As we documented in an earlier post, the current value of the minimum wage is too low by every available historical benchmark. But, given the age and educational upgrading of the average low-wage worker over the last three decades, the level of the minimum wage is positively awful.
Economists generally believe that older, better-educated workers should earn higher wages than younger, less-educated workers. An older worker typically has more experience and on-the-job training, both of which increase skills. Education – whether it is a high school degree, an associate’s degree, a bachelor’s degree, or more – also increases workers’ skills and should be rewarded in the labor market. The falling value of the federal minimum wage, however, has failed to recognize substantial increases in the education and training of the workforce.
Table 1 summarizes the characteristics of low-wage workers by age and education, which we define as those earning less than or equal to $10.10 per hour (in inflation-adjusted 2012 dollars), the level of the minimum wage proposed by the Fair Minimum Wage Act of 2013.
By now everyone has heard about Detroit's bankruptcy. One of the big bills in the city's payable box is the $3.5 billion in unfunded pension obligations. The story in many people's minds is that overly generous public sector wage and benefit packages pushed the city over the brink.
It's worth looking at this one a bit more closely. According to the city, the average retiree gets a pension of $18,275. That's better than many workers, but $1,500 a month in pension benefits will not put anyone on the Riviera. That's coupled with pay that averages less than $42,000 for active city workers. (They accepted a 10 percent pay cut last year.)
It's often difficult to get a sense of the meaning of numbers without a base of comparison. In order to know whether Detroit pensions are a lot or a little we can compare them to the pay at an organization that gets substantial support from the government, Goldman Sachs.
If people didn't realize that their tax dollars were going to boost the profits and pay at Goldman that's probably because it is not an explicit line in the budget. The way the government supports Goldman in its various activities (it was in the news yesterday for jacking up aluminum prices through market manipulations) is by providing it implicit insurance.
This insurance takes the form of the famous "too big to fail" guarantee. There is a widely held belief among investors that if Goldman's deals threatened to put the bank into bankruptcy, as happened in 2008, the government would step in to bail them out, as it did in 2008. As a result, investors are willing to lend banks like Goldman Sachs money at below market interest rates.
Bloomberg News estimated the size of this subsidy to the banks at $83 billion a year. This money translates into higher profits for banks like Goldman Sachs and higher pay for its top executives.
This sets up an interesting comparison, the subsidized pay of top executives at Goldman Sachs with the pensions of Detroit public employees. The graph shows the hourly wage of Goldman Sachs CEO, Lloyd Blankfein, based on his reported 2012 compensation of $13.3 million. (It was $16.2 million in 2011.) Assuming a 40 hour workweek (I know that Mr. Blankfein must work more than this), his compensation comes to $6,650 an hour. This means that in three hours he will earn more than a typical Detroit retiree gets in a year.
We can also make the comparison of Detroit pensions to Goldman Sachs more generally. Goldman Sachs profits in the last quarter were $1.93 billion. This means that if the bank sustains this rate of profitability its profits over two quarters would exceed the $3.5 billion unfunded liability of the Detroit pension system. It seems that there is much more money in being a government subsidized too big to fail bank than in being a declining industrial city.
While four years have passed since the last increase in the federal minimum wage (July 24, 2009), tipped workers (for example, restaurant servers, hair stylists, manicurists, car washers and casino workers) are looking at 21 years at the same mandated federal minimum.
Under the federal Fair Labor Standards Act (FLSA) “tipped employees” are entitled to a minimum wage of just $2.13 per hour – less than one-third of the $7.25 per hour federal minimum wage for non-tipped employees. Thirty-one states, however, have passed higher minimum-wage laws for tipped workers. And seven of these states (AK, CA, MN, MT, NV, OR, and WA) require employers to pay the same state minimum wage to tipped and non-tipped employees. With the exception of Minnesota, all of these states also have set their state minimum wage above the federal level.
Tipped workers are concentrated in industries that have the fewest job protections and the lowest incomes. Steps at the state level provide a glimmer of hope for tipped workers, but tipped workers everywhere would benefit from an increase in the federal minimum wage for tipped workers.
Corporate profits have done well in the lopsided recovery and the stock market is hovering near record highs. Working women and men have been left behind, however, as companies have failed to translate these improvements into robust job growth, rising wages or improvements in the quality of jobs. Income gains since the economy bottomed out in July 2009 have all gone to the top 1 percent of households.
Women lost fewer jobs than men in the recession; the slow recovery in men’s jobs requires far more attention from policy makers than it has received. But women have also fared poorly as job creation has predominantly occurred in low wage jobs as retail sales clerks, restaurant wait staff, child care workers, cashiers and food service. Protracted problems facing women workers that preceded the recession have only been exacerbated by slow employment growth.
