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When I first began investigating the minimum wage a couple of years ago, one of my early surprises was its sharp decline across the decades, having fallen by roughly one-third in real value since its 1968 peak.

This drop was greatly magnified when we considered the economic growth of American society given that our per capita GDP had roughly doubled during that same period, meaning that the minimum wage had declined by almost 70% relative to average income. A 70% drop in a crucial parameter of our wage structure is quite remarkable and clearly explains why lower wage workers could generally support their families a few decades ago, but today subsist in desperate poverty despite massive government social welfare subsidies. I emphasized some of these statistics in my December 2013 New York Times piece on the subject, pointing out that even raising the minimum wage to $12 per hour would merely make up a fraction of this long lost economic ground.

I was hardly the first person to note these remarkable facts, and earlier that same year Sen. Elizabeth Warren had pointed out that if the minimum wage had merely kept pace with the growth in average per capita income, it would have reached a rate close to $22 per hour. Given such figures, the increases to $9 or $10.10 advocated by the Democratic leadership in Congress stood revealed as the paltry and pusillanimous goals that they were.

The devastating power of this simple economic point is easily apparent to the business lobbyists tasked with blocking an increase, and they have regularly suggested that this argument is totally misleading because it ignores that the gains in national economic output have hardly been uniform across all sectors. The doubling in real per capita GDP has been driven almost entirely by increases at the high end, in sectors such as computer software, finance, and biotechnology, with little of it due to changes in the value of the work produced by janitors and waitresses. They argue that wages must follow productivity and if the output of nannies is roughly unchanged from forty years ago, it is absurd to expect their real hourly wages to double or triple. On the face of it, this rejoinder seems quite telling, and I have never seen an effective rebuttal provided in the numerous articles and columns by liberal wage advocates I have read on the subject.

However, let us step back a little and ask ourselves to consider the definition of “productivity,” especially for a service-sector worker of the sort we are considering. Now as both I myself and my sharpest libertarian critics have emphasized, I have absolutely no professional expertise in the “dismal science,” but productivity is obviously directly related to the rate at which economic value is generated and economic value is defined in terms of market prices. So if the hourly wage of a cleaning lady is $9 and the price charged for her service is $11 (including overhead), those figures represent her productivity.

But suppose the minimum wage were raised to $11, boosting her personal wages to $12 per hour and the all-in cost of her services to $14. Assuming her job remained in existence, which it probably would, the market price and productivity of her work would have grown by one-third, although her scrubbing and washing remained completely unchanged. And her new, higher wages would remain just as closely aligned with her new, higher personal productivity as had been the case earlier since productivity is defined based on wages and costs for the service involved rather than the other way round.

Moreover, minimum wage critics have endlessly touted the recent CBO report analyzing the impact of a wage hike. Yet according to that report, some 98% of impacted low-end workers would see dramatic rises in their wages while only about 2% might lose their jobs as a consequence. So according to this analysis, the proposed minimum wage hike would raise the economic productivity of 98% of America’s low-wage workforce—could any politician ask for a better talking-point?

Perhaps my self-declared economic ignorance is shining through at this point, and my expert critics in the economics professoriate can seize on these naïve suggestions to ridicule and humiliate me. I urge them to do so. But it seems to me that much of modern economics is more intended to obfuscate and confuse rather than enlighten, and the disastrous American economic policies of the last decade or so tend to strengthen my suspicion in this regard.

These days, a large fraction of the more vocal and visible economics experts draw much or most of their incomes from the financial subventions of our Oligarch class, and perhaps coincidentally, their claims and the personal interests of their benefactors seem rather closely aligned.

We have been discussing the productivity of low wage workers, but let us now consider the productivity at the other end of the economic spectrum, which has allegedly risen so rapidly over the last few decades and thereby supposedly justifies the massive financial rewards there accrued.

