2006 July 30 Sunday
US House Passes Minimum Wage Increase

The House passed a minimum wage increase.

The U.S. House of Representatives early Saturday passed the first increase in the minimum wage in a decade, paired with a cut in inheritance taxes on multimillion-dollar estates. The House bill increases the $5.15 hourly minimum wage to $7.25 in three steps: $5.85 on Jan. 1, $6.55 on June 1, 2008, and $7.25 on June 1, 2009.

The rise to $7.25 has to be considered in inflation adjusted terms. If inflation runs at 3% in the next 3 years then cut about 9.3% from the $7.25 to get to $6.28 in 2006 dollars. If a recession cools down the inflation rate to 2% then the $7.25 becomes $6.81 in 2006 dollars.

The measure will probably die in the Senate due to opposition to the cut in inheritance taxes.

People on minimum wage make too little to get by.

Full-time workers at minimum wage make less than $900 a month to pay rent, food, healthcare, gas and everything else. No wonder the U.S. Conference of Mayors Hunger and Homelessness Survey found that 40 percent of adults requesting emergency food assistance were employed, as were 15 percent of the homeless.

So much for the "trickle down" theory:

Today's minimum wage workers have less buying power than minimum wage workers did back in 1950 when Harry Truman was president. The 1950 minimum wage is $6.30 in 2006 dollars, according to the Bureau of Labor Statistics Inflation Calculator. It would take $9.31 today to match the value of the minimum wage of 1968. It takes nearly two minimum wage workers to make what one worker made four decades ago.

The Center on Budget and Policy Priorities puts forth a different inflation adjustment analysis on wages. CBPP claims the inflation adjusted peak minimum was only at $7.54 per hour.

  • The real value of the minimum wage peaked in 1968, when it was equivalent to a wage of $7.54 an hour.[3] During the 1970s, the wage floor averaged $6.71 an hour in today’s dollars. (See Figure 2 and Table 1.)
  • Once an adjustment for inflation is taken into account, the purchasing power of the minimum wage has now declined to its lowest level since 1955, with the exception of 1989.

But their third footnote says they are using a less widely used method of adjusting for inflation and that the more widely used CPI-U series would put the peak of minimum wage at $8.88 in 2005 dollars.

We adjust for inflation using the CPI-RS (research series). The “RS” is a historically consistent series used by many analysts, including the US Bureau of the Census, to adjust for price changes. Relative to the more commonly used CPI-U, the CPI-RS grows more slowly, meaning that the real minimum wage deflated by the CPI-U has a higher peak level: $8.88 in 1968 in today’s dollars.

Why use CPI-RS? Anyone know a reason?

Another site puts the 1968 minimum wage at $9.12 in 2005 dollars. You can see the graph of real inflation adjusted minimum wage as rising pretty rapidly in the 1950s and 1960s and then declining some in the 1970s but most heavily declining in the 1980s.

But inflation adjustment is not the only consideration when looking at the historical minimum wage. Economic output per worker has soared since 1968. How has economic output changed since 1968? One reads many comparisons using per capita GDP. But the US Department of Labor Bureau of Labor Statistics Office of Productivity and Technology uses the far more interesting (at least to me) measure: Real GDP per Employed Person Converted to U.S. Dollars using PPPs (or Purchasing Power Parities). Click through to that PDF file and go to page 11 for a time series using that measure for the United States and 15 other countries. A comparison of the United States for 1968 and 2005 shows a 69% growth rate during that time. So production per worker soared even as the minimum wage plummeted. So much for "trickle down". Using 2002 dollars in PPP the 1968 per capita GDP of employed people was $47,898 versus 2005 with $81,024.

America's lower class is not doing well. Why swell its size with low skilled immigration? Why not jack up the minimum wage to $10 per hour. That'll raise wages for those who keep their jobs and cut the demand for low skilled illegal immigrants. The average skill level of illegal immigrants will rise as only those who are worth at least $10 per hour will try to come and the lower skilled lower wage illegals will self deport.

A digression from talk about minimum wage: That BLS document also makes for interesting reading for comparisons of output per worker in industrialized countries. If you go to that PDF file also check out table 2 which shows a time series of per capita GDP of 15 other industrialized countries as a fraction of to the United States per capita GDP. Following down each column you can see where each country peaked versus the United States. For example, Canada peaked at 88.5% of US per capita GDP in 1981 and current is at 80.5%. Australia peaked at 81.5% in 1960 and currently is at 76.5%. Japan peaked at 86.2% and currently is at 76.5%.

That document's table 4 repeats the same analysis as table 2 but using per capita GDP per employed person. By that analysis Canada peaks against the United States in 1977 at 89.3%, Australia peaks in 1982 at 82.5% and Japan still peaks in 1991 but at 77.1%. Also using table 4 as of 2005 Norway at 94.6% came closest to equalling the United States. North Sea oil and high oil prices partly account for the strong showing by Norway. Belgium comes next at 93.3%. Part of Belgium's strong showing per worker is in part due to a lower labor market participation rate of 40.3% versus, for example, Denmark at 50.4%. Those who do not work are less talented than those who do. So a lower labor market participation pushes up average productivity per actual worker.

Share |      By Randall Parker at 2006 July 30 06:40 PM  Economics Labor


Comments
Jeff Crow said at July 31, 2006 9:49 AM:

Let's raise the minimum wage to $100.00/hour. We'll all be rich!

FightHardOrGetOut said at July 31, 2006 12:01 PM:

Randal Parker:

"America's lower class is not doing well. Why swell its size with low skilled immigration? Why not jack up the minimum wage to $10 per hour. That'll raise wages for those who keep their jobs and cut the demand for low skilled illegal immigrants."

You assume an effective enforcement of minimum wage law. It is a very tall assumption, one that is not supported by the recent history.

FightHardOrGetOut said at July 31, 2006 12:08 PM:

Jeff Crow:

"Let's raise the minimum wage to $100.00/hour. We'll all be rich!"

A very original argument. Did I mentioned brilliant?

If you can take pain of massive unemployment and a huge inflation spark in a short run, yes, in a long run our society will be richer and you will have to eat a crow. We would have a massive investments in labor saving machinery, improvements in productivity together with inflation reducing $100/h to effectively $50/h or so, will stabilize economy at a higher productivity level.

Randall Parker said at July 31, 2006 3:12 PM:

FightHardOrGetOut,

Violation of the minimum wage law is rare. Violation of the immigration law is very common. It is easy to use ignorance as a defense on immigration law. It is not easy to use ignorance as a defense on minimum wage law.

FightHardOrGetOut said at July 31, 2006 8:00 PM:

Randall Parker:

"Violation of the minimum wage law is rare. Violation of the immigration law is very common. It is easy to use ignorance as a defense on immigration law. It is not easy to use ignorance as a defense on minimum wage law."

Agreed for businesses of certain size (50-100+ employees? $5M-$10M revenue?).
Lots of illegals get paid in cash. Employer could keep two books. Official book could show an employee working 30 hours at legal wage, real book has employee working 40 h at below min.

I would be interested in data on illegals wages, including off the books. Also employment by larger, presumably min wage law abiding businesses vs small employers.

Randall Parker said at July 31, 2006 8:36 PM:

FightHardOrGetOut,

Yes, some are paid in cash. But, again, most illegal aliens are paid on the books.

Do some break the law on minimum wage? Yes, of course. But, again, it happens much more rarely than the hiring of illegal aliens. Why? Employers can claim they thought the illegal was legal due to some fake ID. But the employer can't pretend not to know the hourly wage being paid or legally required to be paid.


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