Perhaps the most meaningful measure of women’s economic opportunity is the share of women between the ages of 25 and 54 – the prime years for both motherhood and employment – that actually have jobs. In 1990, the U.S. was a leader in terms of employment opportunities for women. Today, it is a laggard. In the years preceding the recession, 72.5 percent of prime age women in the U.S. held jobs. Now it is 69.2 percent – barely above its post-recession low of 69.0% in 2011 and the same as the employment rate of women in Japan, a country not known for providing women with economic opportunities. In fact, the U.S. ranks 24th out of 34 industrialized countries, behind not only the Nordic countries and the major countries of continental Europe, but behind the rest of the English-speaking world (Australia, Canada, Ireland, New Zealand and the U.K.).
July 24th will mark four years since the last increase in the federal minimum wage. By the most commonly used benchmarks – inflation, average wages and average productivity – the current $7.25-an-hour rate is well below the peak it hit five decades ago.
According to these benchmarks, the federal minimum wage peaked in 1968. If it had been indexed to the official Consumer Price Index (CPI-U) from that point forward, the minimum wage in 2013 would be $10.75 — $3.50 per hour higher than it actually is. If we measure inflation from 1968 forward using the same procedure we use today (the way we calculate inflation has been updated several times since the late 1960s), the 2013 value of the minimum wage would be $9.42 (see the figure below) — almost $2.25 higher than it is today.
During much of the 1960s, the minimum wage was close to 50 percent of the average production worker’s earnings. At its 1968 peak, the minimum wage was equal to 53 percent of what the average production worker made. If the minimum wage were at 50 percent of the production worker wage in 2013 (using a projection of the 2012 level to produce a full-year 2013 estimate), the federal minimum would be $10.06 per hour.
Next week marks four years since the last time that there was an increase in the federal minimum wage (currently $7.25 per hour). While we have argued here, here and here that the federal minimum-wage rate is too low, 19* states have taken matters into their own hands. These states have passed legislation to raise their minimum wage above the level set by the federal Fair Labor Standards Act (FLSA). The state of Washington has the highest state minimum wage at $9.19 (with the future level indexed to inflation). Oregon follows closely behind at $8.95 (also indexed). Ten of the 19 states have also linked their state minimum wage to the consumer price index, so that the rate automatically keeps pace with inflation each year (AZ, CO, FL, MO, MT, NV, OH, OR, VT, and WA).
State legislation has set a standard for higher minimum-wage rates linked to cost-of-living increases. It is past time for the federal government to follow suit.
Last night after watching my weekly fix of dancing contests on TV, I clicked around the channels and found myself engrossed in a new Frontline documentary hosted by Bill Moyers, "Two American Families." It's a fascinating profile of two Milwaukee families, one black and one white, struggling to stay in the middle class over 20-plus years. It brings to life -- with human faces and heartbreaking stories -- many of the statistics and analyses that CEPR produces about working people in this country.
My CEPR colleagues' frequent work work to define and examine the decline of "good" jobs in America came to mind throughout the film, as these families' stories mirror what the data indicates. In CEPR's reports, a "good" job is defined as $19 per hour with employer-provided health insurance and an employer-sponsored retirement plan. When we first meet the families in the early 1990s, three of the four parents have lost "good" union jobs in manufacturing (close to $20 per hour and benefits).
The film documents their struggles over the next two decades to find similar jobs to replace the ones they lost, and after watching them all bounce from one insecure, low-wage job to another, it appears that none of the parents ever manage to do so. They work days, nights, and multiple jobs -- usually manual labor -- and yet continually face financial hardship, even foreclosure and divorce.
By the end of the film, we get to see how the eight children across the two families have turned out as adults. From the descriptions of their work situations, it appears that only one (the eldest son in the Stanley family) definitely has a "good" job -- $45,000 per year assisting the Milwaukee common council president. Two of his siblings may have "good" jobs (we don't learn enough to know for sure) -- a sister who's working at a county clerk's office in Virgina, and a brother who, after failing to find work in Milwaukee, is in Afghanistan working for a military contractor.
Everyone has probably seen one of those silly debt clocks that is supposed to keep us apprised of how much money the federal government owes. That's what you buy when you're a Wall Street billionaire who has money to throw around and wants to scare people in supporting cuts for Social Security and Medicare.
But if you don't have any money but you do want to tell people what is going on with the economy, you create a "lost output clock." This clock tells us on ongoing basis the amount of goods and services that we have lost since the recession began in 2007, due to the economy operating below its capacity. This is the value of the education and health care that the economy could have provided, but didn't. The value of the housing, the infrastructure, the research and development and all the other areas of economic activity that did not happen because we are operating the economy at well below its potential level of output.