How do we measure the productivity of a hedge-fund manager, a service-sector worker who annually earns $50 million for his management skills and financial manipulations? Unless I’m missing something, the only metric available is the market price he charges for his services, namely that same figure of $50 million per year. So just as has been claimed by those pro-market pundits, his income closely corresponds to his productivity, but his is merely a restatement of the relevant definitions. If the painter of blotchy canvasses can sell them for tens of millions of dollars, his economic productivity is enormous even if his artistic skills are minimal.

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This same argument would presumably apply on the international scale as well. If an African dictator or the current God-Emperor of North Korea’s Kim Dynasty allocates to himself 5% of the entire national income of his impoverished country, the annual dollars involved may reach into the billions, demonstrating that his economic productivity exceeds that of almost any brilliant American business tycoon, even though the likely benefits he provides to his suffering country are hugely negative. Perhaps the Sultan of Brunei may spend most of his days playing polo or watching TV, but his ongoing productivity—as manifested in the diligent 24-7 gushing of his oil wells—remains far greater than that of any investment banker or elite lawyer.

So when regular columnists in Forbes or other publications cite the fact that over the last generation or two, the economic productivity of our elites has skyrocketed while the productivity of most other Americans has stagnated, I suspect they are simply restating the leftist claim that the rich have gotten richer while no one else has. But it’s nice to hear those sentiments coming directly from such a contrary source.

 

Meanwhile, on a more practical matter, I’ve become much more hopeful that a California minimum wage hike along the lines of that contained in the initiative I failed to qualify for the November ballot may soon be achieved via different means.

A few weeks after my $12 minimum wage initiative began receiving considerable media attention, State Sen. Mark Leno of San Francisco introduced a bill in the California legislation topping my proposal by raising the minimum wage to $13 per hour.

I’d assumed the measure had little chance of passage. Last year the Legislature had been unwilling to consider a figure higher than $10 per hour and leading Democratic constituencies had actually criticized my initiative as unreasonable and unwarranted when it had surfaced.

However, it appears that the huge shift in the political and media momentum on the issue over the last few months, perhaps partly due to my own efforts, may have altered that ideological situation, especially in California. After recently meeting and talking with Sen. Leno and his staff, I now believe his legislation has a reasonably good chance of being enacted this year at least in some form, which is very heartening.

Obviously, I would have very much preferred that my own initiative be the vehicle for raising the California minimum wage and a successful initiative campaign might have been a powerful means of nationalizing the issue in November. But with the failure of my attempt to qualify the measure for the ballot, I am glad to endorse Sen. Leno’s effort and will do whatever I can to help it become law.

Although a state-level minimum wage of $13 would be by far the highest in America, the figure is not at all unreasonable. California’s cost of living is about 30% above the national average, so a $13 rate here is roughly the same as a $10 minimum wage at the federal level, a figure now backed by the Obama Administration and almost all the Democrats in Congress, and even endorsed by conservative Bill O’Reilly on his FoxNews show.

Democrats hold super-majorities in both houses of the California legislature and they only require a simple majority to raise the minimum wage. So all that is necessary for enactment is that they retain the support of the sizable block of moderate Democrats and Gov. Brown, and this would surely be facilitated by the number of prominent conservative Republicans who have now endorsed a large hike in the minimum wage. Just within California, influential moderate billionaires such as Eli Broad and Rick Caruso have now also endorsed a minimum wage hike in that range or even higher, as has Peter Thiel, a billionaire who has strongly rightwing views on economic matters.

If my recent initiative drive to substantially raise the California minimum wage helps spur legislation producing a roughly similar result, I’d count my project a considerable success regardless of the particular circumstances under which the result was achieved.

 
• Category: Economics • Tags: Minimum Wage 
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  1. A very good article. While some trained economists might poke holes in your arguments, their counter arguments are too often supported by jargon and dogma, rather than common sense or evidence based logic.

    Yes, economic theory, like banking practice, is a tool of the rich, primarily concerned with justifying the unjustifiable, and obfuscating the indefensible. My father taught college level economics, and I attended some of his lectures as a student, and as an observer. Later, over lunch or dinner, I’d ask questions about the material he presented in class, and typically his answers were something like “That’s all bull****. It really doesn’t work that way, but you’ll need to know it to pass the test.”

