Dean Baker – The $24 an Hour Minimum Wage

This may not be about Europe, but as always with Dean Baker, there are a number of interesting thoughts in this piece that are relevant here as well.

Dean Baker is a Senior Economist at the Center for Economic and Policy Research (CEPR)

Cross-posted from Dean Baker’s Beat The Press Blog

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The push for a $15 an hour minimum wage has developed considerable political momentum over the last decade. It is a very real possibility that we will see legislation imposing a national minimum wage of $15 an hour by 2024 if Joe Biden wins the election this fall.

That would be a great thing, it would mean a large increase in pay for tens of millions of workers, but it is still very modest compared to what the minimum wage would be if it had kept pace with productivity growth. As is often mentioned, the purchasing power of the minimum wage hit its peak in 1968, at roughly $12 an hour in today’s dollars. However, productivity (output per hour work) has more than doubled over the last 52 years.[1]

This means that if the minimum wage had kept pace with productivity growth it would be over $24 an hour today. Furthermore, if we go out four years to 2024, and we see normal inflation and productivity growth, a productivity adjusted minimum wage in that year would be almost $27 an hour, nearly twice the $15 an hour target.

The idea that the minimum wage would keep pace with productivity should not seem far-fetched. It actually did follow productivity growth fairly closely in the first three decades in which we had a national minimum wage, from 1938 to 1968. This did not lead to soaring unemployment. In 1968 the unemployment rate averaged 3.5 percent. So, the idea that the minimum wage track productivity growth should not be far-fetched.

Nonetheless, I would not advocate a $27 an hour minimum wage for 2024 or even phased in over a longer period of time. The reason is that we have restructured the economy in ways that it likely could not support a $24 an hour minimum wage in 2020. Raising the minimum wage to this level would almost certainly result in spiraling inflation.

We would then have to take steps to counter this inflation, such as interest rate hikes by the Fed or tax increases by the federal government. The result would be higher unemployment, and quite possibly a situation that left workers in the middle and bottom worse off than if we left the minimum wage at its current level. The key to allowing workers at the middle and bottom to get their fair share of the economic pay is to reverse the policies that redistributed so much income upward.

Reversing Upward Redistribution

I realize I must sound like a broken record on this stuff to regular readers, but the point is important. If workers at the middle and bottom are going to have more, people at the top have to get less. This is straightforward. If we could tell a story whereby the high pay for those at the top leads to more rapid economic growth so that their higher pay in effect paid for itself, then cutting pay for those at the top would not be freeing up resources for the middle and bottom. But this is not the case. By every measure, productivity growth has been slower in the period of inequality (from 1979 onward) then it was in the period of equally distributed growth, from 1947 to 1973. While it may not be the case that growing inequality is the reason for slower growth, it takes quite an imagination to claim that it led to faster growth.

It is also worth remembering that the gains were at the top end of the wage distribution, not corporate profits. The before-tax profit share of net income was 23.4 percent in 1968. In 2018 (the last year for which full data are available) it was 24.7 percent.[2] With the data to date showing a drop in the capital share of roughly 0.7 percentage points from 2018 to 2019, the final figure on profit share for 2019 is likely to be a little different from the figure for 1968. This means that the redistribution from workers at the middle and bottom did not go to any significant extent to corporate profits.

The big winners were instead high-end wage earners, people like CEOs and other top-level corporate executives, hedge fund managers and other Wall Street types, higher-paid tech workers, and highly paid professionals, like doctors and dentists. If we want to make it possible for the minimum wage to rise back to its productivity-adjusted 1968 level, then we have to take back the big pay going to those at the top.

I know I harp endlessly on this issue, but reversing the big paychecks for those at the top (this is the whole point of Rigged [it’s free]) is essential for improving living standards for those at the middle and the bottom. We can envision various ways to make the economy more productive, and some may actually work, but as a practical matter, if we want to see large gains in living standards for those at the middle and bottom, it will have to come at the expense of those at the top.

There are many on the left who would agree with this view, but then say that they would just tax away the high and very incomes earned at the top. That is an alternative route, but I would argue there are both serious political and practical obstacles to reducing high-end consumption through this channel.

