Minimum Wage Workers

Russ Roberts points out one of my favourite little factoids about the US minimum wage: how few people actually earn it.

I often ask students or people attending my lectures to guess the proportion of the US work force that earns the Federal minimum wage or less. The median guess is usually around 20%. In 2006 (the latest numbers available), the BLS reports that the answer was 2.2%:

Unfortunately, on the page he\’s taken his information from he\’s missed one thing which makes his case even stronger.

Nearly three in four workers earning $5.15 or less in 2006 were employed in service occupations, mostly in food preparation and service jobs.

 

That\’s your waitron units and barkeeps folks. And what do we know about people who do these sorts of jobs? Well, perhaps you have to have actually done them (as I have, everything from the graveyard shift in a Denny\’s to tending bar around the corner from this guy\’s place): they all make tips. In fact, so much so that there is (or at least used to be when that BLS report was prepared) a special minimum wage for those in such jobs, one lower than the official Federal minimum wage.

For example, way back when, the min. wage was $3.35 an hour. Waiters got $2.01. You didn\’t really care because even serving pancakes at 5 am you made another $25-$30 a shift ($50-$150 in a decent place). Barkeeps got $3.35 plus tips.

The BLS numbers are reporting what employers paid employees, not what people are actually earning. So we might in fact say that while the number being paid the minimum wage or less is 2.2% of the workforce, the number actually earning that figure is more like 0.5%.

How True

My perspective is classical liberal. I caution the reader not to slip into thinking that classical liberalism characterizes the foils Krugman sets against himself, chiefly Republican politicos. By and large, they do not represent classical liberalism, first, because they are politicos, and secondly, because they are Republicans.

From a study of all Paul Krugman\’s NYT columns. The basic thesis is that his committment to social democratic ideals obscures the fact that many actual proposals and positions are to the detriment of the poor.

You could substitute Conservative for Republican there and it would make perfect sense in the UK context.

Mr. Freedland Speaks Out!

Please Jonathan, learn what words mean:

The Black Monday of 2008, which saw £77bn wiped off London share values, was matched at one point yesterday on Wall Street, where even a drastic emergency cut in interest rates could not prevent wild volatility.

Volatility means changes in prices. Both up and down. The aim of cutting interest rates was in fact to increase volatility: they wanted to make share prices go back up again after they had fallen. So they didn\’t in fact want to prevent wild volatility, they wanted to cause it. Sheesh.

For they suggest turbo-capitalism is not just unfair – it is dishonest and dangerous. If that sounds excessive, focus, if you will, on the banking sector at the heart of today\’s mess. It was the reckless gobbling up and selling on of shaky subprime loans – mortgages given to bad-risk customers – by American banks, and the threat that those debts would never be paid back, that triggered the entire loss of confidence that stopped banks lending to each other and caused the run on our own Northern Rock. Those sub-prime debts were dodgy, but they were wrapped up and sold on as if they were triple-A-rated, pukka debts, as solid as a government bond.

That was dishonest – and you need only look at the cost to the taxpayer of Northern Rock, £24bn in loans and another £30bn in guarantees, to see how dangerous it has been for our economy and, given the diversion of public money that could have gone elsewhere, for our entire society.

The American banks have already owned up to $100 billion in losses on such products: those who made the mistake (the dishonesty if you must) have paid the price: we\’re not going to see this particular mistake repeated in our lifetimes. Please also note that all of this has happened before the bureaucrats have finished sharpening their pencils. Yes, markets do go wrong, as does any other system inhabited by human beings. The question is, what system clears up such mistakes best? Markets or those guys still working away with the penknives on their pencils?

As to Northern Rock, I\’ve not heard that their own loans sold on (the Granite paper) have defaulted. That was a different mistake, one of borrowing short and lending long (which all banks do) on a larger scale than was prudent. What\’s made that problem greater than it could and should have been is precisely that we\’ve got the pencil sharpeners looking for a political solution. Twenty years ago there would have been some City heads knocked together (if indeed NR hadn\’t been stopped from pursuing the path it did in the first place) and we\’d have had a messy, but adequate, solution back in August.

You could argue that capitalism is always like this, parasitical on the state.

Well, some of us do indeed argue that, that capitalism, in the form of big business, always tries to be parasitical on the State. Seeking rents and privileges. Which is why we argue that the State should not have the power to grant such rents and privileges. But that\’s not I think what you are arguing.