    Claims that CEO / executive productivity has “skyrocketed” are based on the incomes they have achieved by rigging markets, suppressing wages, offshoring / outsourcing jobs, and creating larger and larger monopolies. Such claims are rather like a gang of thieves who have stolen England’s crown jewels claiming they are more productive than thieves who steal copper wiring from abandoned houses. They are, in fact, no more productive. They’ve simply chosen a richer target.

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  2. Anonymous says: • Disclaimer

    A minimum wage takes away the freedom of the employee to individually negotiate their the fee that they charge work their labour. It makes it difficult for people to improve their lot. Here in the U.K some people employed on the minimum wage are entitled to hand-outs, through tax credits and childcare payments. Having a minimum wage gives the legislators more power.

    The people so employed lose the will to negotiate their own terms. The minimum wage becomes the norm. They become part of an underclass, their confidence is taken away. The employer can replace them if they complain (they can always find someone else at the minimum wage).
    This acts as a dis-incentive to improve one skills. Because they only pay the minimum wage so what’s the point.
    The conclusion of having a minimum wage on the statute is an inflexible workforce of slave-like employees, which will make employing people cheaper but the standard of service will get worse. This is because of a dis-empowered workforce. The whole idea is counter productive and anti-free enterprise.

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  3. Anonymous says: • Website • Disclaimer

    Libertarians and conservatives argue that that Wall Street hedge fund managers somehow “produce economic value” corresponding to the stupendous incomes they are paid.

    How do we know that they produced the value? Because they got the money. Why did they get the money? Because they produced the value. Some people might call that circular reasoning.

    http://rinth1989.wordpress.com/2009/09/22/libertarianism-isnt-free/

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  4. I couldn’t be more pleased to see sensible people finally beginning to use the word “oligarch,” and laughing at the pretensions of the economics goon squad with their Ricardo-retardo ideas.

    I came across this today. Haven’t read enough of it to see if it is sound in its reasoning, but there is definitely something in the air:

    http://www.princeton.edu/~mgilens/Gilens%20homepage%20materials/Gilens%20and%20Page/Gilens%20and%20Page%202014-Testing%20Theories%203-7-14.pdf

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  5. Anonymous says: • Disclaimer

    Nice article. However, the basis for the argument may not find general agreement. The basis seems to be that when the society as a whole gets richer (GDP per capita goes up), the lowest earner too should get richer even if the person’s contribution to the wealth created has not seen an increase. This is a moral argument and many at the high end of the income/wealth spectrum may not agree. If they do not agree, increasing the minimum wage will result in inflation and not higher prosperity for the minimum wage earners. Whether those hiring the minimum wage workers are monopolies or exposed to extreme competition, everyone knows that they can pass on their costs to the customers without a fear of drop in the customer base.

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  6. Anthony says:

    Your economic reasoning is faulty, but the results are generally sound. A factory or office worker earning about $10/hour costs the employer closer to $14/hour, even more if health insurance is included. The employee is generating *at least* that much value for the employer. (Probably. It’s *hard* to work out what any one individual is generating, and sometimes favoritism allows some employees to receive more than they produce, but the sums over the firm have to work out, or the firm goes bust.)

    However, the wage is not set solely by employee productivity. It’s also set by competition among employees. A job where the typical applicant can reasonably be expected to create $25/hour in value for the employer might be bid down to $10 ($14 after costs) if there are lots of people qualified to do the work, and not that many openings for people with those qualifications.

    Raising the minimum wage from the not-quite-$10 now to $13 will cost jobs – it will cost those jobs where employee productivity is less than $13 (really, more like $18). But because wages have been bid down by large numbers of employees, not all jobs paying less than $13 are that unproductive. The question is how many jobs are.

