26 September 2013

Honest Day's Wage

Today the most populous state and largest economy in the Union, California, announced that it will raise its minimum wage from $8.00 to $10.00 per hour by 2016.  This will be well above the current Federal minimum standard of $7.25.

For reference, the average of the states that have one is $7.44.  The highest right now is Washington, $9.19.  The lowest is Montana, $5.15 (moot, since you must pay at least Federal).  Nations like France, Ireland, Belgium, Netherlands are ~US$11-13.  The UK, Canada, Japan are ~$US9-10.

A quarter-century before there was a legally mandated one, Henry Ford adopted the minimum wage for his workers in 1914.  Five bucks for an eight-hour work day.  That was about $0.63 per hour then, or about ~$14.40 in today’s dollars.  If that sounds like a lot for a minimum wage, it was – it was double what his competitors paid (and they made their guys work nine hours a day).

But it wasn’t until the 1938 Fair Labor Standards Act that Federal minimum wage, among other things, was instituted nationally.  It started at $0.25 per hour, about $4.14 in today’s dollars.  Since then minimum wage has averaged $7.15 in today’s dollars.  So today’s $7.25 is basically in line with the lifetime average.  (This is not to say that it is necessarily at the “right” level.)  It spent almost a decade (~1963-1971) around ~$9-10.  And it’s bounced around ~$6-7 from the Reagan years forward.  (Again, all in today’s dollars.)

So it’s not out of whack from historical average.  But it has been stuck, in real terms, at pretty much the same level for about three decades.  I know this is a politically sensitive subject.  But one should also bear in mind that what business is willing and able to pay for labor is not simply a function of who might be in the White House or control Congress.  That’s sort of more the stuff of centrally planned economies.  And I think we know how they worked out.

In my view, the greatest culprit responsible for stagnating American real wages is the growing crescendo of legitimate international competition.  In short, we had none at war’s end, 1945.  World War II was fought on the soil of any would-be industrial competitor, and their infrastructures were shattered as a result.  Over the decades they rebuilt.  Or shall I say, we rebuilt them – either through direct Marshall Plan style loans or investment, (e.g. Western Europe and Japan), or simply by buying their stuff (e.g. basically the entire world, notably China).

(And their UN reps still don't pay their NYC parking tickets.  Sheesh, your welcome.)

With each decade, more and more nations now become capable of offering viable skilled and semi-skilled labor, still at a wage lower than what we might have otherwise been able to pay domestically.  And trying to put up walls to stop that (e.g. not “exporting jobs” to the cheapest viable labor source, or erecting trade barriers), I would hope we all understand by now, doesn’t work in the long run.  It stifles trade.  Coddling certain industries just weakens them over time.  Our businesses become uncompetitive if they cannot tap the lowest cost labor that their competitors are.

A recent poignant example is two of the Big Three Autos being thrown into bankruptcy (finally) a few years ago, not to mention their host town, Detroit.  Bankruptcy allowed us to abrogate way-overpriced benefits packages and right-size assembly plants to – in the case of GM – make a handful of cars people want instead of a dozen they don’t.

Protecting overpaid jobs that make inferior products is popular for getting the votes, but over the long run it weakens the nation on the whole.  Raising wages likewise is a popular vote getter, but if not done right, can have the same bad consequences.  We can raise wages in the US when competing with Western Europe, Australia, Japan or Canada because all their wages are higher (and total labor costs even more so, because their benefits are greater).  But we can’t be competitive with China, South Korea, India, Brazil, Mexico or Eastern Europe because their wages are lower.  A lot lower.

And it is that latter list of nations that I feel you can blame, to the extent you must, for more recent American wage declines (not to mention we’re kind of still clawing out of the worst recession of the post WW II era).  Those nations have only in the last decade or so really “arrived” in terms of offering a viable alternative of, not just unskilled, but now more and more skilled labor.  This has the effect of compromising, really for the first time for Americans, middle class wages.

The very wealthy do not have these problems.  Their wealth is invested and grows as capital markets flourish.  And this is why you see the gap widening.  Not because today’s very wealthy wield powers greater than the government’s and have somehow gamed the system to their advantage, to the likes of Rockefeller or Carnegie or Morgan.  I reject that conflation.  They certainly do have significant influence over government.  But the government is a much more powerful beast today, as compared to a century ago.  And interests opposed to the wealthy can tame it to do its bidding as well.

The biggest factor now, say in the past 15-20 years, is higher and higher levels of US wage earners – not just unskilled any more – compete with lower-cost global labor supplies.  It’s a function of free global commerce.  With global exchange, comes an equalizing of living standards.  The higher ones come down or rise slower, and the lower ones come up or rise faster.  Some decades from now possibly, we will all go through this once again, if we can stabilize Africa and/or the Middle East.  And until the standards of living for those lesser nations generally approximate ours, we are going to lose business to them whenever we attempt to raise the cost of labor where we directly compete.

The minimum wage is the low bar that sets the rate for all the rest of us higher income earners.  There is value for all of us not having it too low.  And it is thanks to the unions of decades ago, who set that standard really for all workers in America.  We owe them thanks for that.