On the political side, in addition to facing the full-fledged opposition of the rich, efforts at highly progressive taxation often also face opposition by many people who would not be affected by high top-end rates. Part of this is just confusion — almost no one understand the concept of a marginal tax, which is why many middle-income families are terrified their estate may fall one dollar over the taxation cut-off – but part of it stems from concepts of fairness. Some people consider it unfair to tax someone’s income at 80 or 90 percent, even if they do understand that this only applies to income over some high threshold.

But even if we overcome the political obstacles, there are still practical obstacles. Rich people will not sit there and politely hand over whatever amount we tax them under the law. They will use every tool at their disposal, both legal and often illegal, to avoid paying the legislated tax rate. Remember, if we have a 90 percent marginal tax rate, we are effectively paying rich people 90 cents to hide a dollar of income, or to be closer to the mark, we are paying them 9 million dollars to hide 10 million dollars of income.

I know every progressive committed to high marginal tax rates is convinced that under a progressive regime we will have super-sleuth tax auditors at the I.R.S. who will crack down on avoidance/evasion schemes, but we have never seen the required levels of diligence here or anywhere else. My expectation is that if we have very high levels of progressive taxation is that we won’t see the money, but we will see an explosive growth of the tax shelter industry, another major source of inequality. (Hiding rich people’s money pays very well.)

This is why I want to change rules of corporate governance so CEOs cannot rip off the companies for which they work. (Their $20 million paychecks are not explained by returns to shareholders, which have been historically low for the last two decades.) If CEOs got $2-$3 million, and we saw corresponding pay cuts for others at the top of the pecking order, there would be much more money for everyone else.

In the same vein, the government can make patent and copyright monopolies shorter and weaker, and in some cases, like prescription drugs and medical equipment, not rely on them at all for financing research and development. This would reduce the money going to the top by several hundred billion dollars annually (2-4 percent of GDP).

We should also crackdown on the massive waste, and associated high salaries, in the financial sector. The place to start here is a financial transactions tax and cracking down on the abuses by private equity companies and hedge funds. And, we should subject our most highly paid professionals, in particular doctors and dentists, to the same sort of international competition that autoworkers and textile workers now face.

If we made these sorts of changes, we could realistically talk about a $24 an hour minimum wage in 2020. With an economy that was not structured so as to redistribute so much income upward, there is no reason that the minimum wage could not track economywide productivity.

And think of what a difference it would make if the lowest-paid worker, say a custodian or dishwasher in a restaurant earned $24 an hour, or $48,000 a year for a full-time full-year job. That comes to $96,000 a year for a two-earner couple.

If this is the floor, presumably someone working for 15 to 20 years can expect to earn at least 15 to 20 percent more, which would be putting them over $55,000 a year for a full-time job. In this world, we could really imagine that everyone had a comfortable and secure standard of living, especially if we had national health insurance (which would likely mean higher taxes on our low-wage earners) and free or low-cost child care.

The idea of a $24 an hour minimum wage is also worth thinking about in the context of racial inequality, where we have disproportionately relegated Blacks to the lowest paying jobs. It is not acceptable that Blacks are so much more likely than whites to work as custodians or housekeepers, and so much less likely to work as doctors or lawyers, but that is the reality we have today.

While still far from fair, the situation would be quite different if custodians and housekeepers earned $24 an hour, and doctors and lawyers earned on average something close to half of their current pay. And in that situation, the children of custodians and housekeepers would likely have much better prospects of becoming doctors and lawyers than is the case today.

But to allow for more pay at the bottom, we have to do something about pay at the top. And that means changing the way we structure the market. And, if we aren’t paying attention to restructuring the market, we aren’t serious about addressing inequality, including racial inequality.

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1 Comment

  1. Great article. Two thoughts:
    1. Taxes on the wealthy could be substantially increased (no, not to 90%) without incurring counterproductive tax evasion.
    2. Restructuring collective bargaining—making it easier, less risky, rights for contracting “gig” and “temp” workers, etc, and ultimately sectoral–would have a substantial impact on the incomes of the bottom half.
    3. Taking healthcare out of the “compensation package”—so it’s not employment-based—would also raise compensation (or at least present the possibility)

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