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  7. tom says:

    All of these arguments from both sides of the divide mean very little in actuality to those trying to survive on the minimum wage. Simply put any person earning less than 15 hour in 2014 will have an impossible time paying rent. the government and even corporations such as the vile Wal mart need desperately to build massive amounts of low income housing ir cities like sf, ny, boston and an endless list of other towns or these places will not be able to operate in the consumer based economy that cities currently have in place where low wage work is the order of the day

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  8. Rod1963 says:

    What to pay people at the bottom has become a mess thanks to illegal immigration and legal importation of foreign laborers(H1-B and L-1 for instance). Both of which are supported by businessmen large and small.

    Then there is off-shoring of jobs to Asia which has wiped out our industrial base to a large extent and depressed wages.

    These issues make up the elephant in the room that many big name Conservatives and Libertarians don’t like to talk about since they are major promoters of both. BTW the Dems are just as anti-labor and anti-working class as the Conservatives but they hide it better.

    Worse, these people think it’s good because it makes them richer.

    These factors have kept minimum wages depressed for native born Americans along with harming the middle-class which is currently dying. Why pay $10 or $15 a hour for a American worker when you can get Jose from Mexico to work under the table for $7 or even lower?

    Just ask Hormel who used to employ many Americans and employs mostly illegals or McDonalds in CA which is a major employer of illegals.

    For larger companies especially in the tech industry, they often give the boot to American workers and replace them with H1-B workers from India who work at half the wages.

    And here’s the other issue: Inflation

    It has wiped out the dollar’s purchasing power for the lower and middle-class and has in fact made them poorer.

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  9. DrBill says:

    So according to this analysis, the proposed minimum wage hike would raise the economic productivity of 98% of America’s low-wage workforce—could any politician ask for a better talking-point?

    This is a map-territory error. You can’t get a mountain range out of your way by erasing it on your map: you can only make your map inaccurate. You can’t forestall your car running out of gas by pulling the needle on the gas gauge closer to “F.” You can only make your gas gauge less accurate. You can’t make what you are calling a worker’s productivity go up by raising his wage by fiat. You can only make his wage a less accurate representation of his productivity.

    In a well-functioning market, wages are a measure of how much workers produce. In a poorly functioning market (distorted by, say, minimum wages or financial fraud) wages no longer measure how much workers produce. Simple.

    So when regular columnists in Forbes or other publications cite the fact that over the last generation or two, the economic productivity of our elites has skyrocketed while the productivity of most other Americans has stagnated, I suspect they are simply restating the leftist claim that the rich have gotten richer while no one else has.

    That’s right. And, if you believe that financial markets are well-functioning, then they are making a good argument. Of course, believing that financial markets are well-functioning is a strong sign of insanity.

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  10. Joe Webb says:

    Automation is a word not to be seen in this thread. (leaving aside globalization’s basically unfair labor market…workers compete internationally but professionals do not)
    I read in the business pages that automation has dramatically increased labor productivity but that workers have received almost none of that true productivity.

    The nanny may not have increased her productivity over the years but the factory worker has increased his productivity. Of course that is due to automation and therefore larger capital outlays for automation. Capital demands its return and gets it.

    Labor is in no condition to demand anything, politically and socially. Unionism is moribund.

    Some think this is good because economics trumps everything that we would term as
    social or the Common Good. I suppose that most folks who have read or thought along the lines of The Bell Curve, by Murray and Hernstein, might find those who are libertarian and social-Darwinist to be unwise and dangerous for the country.

    Leaving aside racial inequality and the morass that we have gotten ourselves into over the last half-century trying to Change! what cannot be changed, the facts of economic life for Whites have become socially disruptive to say the least.

    The Free Market today cannot assort rewards/compensation like it once did, more or less equitably when it was a market contained within a single state, like the US. International markets make for huge inequalities of condition: unequal access to information (think electronic trading of Wall St), dramatically unequal ability levels of individuals now competing internationally, and a strong tendency for the best-brightest to get the lion’s share of whatever scarce goods there are , including status, etc. Pluralism is gone. There is only one game in town…get richly rewarded.