Whether it\’s the internet businesses that would be nowhere had it not been for the government research and development that created the web,

Grr, grr. The internet and the web are two very different things. The internet was indeed trialled by the US DoD. The web was something very different indeed, knocked together by one man over a week or two. That Sir Tim Berners-Lee was working at CERN at the time is pretty much irrelevant.

or the vast agribusinesses and others dependent on the "corporate welfare" of state subsidy – an estimated $92bn a year in the US, according to the libertarian Cato Institute – it\’s time to admit there is no such thing as a free market.

No one rational ever tries to state that there is, ever has been or ever will be a free market in anything. Markets are always constrained: it might be by customs, by law, by habit, but there are always constraints. There must be, for how can you have a market without a delineation of property rights?

The argument isn\’t "free markets" or "not free markets". It is always "freer markets" or "less free markets". And one very important part of the argument for freer markets is that we want to reduce the ability of people, whether they be unions, corporations, individuals, classes, professions, whatever, to seek rents and privileges from the State.

It is of course lovely that you quote Cato: but it would be interesting if you understood the point that they\’re trying to make. Archers Midland Daniel is as much a danger to, a leech upon, freer markets as the minimum wage or the UAW. And Cato (along with people like the ASI) are one of the few groups who proclaim this evident truth loudly enough that even you should be able to hear it.

And?

Demand for trained nannies has sent their salaries to record levels, with many earning as much as teachers, nurses or police officers.

So what? Isn\’t this what you would expect in a properly functioning labour market? Roughly equal skills levels command roughly equal wages?

Subsidies, Subsidies

Always the same, eh?

When a litre costs 0.7p, and filling the tank of a 4×4 costs 42p, it is a fair question. Petrol is so cheap here – reputedly the cheapest in the world – as to be almost free. Even under the artificially overvalued official exchange rate, petrol is 45 times cheaper than in Britain.

Some economists call the subsidy "Hood Robin", because it steals from the poor and gives to the rich by favouring relatively wealthy car owners above the poor who rely on public transport.

Subsidies most often don\’t actually benefit those they\’re aimed at initially.

I\’ve got this half-formed thought rolling around. I\’m not quite sure whether I\’m onto something or whether it\’s actually a very silly idea, so your thoughts would be appreciated.

It\’s pretty much a basic assumption at that interface between economics and politics that efficiency and equity often are in conflict. We might say that the market distribution of incomes is efficient, but that it is inequitable. Thus we should redistribute through taxation.

Or we might say that the market pricing of petrol is inequitable, it being too high for the poor, so we should subsidise it. Or, closer to home, that heating is too expensive for pensioners so we should send them al £200 a year to increase equity, at the expense of the efficiency of the heating market and the wider economy (for all taxes have deadweight costs).

My half-formed thought is that equity and efficiency are not in quite as much conflict as many think.  An inefficient system, by definition, either uses more resources to get to a specific outcome or, gets to a  worse outcome with the same resources, than an efficient one. This in itself is inequitable, as in order to get to our (possibly) desired equitable position, the reason we\’re actually fostering this inefficiency, we leave everyone worse off in aggregate than they would have been.

Writing this out I think I\’m actually reinventing a wheel that\’s been around a long time. The answer usually given might be to do with the decreasing returns stuff: the 99th pound you have is worth less to you than the first, so taking that 99th and giving it to someone as their first might increase aggregate well being.

But I still think that there\’s less conflict between equity and efficiency than many think: that an inefficient system by and of itself is inequitable, despite that decreasing returns stuff. The question then becomes whether the increase in equity from the redistribution overcomes the decrease in it from total resources.

Yes, this is reinventing a wheel, isn\’t it?

OK, I\’m left with the statement that we need to look more closely at the claims of increased equity as against efficiency in each specific case. As there are two effects it\’s an empirical question as to which predominates in each case.

No, not knew then, just another reason to be casting the gimlet eye over claims on either side each and every time perhaps?

 

Incentives Matter!

Half of all marriages in Britain are unhappy, but the millions of men and women trapped in matrimonial misery will not walk away for fear of financial and emotional hardship, according to a new survey.

Katherine Whitehorn

I used to love reading Katherine Whitehorn\’s pieces in The Observer: they rather made the paper for me. She\’s back standing in for Boris and is typically on the target.

No quotations, it\’s a great piece: two major points, one that I\’ve been known to bang on about. Everyone knows about economies of scale, far too few think about diseconomies of scale. The other is something that Chris Dillow has been known to bang on about: institutional memory.

RTWT

So, No Collusion Then

Energy watchdog Ofgem has dismissed suggestions that the UK\’s six largest energy companies colluded to increase gas and electricity bills. The regulator has also demanded that those alleging price-fixing should produce the evidence.

They see large changes in market share, record switching between suppliers: signs of a highly competitive market. Yes, it\’s true, that prices are also moving in lockstep….but that\’s also a sign of a highly competitive market (when it isn\’t a sign of collusion). But some people are never pleased:

The Scottish National Party\’s Mike Weir called for the Competition Commission to investigate the companies, saying: "This statement displays an incredible complacency by Ofgem. It doesn\’t take Inspector Rebus to see that this same process happens every time there is an increase."

No, but it might take someone economically literate to see that a rise in taxation, a rise in compliance with green costs and a rise in feedstock costs will lead to a rise in bills to consumers. But here we\’re taking about a politician of course.

Social Mobility

Aha! Something of a gotcha moment here I think.

Men\’s chances of rising up the social scale in Britain have stalled because of greater competition from women and a slower rate of growth for top jobs, a study published yesterday reported.

The studies from which comparisons of social mobility (when in fact they mean economic mobility for they measure wages but that\’s another story) specifically and deliberately exclude women.

We focus here on sons so that results are less directly influenced by women’s labour market participation decisions

Now, take a step back and think about what is the largest change in the labour market of the past three or four decades? It\’s the entry of women into it on equal (or very nearly equal, as compared to the past) terms. The majority of undergraduates, the majority of trainee lawyers, the majority of trainee doctors, are now women. That\’s a vastly larger change, I would submit, than the decline of unions or whatever else one might use to explain social mobility.

So these studies which show a decline in social mobility are not really very accurate. They\’re measuring a decline in social mobility for men, yes. But that is then being interpreted as a decline in total social mobility, which isn\’t actually what is being measured at all. And the decline in male social mobility is being described, but without reference to the largest change in the labour market, the rise to equality of women.

Soi perhaps the next time someone starts to whiffle on about the decline in social mobility, perhaps the appropriate response should be that they\’re talking bollocks? For they\’re not taking account of the huge rise in womens\’* social mobility?

 

* To a large extent, before these labour market changes of recent decades, women\’s social mobility was promoted by marriage. No, I\’ve no figures, but I would guess that this has decreased as the potential for doing it under their own steam has risen. Certainly there are those who insist that the rise in income inequality at the household level has to do with assortative mating, professionals marrying professionals, to a larger extent than in the past.

Polly Discovers Economics!

The most serious objection is not safety but "nuclear blight", the probability that government and energy firms\’ cash, engineers and project management capacity is swept up in this great nuclear South Sea bubble and nothing is left for other renewables.

Halleluljah! Polly has actually managed to grasp an economic concept. And she\’s even grasped the correct end of the stick!

This is opportunity cost. If we decide to go down one path then we cannot use these same resources to go down another.

Of course, this applies to everything, not just nuclear: if we go down the renewables path then we face exactly the same problem. The things that we use to do that cannot be used to go down any other paths. Which means that it\’s not quite the killer argument she thinks it is. It becomes, instead, which is the best use of those resources….and I would argue that nuclear is it.

You can of course disagree with my conclusion, that\’s not a problem. As long as you\’re willing to agree that any path taken leads to exactly the same result, that we can only do one thing with the resources we have available, at least we\’ll be having the discussion about which is the best.

The Real Meaning of Socialism

Yup, here it is:

I also don\’t accept your claim that £7 for a chicken is out of most peoples price range. £7 for a whole fucking bird – that\’s what it should cost. This is a creature that has to be raised, slaughted, plucked and packaged. It only seems expensive because capitalist intsensive farming has reduced animals to mere commodities that are cheap enough to eat everyday.

Expensive chickens. That\’s the real meaning of socialism.

Thanks Tom

Really:

The key word for anyone with an investment horizon beyond the next tricky year or so is "scarcity" – too many people chasing too little stuff. Long after the financial excess is washed through the system, population growth and rising incomes mean the world\’s principal economic theme will be the battle between excess demand and finite or limited supply.

Pretty much the definition of economics isn\’t it? The allocation of scarce resources to satisfy unlimited desires?

British Living Standards Higher Than the US?

Well, that\’s one claim, anyway:

LIVING standards in Britain are set to rise above those in America for the first time since the 19th century, according to a report by the respected Oxford Economics consultancy.

The calculations suggest that, measured by gross domestic product per capita, Britain can now hold its head up high in the economic stakes after more than a century of playing second fiddle to the Americans.

