During the past couple of weeks we have discussed the floor and ceiling on wages put into place by the “greatest generation.” I had intended to move on, but have since felt it important to give a final epilogue.
I happen to be a big fan of Glenn Kessler at the Washington Post. He writes the “Fact Checker” column employing C.P. Scott’s motto, “Comment is free, but facts are sacred.” In the spirit of fact checking, it might be useful to conclude our recent discussion by examining two facts and two concerns which commonly arise within the disheartening dialogue surrounding the minimum wage.
The two “facts,” as presented by minimum wage opponents, are first, the minimum wage was never intended as a living wage, and second, the proof of this is found in the “fact” that the original minimum wage in 1938 was 25 cents which translates today to about $4.17. The two concerns are first, that small businesses will be mortally wounded by a rise in the minimum wage and second, that unemployment will rise as workers are priced out of the labor market.
How do these stack up under scrutiny? Let us begin with the second “fact,” namely, the original minimum wage of 1938 was 25 cents which today is $4.17 when adjusted for inflation. Is this true? Yes and no, with greater emphasis on no.
The US Bureau of Labor Statistics calculates inflation. They maintain many series, each with varying characteristics. Generally the inflation stats are short-term meaning a decade or so long. However, the bureau does calculate a long term consumer price index going back to the Great Depression.
If one employs that long series to inflate 25 cents from 1938 to 2015, one gets the number $4.17. Unfortunately, this information has a very limited application in economics. How so?
When one is interested in studying the changes in purchasing power of a particular currency, one takes a fixed basket of goods and services and contrasts the prices of the basket during the start year and the end year.
Now we come to the point, the basket. How much did an iPhone or iPad cost in 1938? How about a plane ticket from Boston to LA, a Ford F-250 truck, a GPS unit for mapping lobster traps, or a nail gun for building a house? Much of what we buy today did not exist in 1938.
The consumer price index is more helpful as a tool to compare inflation rates one year to the next, but when one tries to explain the cost of living from one century to the next, the results can be highly misleading. Again, how so?
Back in 1938, National Income (gross domestic product minus capital depreciation) was $77.1 billion, produced by a total population of 130 million. Annual income per capita was therefore $593. A person working at minimum wage would earn $500 per year, or 84 percent of the income per person. How does this measure up today?
In 2014 national income was $15,070 billion, produced with a total population of 319 million. Income per capita is therefore $47,241. Today, a person working for the minimum wage of $7.25 per hour earns $14,500 per annum, or 31 percent of income per person.
Two things should be quite clear. First, the minimum wage today is much much lower than it was in 1938, not higher. A person earning minimum wage in 1938 was receiving 84 percent of the average. Today, a minimum wage employee’s paycheck has dwindled to a mere 31 percent of same average.
Second, the minimum wage in 1938 was obviously set at a level to enable one to live on that wage. The comparable wage today (84 percent of average income) would translate to nearly $40,000 per annum. I dare say that those who currently earn minimum wage would find life much more pleasant if they could earn 84 percent of the national income per person as did their forefathers in 1938.
This brings us to our first concern, namely, that raising the minimum wage would cripple small businesses. I have a degree of sympathy for this anxiety. A stanch proponent of a strong minimum wage might dismissively deride those with this concern by arguing that business owners are simply trying to protect their ability to employ people at “slave wages.” However, this casual critique fails to understand, elevate, and enlighten the dialog.
Many small business owners work very long hours without earning, themselves, more than a moderate income. It is therefore understandable that they would be concerned that their own livelihood could be jeopardized by a significant increase in their cost of labor.
However, the worry is far less than they might expect. As I have spoken with small business owners, they themselves rarely know how little their own prices would need to rise to accommodate a full doubling in the minimum wage. When examined, such a rise in prices is always much less than expected.
Further, most businesses which employ low cost labor have, as their main clients, the same low wage earning public. Thus a rise in wages brings more business their way. The reality of this has been shown in several academic studies over the years.
Further yet, small businesses stay in business because they offer a good or service which is of value in a community. The ability to hire labor at low wages is not a necessary condition for their existence. I routinely stop by numerous small businesses because of convenience. I value their presence. That value does not change with a rise in the minimum wage.
Small business owners may not realize the important contribution they make to our communities.
To be sure, whenever a relative price of any good or service changes (in the case of the minimum wage we are referring to labor), adjustments take place across all markets. Some economists fear that a large increase in the minimum wage might create some unemployment. That is a possibility.
As we have noted in prior weeks, during the immediate post-WWII decades, the high minimum wage was accompanied by a high maximum income tax rate which acted as an effective income ceiling. When less is received at the top, more can be received at the bottom. Therefore, a high minimum wage during the 1950s and ’60s did not produce unemployment.
If we were to double or triple the minimum wage today, we would likely need to do the same as was done before, namely, raise the top income tax rate to perhaps 70 percent on incomes over, say, $3 million to avoid possible unemployment at the bottom.
So what are we talking about here? Nothing, really. When Congress has a mighty battle over something as routine as a highway renewal bill, or funding for Homeland Security, how could we ever expect something so bold as a change in wages and tax rates?
(Marcus Hutchins, MA, M. Phil, Economics, Columbia University, NYC, is a former economist, treasury bond arbitrage trader and hedge fund manager. He retired to Southport in 1997 where he resides with his wife Andrea and his youngest daughter Abbey. He welcomes feedback at coastaleconomist@me.com.)
