Tuesday, June 18, 2013
Aggregate demand flows -- with large movement in upper or lower 50 percentile wages
Doubling upper 50 percentile wages would send prices up but not as much as upper 50 incomes. Only 88 percent of overall income goes to them so it would lead to some lowering of prices relative to their incomes.
Businesses catering more to upper 50 earners likely hire more upper 50s employees – higher prices reflecting higher wages. Shifting a small slice of overall income to upper 50s (from lower 50s – via inflation) likely shifts a small bit more demand toward more upper 50 catering/hiring firms – which could actually lead to upward pressure on wages in some firms!
Since lower 50s represent(ed) only 12% of overall income, businesses catering more to lower 50s could suffer in proportion to their customers investigating haircut, but the downturn might be moderate for most (much or most of their demand possibly coming from upper 50s). Lower 50 consumers would suffer horrendously -- lower 50 earners would face more unemployment.
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We can usefully imagine boosting lower 50 wages by half – on the average. Today’s minimum wage ($7.25 an hour) being half today’s median wage ($15 an hour) we can just raise the minimum to the median. Above 50 percentile wages would then feel upward pressure but not necessarily that much – LBJ’s median was only 20% higher than his minimum.
Adding half again to lower 50 percentile wages would raise prices only a little compared to their hefty income increases -- because only 12 percent of overall income goes to bottom half earners. As incomes make up only 2/3 of the cost of GDP output, figure that half again of 8 percent (2/3 of 12%) = 4% added to prices (not counting other wage push ups).
Reality check: an average $8,000 yearly raise for 70 million employees = $560 billion. Divide that by $15.8 trillion GDP and we get 3.6% direct inflation.
Businesses catering more to lower 50s tend to hire more lower 50s – lower prices generally reflecting lower wages. Shifting a small slice of overall income to lower 50s (from upper 50s – via inflation) means shifting extra demand to lower 50 catering/hiring firms – which could actually lead to upward pressure on wages in some cases!
Since upper 50s represent(ed) 88% of overall income, businesses catering more to upper 50s would suffer only in proportion to their customers very moderate shave, but even that marginal downturn might be partially filled in by newly affluent lower 50 consumers. Upper 50 consumers would feel a small pinch (as my doctor says, needle in hand). Upper 50 earners could face a similar pinch in unemployment.
Reality check: if LBJ's federal minimum wage of $10.69 an hour had kept pace with both inflation and per capita income growth (click on the first link: "All Races") it would have reached $14.11 an hour by 1978 – when per capita income was only 2/3 of what it is today!