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The Minimum Wage and Economic Growth

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Written by Dean Baker and Will Kimball   
Tuesday, 12 February 2013 22:26

In his State of the Union address to Congress President Obama called for a higher minimum wage. The purchasing power of the minimum wage peaked in the late 1960s at $9.22 an hour in 2012 dollars. That is almost two dollars above the current level of $7.25 an hour. Most of the efforts to raise the minimum wage focus on restoring its purchasing power to its late 1960s level, setting a target of around $10 an hour for 2015 or 2016, when inflation will have brought this sum closer to its previous peak in 2012 dollars.

While this increase would lead to a large improvement in living standards for millions of workers who are currently paid at or near the minimum wage, it is worth asking a slightly different question. Suppose the minimum wage had kept in step with productivity growth over the last 44 years. In other words, rather than just keeping purchasing power constant at the 1969 level, suppose that our lowest paid workers shared evenly in the economic growth over the intervening years.

This should not seem like a far-fetched idea. In the years from 1947 to 1969 the minimum wage actually did keep pace with productivity growth. (This is probably also true for the decade from when the federal minimum wage was first established in 1937 to 1947, but we don’t have good data on productivity for this period.)

As the graph below shows, the minimum wage generally was increased in step with productivity over these years. This led to 170 percent increase in the real value of the minimum wage over the years from 1948 to 1968. If this pattern of wage increases for those at the bottom was supposed to stifle growth, the economy didn’t get the message. Growth averaged 4.0 percent annually from 1947 to 1969 and the unemployment rate for the year 1969 averaged less than 4.0 percent.

baker-2013-02-12

This link between productivity and the minimum wage ended with the 1970s. During that decade the minimum wage roughly kept pace with inflation, meaning that its purchasing power changed little over the course of the decade. The real value of the minimum then fell sharply in the 1980s as we went most of the decade without any increase in the nominal value of the wage, allowing it to be eroded by inflation. Since the early 1990s the real value of the minimum wage has roughly stayed constant, which means that it has further fallen behind productivity growth.

How was it decided to break the link between productivity growth and the minimum wage? It is not as though we had a major national debate and it was decided that low-wage workers did not deserve to share in the benefits of economic growth. This was a major policy shift that was put in place with little, if any, public debate.

If the minimum wage had kept pace with productivity growth it would be $16.54 in 2012 dollars. It is important to note that this is a very conservative measure of productivity growth. Rather than taking the conventional data published by the Bureau of Labor Statistics for the non-farm business sector, it uses the broader measure for economy-wide productivity.[1] This lowers average growth by 0.2-0.3 percentage points.

This measure also includes an adjustment for net rather than gross output. It also uses a CPI deflator rather than a GDP deflator, which further lowers the measure of productivity growth.[2] Even with making these adjustments the $16.54 minimum wage would exceed the hourly wage of more than 40 percent of men and more than 50 percent of women . We would have a very different society if all workers were earning a wage above this productivity linked minimum wage.



[1] If we just used non-farm productivity as the basis for indexing the minimum wage, the most commonly used measure of productivity, the minimum wage would have been $21.75 in 2012 [http://www.cepr.net/index.php/blogs/cepr-blog/new-cepr-issue-brief-shows-minimum-wage-has-room-to-grow].

[2] These adjustments are explained in Baker, 2007. For the years since 2006 we assumed that the difference in the growth rate of non-farm productivity and the growth of this adjusted measure is the same as it was on average for the years 2000-2006.

Comments (6)Add Comment
policy shift?
written by Jennifer, February 13, 2013 8:55
This was a major policy shift that was put in place with little, if any, public debate.

Could you give a little context here, this is new to me. You describe it like it "just happened" but I am sure there are some specific things you can point to?
policy shift? (context?)
written by geraldmcgrew, February 13, 2013 1:49
Jennifer,

Dean may well have a different answer, but I would argue that during the long term economic crisis of the 1970s we went into an effective political stalemate on economic issues. At the end of that decade that stalemate was broken in favor of pro-capital, anti-labor political forces, which was to some extent ratified by the election of Ronald Reagan.