    Social life in the US , just 60 years ago, and I assume in Europe as well, was characterized by at least half of high IQ folks NOT involved in the high stakes game of economic success. Today, that has almost been erased. This has left social life poorer for the bottom 80%. In the ghettos, it is even worse, as the talented -tenth has been largely removed.

    The old argument for a Social Wage during the post-war years was largely determined by the threat of a half-way viable socialist (communist) world that worked relatively well until about 1960…economically of course. Also, in Europe, the social democratic model has continued and has kept the peace up until now. It is called the Rhenish model.

    Some jobs are not productive in any measurable way, like the nanny’s. What is a teacher worth?, etc.

    Political economy is the old term that compasses this reality. Economics is not just economics, it is the fundamental guarantor of social peace (after Race).

    A high minimum wage per Ron’s argument is Good for social peace. What we are going to do with our race problems is anybody’s guess. Mexicans further threatening White workers is a disaster and the social relations factor is explosive. Libertarians are singularly one-dimensional and therefore incapable of rational thought.

    Country is First, and that means indivisible to the largest extent possible. Multiple races is a disaster , always has been and always will be. Economics is at best Second, or maybe Third, that is if you want social peace, comfortable neighborhoods, and so on.

    Arguably, part of social peace even within the White race, is the need for people who are smart who just do not want to strive with both hands all the time, only one-handed participation in the economy is good-enough. They should not be penalized 50%. Society needs folks who pursue art, mountain-climbing and story-telling, and the like. Lower the pace…and relax.

    Social-Darwinism is ok up to a point. But We have reached that point, and we are threatened now with societal disintegration. Racial polarization now is rapid, and more economic polarization (class struggled) we can do without.

    Finally when race and class merge into a single social-political mass that Demands! as we are now seeing with the White percentage of the US down to about 60% of the population and more non-White babies being born than White babies, we are near the tipping point …civil war beckons and that will be pretty hard on economic productivity.

    Joe Webb

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  11. Joe Webb says:

    I neglected a major point. Our economy suffers from low Consumer Demand. Getting more money into the hands of workers would greatly stimulate consumer demand. Hence a higher minimum wage would be great.

    Another way of putting it is this: There is Too Much Capital and Not Enough Wages. This leads also to investment bubbles as surplus capital cannot find normal investment opportunities, and takes a flyer on rare tulip bulbs, housing, and so on. Where I live, south of San Francisco, the housing market is soaring and some are warning of another bubble.

    Joe

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  12. AG says:

    How countries calculate their GDP

    http://www.economist.com/blogs/economist-explains/2014/03/economist-explains-26

    In michael lewis book “Boomerang”, you can see how GDP or wealth can be artifically inflated. Some young kids borrowing millions dollar traded each other’s properties at inflated million dollars price tag and created wealthiest GDP per capita in the world without creating any real value. Yes, some kids from Iceland did that.

    GPD and wealth are not that much related to true value. In economical activities, person or country who ripps off most wealth might not be the one who create them in this gamed system. Exploitation is the rule.

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  13. […] links The Huge Economic Productivity of Divine Monarchs – The Unz Review Reply With […]

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  14. The productivity of a maid would be measured in how many homes or rooms she cleans per hour. It is not measured by her salary. Soon enough we will have robots replacing maids, just as computers replaced switchboard operators.

    Cashiers are more productive today due to bar code scanners, but soon technology will replace cashiers, which will further increase the productivity of retail stores.

    Usually humans become more productive via the better use of technology.

    unions usually force employers to give workers increased pay based on seniority , union workers are not payed based on productivity. Increases the minimum wage will not increase the productivity of a maid, it will decrease her productivity and the end result will be a faster implementation of robotics to eliminate these un-productive jobs.

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  15. JH says:

    Nice framing of the subject with “current God-Emperor of North Korea’s Kim Dynasty “.

    Be great if you could make a simple youtube cartoon (I can’t) illustrating the articles point framing it with North Korea’s “Current Kim”. The kids all know who he is he’s their current bad-guy.

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