On the flip side, of course this lost potential output corresponds to the 8.5 million additional jobs we would have right now if the economy was operating at its potential. At potential GDP we would also see roughly 4 million part-time workers be able to get full-time jobs. And we would see workers at the middle and bottom of the wage ladder securing real wage gains, since they would have considerably more bargaining power.
We have known how to boost an economy out of a slump since Keynes wrote the General Theory more than 75 years ago. But because people with superstitutions about the flat earth and balanced budgets control economic policy, we continue to have an economy operating well below capacity with massive amounts of unnecessary unemployment and underemployment.
One of the simple facts of the economy that troubles many economists is the absence of any relationship between profits and investment. Economists like to tell people that if we make investment more profitable, we will have more investment. It turns out the world doesn't work that way.
Here's one of my favorite graphs of the economy going back to the early years right after World War II. It's about as simple as it gets. It shows the investment share of GDP. Then it shows the profit share of net value added in the corporate sector. The measure of profit here is the broad measure of business operating surplus. Using net takes away the downward bias in recent years that would result from a rising depreciation share of output. The last line is the after-tax profit share.
The first item worth noting here is that investment doesn't fluctuate all that much. It peaks at 13.4 percent of GDP in 1981. The closest it ever comes to this share again is in the looniness of the stock bubble when the ability to raise money on Wall Street for every crazy idea pushed the investment share up to 12.7 percent of GDP. Even this number is overstated by 0.3-0.4 percentage points because of the growth of car leasing in the 1990s. (A leased car is owned by the leasing company and therefore counts as investment. By contrast, when a consumer buys a car it is treated as consumption.)
The takeaway is that anyone who expects a huge uptick in investment to provide a major boost to demand is either smoking something serious or simply has never looked at the data. It hasn't happen in the last 65 years and it's not about to happen now.
The following highlights CEPR's latest research, publications, events and much more.
CEPR on Good Jobs for Black Workers
CEPR Research Associate Janelle Jones and Senior Economist John Schmitt released the latest in their series of reports on job quality. The new report focuses on African-American workers, noting that the big increases over the last three decades in educational attainment among black workers have not been matched by improvements in job quality. CEPR posted an infographic to Tumblr that breaks down the main points of the report.
CEPR on Edward Snowden, the NSA and Foreign Policy
CEPR Co-Directors Mark Weisbrot and Dean Baker have op-eds on The Guardian and Yahoo! Finance's The Exchange, respectively, on the case of whistleblower Edward Snowden. Mark wrote in his columns about Ecuador's principled consideration of asylum for Snowden and how it has been demonized in the media as a result. Dean wrote on how the case has exposed the privatization of national security. Mark followed up his Guardian piece with a new column in Aljazeera English examining the Obama administration’s shift in diplomatic strategy on Snowden. Mark also issued a statement and was on RT's Cross Talk to debate the case opposite Ariel Ratner of the Truman National Security Project .
CEPR’s Americas Blog has been monitoring Snowden's case with an eye toward U.S. foreign policy and the Americas. Posts by Mark Weisbrot so far have noted how the Obama administration’s initial approach of threatening other countries over Snowden backfired, while its media strategy of making Snowden appear to be a “spy” and a traitor has had success with the major media. Posts by International Communications Director Dan Beeton have examined U.S. policymakers’ threats to punish Ecuador by ending trade preferences – a threat that Ecuador preempted by abandoning the trade benefits so that they could not be used as leverage. The blog has also noted an appeal to Ecuadorean President Correa by Oliver Stone, Noam Chomsky, Tom Hayden, Daniel Ellsberg, Danny Glover, Shia LaBeouf and many others to grant Snowden asylum.
CEPR on How Volunteering Pays Off
A paper by CEPR Senior Research Associate Helene Jorgensen found a positive volunteer effect on the probability of employment for persons who were not employed and volunteered for more than 20 hours per year. The paper, “Does It Pay to Volunteer?”, also found that many volunteers did not actually volunteer in the professional field in which they were seeking employment, suggesting that volunteering may have signaled to prospective employers the applicant possessed desirable qualities such as motivation, creativity and reliability. Forbescovered the paper, and Helene wrote a blog post on the topic, comparing her paper to another study, “ Volunteering as a Pathway to Employment,” that was conducted by the government agency Corporation for National & Community Service (CNCS) and released the same week.
CEPR Research Associate Janelle Jones will be on Bloomberg's Bottom Line tonight at 7:40 p.m. to talk about her latest report with Senior Economist John Schmitt, "Has Education Paid Off for Black Workers?" According to the report, black workers today are better educated and older than they were three decades ago but are still less likely to be in a good job now than they were in 1979. The report examines the deterioration of job quality for black workers in the United States and evaluates several policies that could help to reverse the trend. The following graphic explains the report's findings.
Following up on last Wednesday’s item regarding downward revisions to gross domestic product (GDP) it is worth pointing out again that gross domestic income (GDI) is not a better measure of the economy. Though the two measures are in theory equal, each relies on different data sources and so the two differ by a “statistical discrepancy.”
As Dean and I noted previously, movements in the statistical discrepancy appear to be in part driven by misreported capital gains. Capital gains are not supposed to count toward GDI, which measures income with respect to production of current goods and services. However, it is likely that some amount of short-term capital gains are reported as ordinary income. (The IRS isn’t picky about such errors because it doesn’t really change taxes owed.) If a fixed percentage of capital gains is always misreported as ordinary income, then the absolute amount of misreporting will be larger when capital gains are larger. Thus, GDI becomes overstated and the statistical discrepancy--ordinarily positive—turns small or even negative.
Previously, we used quarterly data from the Federal Reserve to show how household net worth varied with the statistical discrepancy—specifically that the discrepancy fell during periods of stock market and housing bubbles. This relationship is seen in the graph below.
The median wage in 2012 (about $16.28/hr) was only 5.7 percent higher (in real, inflation adjusted dollars) than it had been in 1973. Part of this is explained by a 3.5 percent drop in the downturn, but the bigger story was the three prior decades of paltry wage growth.
The culprits in this story are legion and include--over the long haul--a collapse in private sector union density, a meager (in value and scope) minimum wage, workers-be-damned trade policy, and job growth crowded into low-wage service occupations. But a big part of the story is simply slack in the labor market. Over the past generation, the only respite from unrelenting downward pressure on wages came during a brief spell of full employment in the late 1990s. Those years saw wage gains across the board, closely resembling the shared prosperity of the 1947-1973 era. But on either side of that boom, when high rates of unemployment were the norm, wages (especially for those at the median and below) fell steadily.
We can see the importance of full employment at work in the relationship between wage growth and unemployment in the states across the boom of the late 1990s and across the last business cycle. The graph below plots the change in real wages for two seven year periods: from 1996-2002 and from 2006-2012 (the latter running from the year before the recession to the most recent available annual data) against each state’s unemployment rate at the midpoint of the period (1999 and 2009).
In the late 1990s, state unemployment rates clustered around that national rate of just over 4 percent, and only three states suffered unemployment rates over 6 percent. Workers at most deciles, accordingly, enjoyed robust wage growth. Full employment was especially important for workers at the bottom of the wage distribution. Wage growth—and the relationship between full employment and wage growth—was strongest at the 10th decile and weakest at the 90th.
Ben Casselman at the Wall Street Journal wondered last month whether the economy was doing better than the GDP numbers suggested. By contrast, we learn today that even GDP hasn’t done as well as those GDP numbers suggested.
The latest from the Bureau of Economic Analysis indicates that the economy was smaller in the first three months of 2013 than previously reported. In May, BEA reported 2.4 percent economic growth in the first quarter of the year. Today, that figure was revised down to 1.8 percent.
Domestic demand for all newly-produced goods and services contributed 1.3 percentage points to GDP growth—revised down from 2.0 percentage points in April’s estimate. All categories were revised downward, with personal consumption contributing 1.8 percentage points rather than 2.2, fixed investment contributing 0.4 percentage points instead of 0.5, and government expenditures subtracting 0.9 percentage points down from a previously reported -0.8.
Foreign demand was revised down as well. Though exports had been thought to have added 0.4 percentage points to GDP growth, BEA now reports that exports fell, subtracting 0.2 percentage points.
At least one observer had previously pointed to the rebound in inventory accumulations as indicating “future consumer spending” but that rebound was much smaller than initially thought— adding only 0.6 percentage points to economic growth, rather than 1.0.
All in all, this is very bad news for how the economy performed in early 2013. Major historical revisions are on the way next month. Perhaps the second quarter numbers will look better than the first. The downward revisions to the first quarter data makes that a lower bar.
While many are celebrating the Supreme Court’s decision granting marriage equality to same sex couples, some have been quick to highlight the potential budgetary costs of this decision. In particular, opponents of the court’s ruling are warning the public that it will lead to much higher costs for Social Security.