It says that GDP per head in Britain will be £23,500 this year, compared with £23,250 in America, reflecting not only the strength of the pound against the dollar but also the UK economy’s record run of growth and rising incomes going back to the early 1990s.

Unfortunately, it\’s tosh, as they\’re using market exchange rates. Should b using PPP, as even the authors of the report agree:

The Oxford analysts also point out that Americans benefit from lower prices than those in Britain. With an adjustment made for this “purchasing power parity”, the average American has more spending power than his UK counterpart and pays lower taxes.

Back to sleep everybody.

And We Were Doing So Well…

Having managed to start off the New Year with myself and Antonia Bance actually agreeing on a point we then get this:

7. Hundreds of new houses built in Oxford, hundreds of thousands nationally, and increased regulation to target profiteering and unscrupulous landlords

That\’s part of her wish list for the coming year. The problem is that the two aims are mutually contradictory. We actually want landlords to make a profit: that\’s what gives them the incentive to invest in a house and then rent it to people. Making more housing available (a good idea at a time of both rising population and a further, on top of that, rise in household formation as we live in smaller groups) means an expansion of the privately owned rental market. Thus less regulation, not more.

One of the beneficial changes over the past few decades has been the way in which the regulations on that market have been lifted. Assured tenancies, the abolition of "fair rent", essentially a move back in time, or, if you prefer, towards a more European market, by the destruction of the insane rules which pretty much destroyed the rental market after WWII.

We\’ve already in fact tried this experiment, regulating landlords, and it leads to the absence of housing available to rent. If we actually want more housing available, better that we not make the same mistake again, eh?

Excellent News!

Isn\’t it?

Children as young as five are routinely being used to quarry stone for the booming British patio and garden landscaping market, one of Britain\’s leading stone importers has warned.

Chris Harrop, a director of Marshall\’s Plc, said that large sections of the gardening industry were turning a blind eye to the use of child labour in the sandstone quarries of Rajasthan, western India, in order to maximise profits.

Only about a third of the 200,000 tons of patio stone imported into the UK from India each year was sourced ethically, Mr Harrop said, with the rest often being produced in atrocious conditions.

Jobs, incomes, good things to have, eh? Sadly, that\’s not the way this bloke is thinking (quite apart from the fact that he imports "ethical" stone and faces price competition from those who don\’t). But it is the way he ought to think. Paul Krugman:

When the movement gets what it wants, the effects are often startlingly malign. For example, could anything be worse than having children work in sweatshops? Alas, yes. In 1993, child workers in Bangladesh were found to be producing clothing for Wal-Mart, and Senator Tom Harkin proposed legislation banning imports from countries employing underage workers. The direct result was that Bangladeshi textile factories stopped employing children. But did the children go back to school? Did they return to happy homes? Not according to Oxfam, which found that the displaced child workers ended up in even worse jobs, or on the streets — and that a significant number were forced into prostitution.

The point is that third-world countries aren\’t poor because their export workers earn low wages; it\’s the other way around. Because the countries are poor, even what look to us like bad jobs at bad wages are almost always much better than the alternatives.

So, buy ethical stone and force children into prostitution. Good idea, eh?

Ooooh, No Dean, No…..

There is no dispute that there has been a massive upward redistribution of income over the last quarter century.

Now I normally quite like Dean Baker: he knows his onions and while our world views are radically different his campaign to try and get journalists to understand numbers rather parallels my own mocking of those who don\’t. But that\’s an outrageous statement, worthy only of the most mouthbreathing type of class warrior.

I would be astonished if anyone either literate or numerate would actually agree with it, far from admit that there is no dispute, that there has been an upward redistribution of income. For if here had been, we should see that those at the bottom were getting lower incomes now than they were.

And as people like Paul Krugman (with whom Dean has co-authored at least one paper, so a reasonable authority to use here) keep telling us, this isn\’t true. Incomes may have been flatlining for 30 years (well, wages actually, not total compensation, so even that\’s pretty dodgy as evidence) but they haven\’t been going down.

Now what is true is that the rich have been getting richer faster than the poor have been getting richer. That is, we\’ve not actually had  "redistribution" of income, we\’ve had the new income being created distributed in an uneven manner. Inequality is increasing, yes, but that isn\’t the same as stating that the poor are getting poorer.

The NYT is anxious to tell us that a big part of the upward redistribution was just “basic economics.” It tells readers that:

“One reason for the change is basic economics. In a global, high-technology economy the most successful workers can be more productive and can play on a bigger field.”

