Friday, April 18, 2014

More on Minimum Wage

Many states have taken time during their recent legislative sessions to pass higher minimum wage laws. Whether this is an attempt to keep pace with inflation (which is at historic lows), or battle income inequality is up for debate. I wrote two months ago about the state of inequality. Here are two graphs depicting: 1) the upward shift of the population among income brackets (less people in the lowest income bracket, more people in $50k-$200k range) and, 2) the higher concentration of wealth among higher income brackets (less wealth among lowest income bracket; $100k-$200k range grows; $1 million+ bracket grows).

As I mentioned at the time, these trends show a positive movement of the population up the income ladder with the consequence that more of the total state income is held by people making $75,000 or more. But are those making much less, like the minimum wage, cut out of this growth in prosperity?
The unemployment rate has dropped almost linearly from a peak of 17.4% in 1983, with reversals of trend coming after each recession. Widely held economic theory says that raising the minimum wage results in higher unemployment. But that can be difficult/impossible to tell when unemployment rates are much more heavily influenced by macroeconomic conditions (changes in preferences, globalization, technological innovation, etc.). Shifts in the nature of the labor force away from mining and manufacturing toward health care, retail, law, finance, and other technical jobs requiring computer skills ultimately produced new, different jobs that displaced some workers from the labor force while providing new sectors for other workers. Upticks in the unemployment rate seem to follow the path of recessions (crash of 1987, tech bubble, Great Recession of 2008).

By adjusting the state minimum wage by the inflation rate (taken from the Bureau of Labor Statistics CPI rate - table 24), we can see a fairly flat rate.

The current minimum wage of $7.25 is keeping pace with inflation though it is down slightly from a record peak of almost $8.00. Thus, increases to the nominal minimum wage have kept the real minimum wage steady, and increased it somewhat, since 1980. During this time, the unemployment rate of WV has dropped, subject to macroeconomic conditions in the broader U.S. economy. At the same time, the share of taxable income in WV has experienced a shift from earners making less than $50,000 to workers making $75,000 or more. The lowest taxable income bracket of below $30,000 in 1997 and below $25,000 in 2011 (the IRS changed the brackets for some reason) shows a movement of workers out of that bracket. A total of 46% of returns were filed for those making under $30,000 in 1997, while 25% of returns were filed for those making under $25,000 in 2011.
From this information it can be reasoned that workers making under $25,000, around the minimum wage, are not making less in inflation adjusted terms. Not only that, but more and more workers are not in this category. And lastly, that is why the share of total income of the bottom income brackets has dropped; not because they are earning less, but because of the upward mobility of higher earners.
In conclusion, there is an indeterminable relationship between unemployment and minimum wage. It may increase unemployment at the bottom of the income spectrum, but there is not clear data showing this and no way of inferring causality. The minimum wage has stayed constant, in real terms, as unemployment has dropped in WV over the years. It is currently above the 1980-2013 average of $6.55 in 2013 dollars. Increasing it now may slightly increase the share of income going to the bottom tax bracket, but it won't be considerable due to the broader shift of workers up the income brackets and their increasing wages.
This is an issue of importance being hotly debated at the global level. The release of Thomas Piketty's book: Capital in the Twenty-First Century has created a flurry of discussion over inequality and whether it is due to grow indefinitely in the future. Piketty's main thesis is that the growth rate on capital has been higher than the growth rate of labor over the broad course of human history. This makes the people owning capital assets (stocks, buildings, land, machines) wealthier than the people providing goods and services. He uses this point to advocate for a global redistribution of income. While the jury is out on his claim about growth rates, the story for a large amount of people over their lifetimes has been a rising standard of living as they jump up the income scale. The Great Recession may have called this mobility into question, but the numbers have yet to show that it has stopped. There is still wealth to be made for those that can and will work for it.

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