Before anyone rushes to push through a constitutional amendment, it would be worth trying to get an idea of the potential costs to Social Security resulting from this decision. Essentially the decision says that same sex couples have the right to be married and enjoy the same benefits and protection that Social Security provides to heterosexual couples.
There would be some issues involving children of spouses of disabled workers or workers who have an early death, but the bulk of the impact will be from spouses in same sex couples who will be entitled to a higher retirement benefit as a result of marriage. This takes two forms. First, in retirement a spouse is entitled to half of their married partner’s benefit if this would be larger than the benefit they would receive based on their own work history. Second, after a spouse dies, a retiree is entitled to the higher of either their own benefit or their spouses. By virtue of the fact that same sex couples will now be able to have the same rights in marriage as heterosexual couples, both of these channels will lead to higher benefit payouts.
Of course in the vast majority of cases, the wage-based benefit of the lower earning spouse will be more than half of the benefit of the higher earning spouse. The reason is that the benefit structure is very progressive. Suppose that a higher earning spouse had an average lifetime indexed-earnings of $100,000 in 2013 dollars. Under the current benefit formula this worker would be entitled to $2,500 a month or $30,000 a year, if he or she waited until age 66 to start collecting benefits.
In order for a worker’s wages to qualify them for at least half of this benefit or $1,250 a month, they would need average earnings of just $29,750 a year (@ $15 an hour for a full-year worker), less than one-third of their high earning spouse’s wages. While there continue to be large gaps between male and female earnings, the gaps are likely to be smaller between the earnings of two men or two women in a same sex marriage. Therefore it is likely that in the case of most same sex couples, the lower earning spouse will have a wage-based benefit that is at least half as high as that of the higher earning spouse. In the cases where this is not true, the bump up to half of the spouses benefit is likely to be small.
The Coalition for Sensible Safeguards (CSS) released a report this month detailing several would-be federal regulations currently delayed by bureaucratic logjams. Business interests lobby the White House Office of Information and Regulatory Affairs (OIRA) and draw out the rule-making process with lawsuits and meetings, often forcing OIRA and other agencies to miss important statutory deadlines. Aptly titled “Down the Regulatory Rabbit Hole: How Corporate Influence, Judicial Review and a Lack of Transparency Delay Crucial Rules and Harm the Public,” the report argues for numerous pending rules that would regulate automobile rearview visibility, silica dust exposure levels for construction workers, coal ash waste containment, imported foods, wage standards for homecare workers, energy efficiency standards and consumer financial protections. What holds this seemingly disparate list of demands together is an urgent cry for an effective federal regulatory system that protects workers and consumers from corporate interests.
At a time when the issue of jobs is a high national priority, one proposal around wage standards for homecare workers stands out. Specifically, CSS calls to expand the Fair Labor Standards Act (FLSA) to cover homecare workers, a change that has been under OIRA review for the past two years. Since 1974, homecare workers have been excluded from federal minimum wage and overtime requirements by an exemption intended for casual workers, such as teenage babysitters. However, this rule does not reflect the reality of today’s industry. As CSS reports, homecare is a growing and increasingly formalized industry made up of approximately 2.5 million workers nationally. Outdated labor standards mean that, according to Think Progress, “…many home care workers make below minimum wage and aren’t paid overtime, even if they live with their clients…[and] nearly 40 percent of these workers make so little that they turn to public benefits such as food stamps or Medicaid to get by.”
Prospects for homecare workers at the state level are mixed. While many homecare workers are protected by state minimum wage and overtime laws, 28 states have no such mandates. According to the Paraprofessional Health Institute and National Employment Law Project, in 2010, 15 states granted specific wage and overtime rights to homecare workers while seven states had wage minimums without overtime coverage. Moreover, many of the state wage and overtime protections exclude certain workers such as “personal attendants” and those employed directly by private households.
In the great state of California, approximately 360,000 largely unionized homecare workers are employed by In-Home Supportive Services, a state program subsiding homecare services for around 450,000 elderly, blind, and disabled residents. Since California already extends minimum wage requirements to homecare workers, revising the FLSA would impose new overtime rules on California, costing what detractors estimate at $150 million per year. Among them is California’s Governor Jerry Brown, who the Los Angeles Times reports would likely respond to the new rule by limiting the hours state homecare workers may work, effectively cutting the amount of care beneficiaries receive and pitting advocates for the disabled against labor.
As with the case of homecare workers and the FLSA, our regulatory system speaks to our national values. Rather than pay the true price of elder care, energy, construction, etc., we often opt for the absolute cheapest goods and services. Never mind the external costs to workers and consumers. A strong regulatory system lifts those costs off the backs of our neighbors, protects us from similar harm, and makes us all better off.