Prof. Oren M. Levin-Waldman will discuss his most recent article: “Let’s Not Be Complacent Because Wages Are Rising” By Oren M. Levin-Waldman, on Wednesday, November 7, 2018th at 10am EST on the Westchester On the Level Internet radio broadcast. Use the following hyperlink … http://tobtr.com/s/11041963 … to listen “Live” or “On Demand”. Please recognize the broadcast is initiated at 9:55am EST and is archived within 15 after the conclusion of the broadcast day at 12Noon.
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Let’s Not Be Complacent Because Wages Are Rising By OREN M. LEVIN-WALDMAN
We are told that the economy is doing well and wages have grown, or so that is the headline. We don’t know what the actual wage growth has been, but assuming that it is true certain assumptions ought to follow. If following tax cuts people have greater purchasing power, and they are demanding more goods and services in the aggregate, we would expect businesses to expand. This will lead to more hiring and wages to grow.
We would also expect that if wages grow, which leads to more aggregate demand for goods and services thereby fueling even more economic growth, prices will also increase thereby fueling new inflation. This in turn will lead the Federal Reserve Board (Fed) to raise interest rates, thereby applying the breaks to the economy which in turn will lead to an increase in unemployment. Just the mere mention of inflationary pressure is usually enough to trigger discussion of interest rate hikes, which then leads to some volatility in the stock market. Of course, we are seeing that now, aren’t we?
Still, let’s return to rising wages. Everybody will agree that rising wages is a good thing, but unfortunately there is too much room to become complacent. The first casualty of rising wages may be the minimum wage and political support for it. Critics of the minimum wage will naturally say that if wages are rising because of a strong economy there is no reason to raise the minimum wage. The rising tide, after all, will lift the boats of those at the bottom of the distribution.
But if wages are rising, why shouldn’t the minimum wage be increased? In the early 1990s when studies of minimum wage increases in the fast food industry were done by David Card and Alan Krueger, they showed that contrary to expectations of a disemployment effect, employment actually rose in those establishments where the minimum wage increased. By their own admission, the fast food industry is a labor monopsony, meaning it is the largest employer of low-wage workers. Therefore increasing the minimum wage would not have adverse employment effects.
These studies were nonetheless controversial because they challenged the reigning orthodoxy that increasing the minimum wage will lead to either lower employment, a substitution of technology for workers, or a reduction of benefits. None of these were found to be the case. Did this then mean that the orthodoxy had been wrong all along? Well no. Critics of the minimum wage maintained that there were no effects because the minimum wage was still so far below a market clearing wage that there could not be any disemployment effect.
Even Card and Krueger recognized that there was a tipping point — a point beyond which an increase in the minimum wage would lead to employment consequences. It was only that we had not yet reached that tipping point. Let’s then consider the following: in 2016 the median hourly earning for New York was about $20.56. If wages have been growing in the last few months we would expect it to be higher now. Were we to assume the median hourly earning to be the ‘market clearing’ wage, that would imply that an increase in the minimum wage even up to $15.00 is not going to have adverse effects.
Granted the median hourly wage is lower in some parts of the country than in New York, but it was higher in other parts. In Arkansas, the median hourly wage was $14.48 while it was $22.68 in Alaska and $32.63 in the District of Columbia. Perhaps a minimum of $15 an hour is too high in Arkansas because it exceeds what we are assuming to be a ‘market clearing’ wage, but even a nominal increase in the federal minimum wage from its current $7.25 an hour to say $10.00 an hour will still be below.
The critic will still retort that raising the minimum wage is unnecessary because wages are growing on their own. But that growth in wages will be arrested when the Fed applies the breaks in response to inflationary pressures. All the more reason to raise the floor to protect the most vulnerable workers.
If wages are growing on their own, this is the time to raise the federal minimum wage because, that, in and of itself, will not spark inflation. A look at the historical record only makes clear that the federal minimum wage has tended to be increased during growth periods. Another reason to raise the minimum is that it can help maintain wage growth throughout the wage distribution as a result of contour effects, or simply interval effects.
I have argued in this space many times that a wage policy is essential for maintaining aggregate demand for goods and services. That there is growth overall in wages does not mean that the wages of those at the bottom are rising on their own. One version of the efficiency wage holds that employers who would like to raise their workers’ wages are loathe to do so for fear that they will be undercut by their competitors paying low wages. Therefore an increase in the floor enables them to do so.
Of course, the critic will continue to retort that if more firms are hiring then low-wage workers can leave and go to firms paying more. But we don’t know if all wages are rising or just the wages of more skilled workers are rising. Therefore, we still have the problem of an oversupply of low-skilled workers continuing to push down the wages of those at the bottom. So isn’t this the point of a wage floor — to ensure a bottom limit beneath wages cannot fall? Precisely!
The reality is that there is no one ‘market clearing’ wage for the entire labor market; rather there are different ‘market clearing’ wages for different labor markets. The absence of skills in the low-wage labor market puts workers in a vulnerable position where they can easily be exploited by employers who continue to have what these workers don’t have: market power.
The idea of so-called natural market forces is really a mask for the asymmetrical power imbalances that exist in different labor markets. In skilled labor markets workers tend to have more power and in unskilled labor markets they have less. The purpose of labor market institutions is to give workers, particularly the unskilled, a measure of market power they otherwise would not have. These realities can easily be obscured by headlines touting rising wages. It is no time to be complacent.
Restoring the Middle Class through Wage / Oren M. Levin-Waldman / Palgrave MacMillan
This book makes the case for minimum wage as a way to improve well-being of middle-income workers, reduce income inequality, and enhance democracy….
Minimum Wage: A Reference Handbook / ABC – CLIO
The Minimum Wage: A Reference Handbook By Oren M. Levin-Waldman. As of 2014, the minimum wage in Seattle is $15 an hour — double the federal minimum wage.
“Wage Policy, Income Distribution, and Democratic Theory” By Oren M. Levin-Waldman
Dr. Oren M. Levin-Waldman, Ph.D., Professor at the Graduate School for Public Affairs and Administration at Metropolitan College of New York, Research Scholar at the Binzagr Institute for Sustainable Prosperity, as well as faculty member in the Milano School for International Affairs, Management, and Urban Policy at the New School. Direct email to: firstname.lastname@example.org