

    Inspired by the Bank of Credit and Commerce International (BCCI) scandal of the 1980s, the film ‘The International’ (2009) raises concerns about how global finance affects international politics across the world. The tag line for the film, “They control your money. They control your government. They control your life. And everybody pays.”

    In ‘real’ life there was the Savings and Loan (S&Ls) scandal of that same decade. S&Ls were caught in a squeeze between a higher prime rate and their own loans and deposits fetching rates lower than prime. Deregulation of the S&L industry, combined with regulatory failure and fraud worsened the crisis.

    The film and the S&L scandal were a sign of the rattling of the prior conservative stance on greed, profits, and oversight. Oversight was out, greed and profits were now the only objective of all businesses. And the financial institutions (banks, S&Ls, etc.) were necessary for this. Both to hide the crimes and for a ‘piece of the pie’ to distribute the money. Soon all involved got more greedy and more dismissive of following the rules. And look where we are today. The rich and near rich openly brag about stealing and paying no income taxes.

    The malady you diagnose, ‘an economy that ensures a disproportionate share of income goes to those at the top’ is one part of this overall decline of the US. Not an economic decline but a decline of the continuing evolution of American democratic culture.

  7. Ikonoclast
    August 27, 2021 at 2:19 am

    The USA is doomed. Do Americans realize how far their nation has sunk? (Not that it ever was a moral nation anyway.) I don’t think they do know. Nor do I think they understand the deep historical reasons why. It goes right back to slavery, imperialism and a whole bunch of attitudes involved in fonding America and unchanged and not disavowed in real practice, right up to this day, including the failure to disavow capitalism. The greed and cruelty were and are all bound up with proto-capitalsim and capitalism.

  8. Econoclast
    August 27, 2021 at 11:10 pm

    I will offer another fact related to Dean’s interesting piece: In 1992 a study was done by a local (Pacific Northwest) political body that showed the wage necessary to keep a one-wage-earner family of four above all forms of public assistance to be $20 per hour (in today’s dollars that has nearly doubled, approaching $40). This study was used to fashion a county’s rules applied to subsequent land developers, governing what they paid their workers. This rule governed for years. I don’t know the current situation.

    Although this was put into political practice that, as far as I know, produced no local unemployment or inflation, I doubt it is possible today to enact the idea on a national scale and it is unfortunately similarly impractical to Dean’s $26 minimum wage. Just another example of an issue that can no longer be addressed by reform as long as predatory corporate financial capital rules.

  9. Ken Zimmerman
    August 29, 2021 at 8:47 am

    Robert Bellah claimed in 1967 that the United States is a nation organized as a civic religion. Two of the principles of that religion are among the most used explanations for that nation’s actions and appeal.

    The first is the City on a Hill/Beacon of Hope. The City on a Hill/USA as beacon of hope and righteousness theme has been frequently expressed in recent national elections—19 times in the victory and concession speeches, 159 times in the debates and 81 times in the nomination acceptance speeches. This totaled 259 times and was the most of any of the tenets and symbols we examined. Examples include: Reagan’s statement in his 1984 nomination acceptance speech, “Four years ago we raised a banner of bold colors—no pale pastels. We proclaimed a dream of an America that would be ‘a shining city on a hill’”; Romney’s declarations, in the third debate of 2012: “what I think our mission has to be in the Middle East and even more broadly, because our purpose is to make sure the world is more—is peaceful. We want a peaceful planet…That’s our purpose. And the mantle of leadership for the—promoting the principles of peace has fallen to America” and “This nation is the hope of the earth.”; and Biden’s assertion in the 2008 Vice-Presidential debate that:
    America is a nation of exceptionalism. And we are to be that shining city on a hill, as President Reagan so beautifully said, that we are a beacon of hope and that we are unapologetic here. We are not perfect as a nation. But together, we represent a perfect ideal, and that is democracy and tolerance and freedom and equal rights. Those things that we stand for that can be put to good use as a force for good in this world.

    The final and most mentioned civic religion principle is ‘Higher Purpose.’ The principle of having a higher purpose above self-interest showed up 11 times in victory and concession speeches, 79 times during the nomination acceptance speeches and 156 times during the debates. Examples include: Bush’s pronouncement in his 2000 victory speech: “Our nation must rise above a house divided. Americans share hopes and goals and values far more important than any political disagreements. Republicans want the best for our nation. And so do Democrats. Our votes may differ, but not our hopes.”; Obama’s statement, in the second 2008 debate “we may not always have national security issues at stake, but we have moral issues at stake. If we could have intervened effectively in the Holocaust, who among us would say that we had a moral obligation not to go in?”; and Kerry’s (quoting Kennedy’s inaugural address) injunction in the third Presidential debate, that “God’s work must truly be our own.”

    In total, the principle of having a higher purpose above self-interest emerged 243 times. This was second only to the city on a hill theme. However, these two items were frequently articulated together. For example, in the first debate of 1960 Kennedy asserted that:
    The kind of country we have here, the kind of society we have, the kind of strength we build in the United States will be the defense of freedom. If we do well here, if we meet our obligations, if we’re moving ahead, then I think freedom will be secure around the world. If we fail, then freedom fails.

    The higher purpose (promoting freedom) intertwines smoothly with the city on a hill/beacon of hope pattern. Similarly, in Ford’s nomination acceptance speech he says, “Today America is at peace and seeks peace for all nations.” Here again, the higher purpose (seeking peace) seamlessly intertwines with the idea of the United States being the hope of nations. While these items appear separately, they are more frequency found together. This suggests that the two items may perhaps be better conceived as one theme. Minimally, it is clear that in the American civil religious discourse there is a link between the idea of serving a higher purpose and being a beacon of hope.

    I believe this discussion raises at least two questions. First, is Bellah correct in his claims about the USA as a civic religion? Second, if Bellah is correct, is that religion now failing or has it already collapsed?

  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.

%d bloggers like this: