Raising the Minimum is the Bare Minimum

In 1995, when John Sweeney ran the first and as-yet-only insurgent campaign for the presidency of the AFL-CIO, his platform took the form of a book entitled America Needs a Raise. If that title rang true in 1995, it clangs with deafening authority today.

Which leads us to the only problem with the current campaigns to raise the minimum wage: It’s not just workers at the low end of the wage scale who need a raise. It’s not just the work of the bottom 9 percent of labor force that is undervalued. It’s the work of the bottom 90 percent.

Conservatives who oppose raising the minimum wage argue that we need to address the decline of the family and the failure of the schools if we are to arrest the income decline at the bottom of the economic ladder. But how then to explain the income stagnation of those who are, say, on the 85th rung of a 100-rung ladder? How does the decline of the family explain why all gains in productivity now go to the richest 10 percent of Americans only? And are teachers unions really to blame for the fact that wages now constitute the lowest share of Gross Domestic Product since the government started measuring shares, and that corporate profits now constitute the highest share?

We need to raise the minimum wage, but that’s only the start. Even more fundamentally, we must reverse the deeper and more profound redistribution of wealth that has now plagued the nation for several decades: that from capital to labor.

For as income from work declines for the nation as a whole—inflation-adjusted median hourly wages are now more than $1.50 lower than they were in 1972—income from investment soars. The stock markets are hitting record highs, and major corporations are using the $1.5 trillion they have lying around to raise not wages but dividends. They are also using some of that cash to buy back their own stock, which raises the value of the outstanding shares, to which, happily, most CEO’s compensation packages are linked.

The institutions that once ensured that American workers actually got their share of the pie—unions—have been so thoroughly battered down that they can no longer effectively bargain for raises. That leaves that other instrument of the popular will— the state—as the sole remaining institution that can bargain for workers. That’s why the minimum wage, the living wage and the Earned Income Tax Credit have taken on a greater significance than they previously held: They not only raise the incomes of the poor, but are the last remaining vehicles for raising wages.

That’s why just stopping with raising the minimum, important though that be to the nation’s economic and moral health, is nowhere near enough. Making it safe again for workers to try to join unions is a necessity, too, but that’s a fight that labor has been waging for half-a-century with nothing to show for it. The left needs to battle on other fronts as well.

We could begin by shifting the tax burden from labor to capital—after all, income in America has long been shifted from labor to capital.  We could abolish the payroll tax on the first $25,000 that people make, substituting for it a higher threshold on taxable income. We could raise the tax rates on capital gains and dividends not just to the same levels as income derived from work but higher still. And we could explicitly designate some of the revenue from capital income to go to a much expanded Earned Income Tax Credit—expanded not just by making the payments more generous, but also by raising the criterion for eligibility well above the government’s poverty threshold.

By explicitly taking back from capital some the wealth it has taken from labor, government would begin to address the root causes of economic inequality. Not all of them, to be sure: The stratospheric salaries that top corporate executives and Wall Street traders command aren’t capital income as such. One way to rein in executive pay might be to set corporate tax rates by the size of the gap between top executives’ and median workers’ pay, the data on which the Securities and Exchange Commission is supposed to make public under the terms of Dodd-Frank. Or it might be to set corporate tax rates based whether the corporation has a stakeholder or a shareholder board. In Germany, corporations are required to have equal numbers of employee and management representatives on their boards, which has effectively reduced CEO pay at most German companies to a multiple of 10 or 12 times that of its median employee, not the 200 or 300 times that’s the norm in the U.S.

If we want to address economic equality, we need to follow the money. In recent decades, as a result not just of globalization and technology but also of the decline of unions and the rising political power of the rich, the money has almost entirely gone to the rich—in the current recovery, fully 95 percent of income growth to the top 1 percent. So by all means, raise the minimum wage. But don’t stop there. 

Comments

I was reading recently how JFK endlessly avoided taking a stand on civil rights and even privately discouraged activists -- for fear his opposition to Apartheid would cost him the support Southern senators on everything else (he was right). He finally got backed into a corner and was forced to take the right stand.

Obama faces the opposite political calculus. The American labor market is such a wreck for so long (when I explained how badly to my late, more articulate brother John he quipped: "Martin Luther King got his people on the up escalator just in time for it to start going down for everybody") that presidential support for major reform would do nothing but build and build mountains of political capital.

I suspect the White House crowd has finally figured this out which may be the only reason they are finally moving (even if they don't know where to move -- hence, their warmed over version of "model cities").

Krugman's fear that people don't understand macro-economics will prove unwarranted if the Democrats are keeping everybody focused on real labor reform. BS concerns about the deficit will sound forced while we are really straightening out the country. Just the political momentum alone moving in Democratic favor will blow away a lot of the reactionary wind, as these things go.

There is a reason the Democrats can barely beat the crazy Republicans, year in an year out. Lacking perspective (see discussions of gross lack of labor market perspective below) Dems have no idea at all that they are offering people no serious game changing programs at all (health was great -- but most didn't need it -- and everybody's scared of it).

Time for a lot of political ball control: double the minimum wage -- start talking up legally mandated, centralized bargaining; in use around the world starting post WWII, introduced by right wing industrialists, yet!)

Progressive economists should readily admit -- shout, scream -- that a “moderate” federal wage increase, typically 10% cited in conservative studies, should indeed have little or no effect on poverty rates. Why would an extra 1/4 of one percent of GDP added to low wage pay checks be expected to clear a broad swath through poverty? That is what a $1 an hour increase in the federal minimum wage equates to -- about $40 billion out of a $16 trillion economy. (E.I.T.C. shifts $55 billion.)

A $15 an hour minimum wage OTH would send about 3.5% of GDP the way of 45% of American workers -- about $560 billion (much of it to bottom 20 percentile incomes who today take only 2% of overall income).
* * * * * *
Could raising the wages of 45% of the workforce actually raise demand for the goods and services they produce? Sounds sensible at some level; raising wages so much ought to add demand somewhere – but, is it all smoke and mirrors? Before the 45% -- who would get a wage hike to $15 an hour -- can raise demand anywhere, they would need to get the extra cash from somewhere else – meaning the 55%. (Bottom 45 percentile incomes – not wages – currently take 10% of overall income – so, at no time are we talking giant chunks of the economy here.)

The 45% can get higher pay even as "numerical" (to coin a phrase?) demand for their output declines due to higher prices -- as long as labor gets an bigger enough slice of the new price tags. This can be compared to a leveraged buyout or buying stocks on margin.

Products produced by low-wage labor tend to be staples whose demand tends to be inelastic. Demand for food is inelastic – maybe even fast food. If the price of your Saturday family jaunt to McDonald's rises from $24 to $30, are you really going to eat at home (the kiddies haven't forgotten the fundamental theorem of economics: money grows on trees :-])? And fast food should be the most worrisome example: lowest wages to start with; even so, highest labor costs, 25%.

Wal-Mart is the lowest price raising example (surprise) with 7% labor costs. Jump Wal-Mart pay 50% and its prices go up all of 3.5%.

If low wage labor costs average 15% across the board and go up 50%, overall prices increase only 7.5% -- and that is for low wage made products only; nobody's car note, mortgage payment or health premium is affected. If demand drops just enough for price increases to maintain the same gross receipts (conservative, even without inelasticity), low wage income should improve appreciably.

Allow me to cite: from a 1/ll/14, NYT article "The Vicious Circle of Income Inequality" by Professor Robert H. Frank of Cornell:
“… higher incomes of top earners have been shifting consumer demand in favor of goods whose value stems from the talents of other top earners. … as the rich get richer, the talented people they patronize get richer, too. Their spending, in turn, increases the incomes of other elite practitioners, and so on.”

The same species of wheels-within-wheels multiplier ought to work the at both ends of the income spectrum -- and likely in the middle. A minimum wage raise to $15 an hour is not going to send most low-wage earners in pursuit of upper end autos, extra bedrooms or gold seal medical plans. Wal-Mart and Mickey D's should do just fine, OTH – which in turn should keep Wal-Mart and Mickey D's doing even better.
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Did I forget to mention … ? The poverty line that a "moderate" minimum wage could not help anybody cross -- $20,000 for a family of three – is only about half as high a hurdle as a realistically worked out minimum needs line should be. .

A practical line would be more like $40,000 a year. Today’s official federal formula is an early 1960s creation: multiplying the price of an emergency diet by three (dried beans only, please; no expensive canned) – no current basket of goods. For a reasonable basket of goods consult page, 44, of the, 2001 (2008), MS Foundation book “Raise the Floor.”

So, a so-called "moderate" increase in the minimum wage will not even clear a half-height hurdle.

Final thought: Why does everyone obsess so over the "hazards" of raising one price in our economy -- low wage labor's. Nobody shudders when the Teamster Union raises its price. It is not like the price of low wage labor has been habitually tested against market willingness to pay and been barely holding its own. It is more -- it is exactly -- like the price of low wage labor has sunk further and further below market willingness -- precisely for lack of testing -- as the ability to pay has grown and grown -- for almost half a century now. See my everything-adjusted-for-everything minimum wage history chart:
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The easily could-have-been minimum wage if dbl indexed for inflation AND per capita income growth:

yr..per capita...real...nominal...dbl-index...%-of

68...15,473....10.74..(1.60)......10.74......100%
69-70-71-72-73
74...18,284.....9.43...(2.00)......12.61
75...18,313.....9.08...(2.10)......12.61
76...18,945.....9.40...(2.30)......13.04........72%
77
78...20,422.....9.45...(2.65)......14.11
79...20,696.....9.29...(2.90)......14.32
80...20,236.....8.75...(3.10)......14.00
81...20,112.....8.57...(3.35)......13.89........62%
82-83-84-85-86-87-88-89
90...24,000.....6.76...(3.80)......16.56
91...23,540.....7.26...(4.25)......16.24........44%
92-93-94-95
96...25,887.....7.04...(4.75)......17.85
97...26,884.....7.46...(5.15)......19.02........39%
98-99-00-01-02-03-04-05-06
07...29,075.....6.56...(5.85)......20.09
08...28,166.....7.07...(6.55)......19.45
09...27,819.....7.86...(7.25)......19.42........40%
10-11-12
13...29,209.....7.25...(7.25)......20.20?......36%?

We should abolish the payroll tax on the first $25,000 that people make. That's a great idea that could possibly make it through the GOP-controlled House, as long as it is not tied to a tax increase.

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