Is that so? How about the fact that in a global, high-technology economy the “most successful” workers face a much bigger group of competitors who can depress their wages. Isn’t that also “basic economics”?

As I\’ve been a big supporter of that argument that the NYT puts forward I have to say that I agree with it. One thing that strikes me though is that this is the first time I\’ve seen anyone other than myself actually advance it (shows I\’m not reading enough, obviously).

In more detail it goes roughly like this. The increases in income inequality seem (if we believe the Piketty and Saetz numbers) to be largely driven by strongly rising incomes in the top 1%….indeed, in the top 0.1%, even 0.01%. Now it\’s not all that difficult to hold the thought that there are some people who can not only compete on the national stage, they can also do so on the global. Stephen Spielberg\’s $220 million a year is clearly not funded by the fact that he is one of the best filmakers in the US: rather, by the fact that he is one of the best in the world. I think I\’m right in saying that Hollywood\’s overseas takings have in recent years passed domestic for the first time. Tiger Woods\’ $100 million a year  would  not be funded purely by the US market for golfers and endorsements: it requires avid golfers in Taiwan, Dubai, the UK, to also be passing over the occasional dime or two. So those global superstars are indeed powering away from the rest as a result of globlisation: not because of any import effects but rather because they can export their goods and services to 6 billion, not 300 million.

The answer to the second part is that yes indeed, this is basic economics: we have been seeing it in programming for example. That there are millions of such (OK, tens of thousands perhaps) in India, Russia etc, willing to program for some fraction of extant American programming wages has indeed depressed US such wages. So? That doesn\’t change the fact that those capable of bestriding the globe, collect global instead of national rents for their scarce talents, have, as a result of globalisation, been able to do so.

The fact is that CEOs and other highly paid workers have seen their pay explode in ways that is not matched by the most highly paid workers in Europe, Japan, and other wealthy countries.

This isn\’t quite true. Income inequality has been rising within every country (as opposed to global, which has been falling, with all the usual caveats about Concept 1, 2 and 3) which rather supports the globalisation argument. It is, as the word suggests, a global phenomenon, as is the rise in national income inequality (the simplest way to see this is to look at the Gini for OECD countries over time…I would direct you but I\’m on dial up at present).

Perhaps one trivial example. If I were confined to writing for only UK outlets (as would pretty much have been true before the internet) my income from said writing for this year just ending would be around UK median income, perhaps a little lower. As I\’ve been able to write for US outlets as well (in the same way that Dean now writes for The Guardian….damn Yankees, coming over here and stealing our jobs!) and more directly for US readers and advertisers my income has been about twice US median household income.

There are indeed effects from globalisation which are making average incomes lower than they otherwise would be, the result of being able to import labour contained in goods from other, lower waged, countries, but I don\’t think enough is made of the point that if, as we are consistently told, the rise in inequality is concentrated in the effects the very top of the income distribution has on such distribution and averages, then exports are more likely to be the explanation than imports. Hmm, no, maybe that\’s too strong a statement. That not enough attention is being paid to the possible effects of those exports as opposed to the income effects might be better.

It is very much a debatable question as to whether there is anything intrinsic to the economy that lead to the explosion of inequality in the last quarter century.

Well, as above, I think Dean\’s got it the wrong way around. There\’s not much debate that globalisation is increasing within country inequality, and it really is debatable as to whether there\’s been an upward redistribution of incomes.

Economists Know More Than You Think

I was telling my colleague Danny Finkelstein about my new theory that the free market doesn\’t work properly when the real customers are those who commission a product rather than those who use it. It is, for example, businesses, not the householder, that choose the courier service that makes you stay in all day in case it calls; it is insurance companies, not patients, that are are private medicine\’s real customers. “Ah,” said Danny, “this conundrum is well known to economists. They call it the Principal-Agent Problem. There are whole chapters in textbooks about it.”

I felt as proud as Molière\’s Bourgeois Gentleman, enchanted to discover from an expert that quite spontaneously he had been speaking something called “prose” all his life.

Not all that unusual. You see someone struggling to a conclusion, working from first principles, and they then come up with the answer. And it\’s already there in the textbooks, they just didn\’t know that it was.

One example I like currently is all those greens, telling us that markets don\’t take account of externalities, that we have to make the cost equal the "real cost". Indeed, and economists did indeed note this a long time ago. Vast amounts of modern economic research is in trying to work out "how" to do this: it\’s already accepted that "whether" to do this is either useful or necessary (dependent upon circumstances).