But to the extent the unions of today push for higher wages in industries where we compete against those lower labor cost nations, in the end, it will just weaken our economy.  It won’t begin to be a good idea until certain of their labor costs start to approach ours.  And in some areas we do see business leaving China for example, coming back to the States, because the wage gap has closed to a degree that the intangible grief of dealing with Chinese impositions, shortcomings and corruption is no longer worth what’s left we might save on labor costs.  But that’s only anecdotal right now, not trend.

Right here, right now, September 2013, raising the minimum wage is a bad idea.  I am not against raising wages at the right time and where we can compete.  It’s just, the timing is very wrong right now.  Raising the minimum wage has a number of effects.  The first, most obvious, most immediate, most popular is, it puts more money into the hands of people that will likely save none of it and spend it all.

This has an immediate stimulative effect to the economy.  Which is good.  This is the part everyone readily understands, and the largest reason why it’s a cheap political ploy to gain favor with the crowd.  By the way, the only specific detail to the President’s economic plan that I could find, was suggesting raising the Federal minimum wage from $7.25 to $9.00.  The rest suggests promise, but is too vague.  (It’s on the W.H. website.  Check it yourself.)

But down the road you have two, not so good effects to raising wages in the absence of increased real output.  The money has to come from somewhere, right?  Raising wages is an immediate reduction of profits for employers.  So soon after the government raises the minimum wage on them, like in California today, business owners sit down and start trying to figure out how to recoup those lost profits.  The most common way is they immediately try to pass on to their customers the increased costs by raising prices.  The other is, they either hire less people, or fire some of the ones they have, and make everyone left work harder.

This is all inflationary.  There’s just more dollars sloshing around the system for the same, if not less, amount of goods and services now offered at higher prices.  It also reduces real output.  The money could otherwise have been spent to hire more people and expand the business.  In the end on the aggregate, those that received a higher wage, just have to pay that much more for the same goods and services due to inflation.  As well, they now live in a weaker economy, increasing the threat that they’ll just get fired.

But most people don’t think beyond, “hey how about I give you more money, and you just keep doing the same exact job you have been doing.”  Who’s going to say "no" to that?  I wouldn’t.  I will go on record and confirm that I have never once turned down a raise, because I was concerned that having more dollars in my pocket might create inflation for everyone else and possibly compromise certain other expansion goals for my employer.  I’m just not that much of a team player, I guess.

But a little bit of inflation is a good thing.  When times are good.  In the presence of real demand, it allows for businesses to raise prices and make them stick.  With that marginal increase in profit, they can expand business and thus real economic output.  And the positive psychology of putting a little more buying power into the hands of your employees makes them happier.  They might work harder without even having to ask them (I said “might”).  They might feel more confident about spending, which further improves the economy.  Much in the spirit of Henry Ford, who realized that his workers weren’t just a source of labor – they were his potential customers too.

But not now.  The economy is too weak.  It is only just finally staging a real recovery in my view.  So the last thing it needs is a kick in the ribs.  Just this year, it’s already trying to absorb the expiry of lower personal income and payroll tax rates, as well the effects of the so-called “sequester”.  Further, businesses are right in the middle of getting their footing with respect to the new health care issues.  So they need a little time before they get hit with another round of higher employee costs.  And also, the… how do I say this… absolute, narcissistic, ignorant insanity going on in the D.C. Beltway lately… it’s not helping.

(It is actually testimony to how vibrantly things might be building, as the economy putters along at all in the face of all that.  Just imagine how we’d be doing if we could maybe have one whole year of not getting smacked in the face every week with incompetent and bankrupt political leadership.)

But I digress… Let the economy get some real legs before you hit businesses with yet another drag like more labor costs.  Also, I am concerned about the Fed in that it has more than tripled the size of its balance sheet over the past few years.  They have been (and still are) printing gobs of dollars to stave off the deflationary effects of the mild depressive state that has befallen us.  So I’m suspicious that any real uptick in economic growth might now generate more inflation than anticipated, until the Fed can deflate its balance sheet.  Doing another inflationary thing around that – like raising labor costs – is unwise.

Let the economy grow for real for a while (which hasn’t happened yet).  Let the Fed demonstrate they can unwind as smoothly as they wound up their balance sheet.  Show real growth with inflation under control.  That’s a scenario that would be borne out over the course of the next few years.  At that point, it would be appropriate to raise the minimum wage.

And at that point we should raise taxes a bit too, if we want to pay down debts and allow our government to continue to provide the level of services they’ve sold to us in exchange for our votes over the decades.  (Otherwise, yeah.  We are going to have to cut things like food stamps.  Democrats can call Republicans mean for suggesting that.  But if you want to live in reality, the money has to come from somewhere.  And there’s only so much we can print out of thin air, with our current debt and output levels.)

But suggesting raising the minimum wage right now is almost perfectly wrong timing.  And if that’s anyone’s best idea about improving the economy, then they really don’t have squat.

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