This of course does not mean that the nation consciously chose this path after open national debate on economic issues when it elected Reagan. It just means that economic forces were in conflict and one side came out on top (actually begninning some time during Carter's presidency). In the 1980s, with the dominance of capital over labor having been established, minimum wage maintenance was no longer a priority for top political power holders and it may even have been their conscious intent to weaken it (and other pro-labor laws and policies).

Contemporary Social Sturcture of Accumulation (SSA) theorists contend that we are now in the early to mid stages of another long term structural economic crisis which again is also characterized by political stalemate with respect to economic issues (while Obama won a convincing electoral victory, his economic policies can still be viewed as a manifestation of stalemate). If these theorists are correct, the big question is who will win the extended social and political battle over our economic direction as this political stalemate and the structural economic crisis it reflects are eventually resolved.
...
written by watermelonpunch, February 13, 2013 4:18
@ geraldmcgrew
Thanks.
I remember vaguely these issues being talked about among adults in the late 70s & early 80s. I was too young to understand what it meant, but I now better understand some of the adult political arguments I overheard.

Ironically, some of the adults I remember predicting the bad effects of what was happening, later came to embrace those who had overruled them. Or at least accept without much resistance.

Why didn't more people push for debate?
Perhaps it didn't effect enough people.

I saw a twitter message that referred to a poll from 2007 where the topic of minimum wage wasn't all that much of a priority for people. I bet it's more of a priority now - now that so many more people are working for at or near minimum wage!!
More policy
written by Jennifer, February 13, 2013 9:03
Thank you for the response. I'm still curious if you could put your finger on any particular events or policies that pushed capital over labor, or was it just a slow encroachment. It's commonplace to use the air traffic controller's strike as a bellwether, but I've heard informed people put labor's decline before that, as you have here.
More Policy (bellwethers)
written by geraldmcgrew, February 13, 2013 10:19
Jennifer,

While I'm certainly not the best qualified to answer this, I think there was a long encroachment and choosing single events is inevitably arbitrary. However, I do have this:

"...the self-destruction of liberalism in the 1970s(:) McGovern's candidacy embraced the nation's new identity politics, distancing himself from the AFL-CIO in hopes of beginning a new coalition based on youth, antiwar protesters, and people of color. Not only did McGovern fail miserably, but his candidacy provoked a weakening of organized labor's political efficacy from which the latter never recovered. The Carter presidency - and not the election of Reagan or Reagan's firing of PATCO workers - represented the end of American liberalism as a hegemonic coalition. Carter, a Southern Democrat with weak ties to organized labor, and more importantly a lack of interest in labor's agenda, allowed the 1978 defeat of labor law reform and the gutting of Hubert Humphrey's ambitious full employment proposal (which contained an ample industrial policy that hearkened back to the class populism of the second New Deal). Carter was uninterested in these proposals (he cared far more about deregulation and fighting inflation), and failed to push hard for them; Carter also capitulated to the massed power of fully mobilized business associations for whom the defeat of these measures signified the frution of forty years of class formation(.)"
(Richard McIntyre and Michael Hillard, Capitalist Class Agency and the New Deal Orders: Against the Notion of a Limited Capital-Labor Accord, pp. 16-17, Review of Radical Political Economics published online 17 September 2012)

Even if one agrees with this telling, I think starting here is still unavoidably arbitrary since the seeds of McGovern's approach were planted earlier. And so on, and so on...

Obviously this trend was greatly intensified during the Reagan years. I've heard it said that its full victory came with the signing of welfare "reform" by Clinton during the Gingrich congress. Again, I'm sure some (more qualified than I) might choose other events and policies as more and less significant.
Productivity is key.
written by Michael, February 20, 2013 1:30
We've been misled into the idea that incomes should keep pace with inflation. The fact is, if we are producing about 2%/year because of increasing productivity, we need to consume 2% more. This is only sustainable if incomes rise with productivity, not just inflation.

Since about 1980, incomes have fallen behind. Until 2007 households made up for lagging incomes by taking on debt. When debt stopped increasing in 2007, the economy tanked...

http://econopolitics.com/2012/10/29/real-problem-us-economy/

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