Friday, April 5, 2013

The black hole theory of the minimum wage

The black hole theory of the minimum wage: 
Physicists theorize that inside a black hole the laws of physics breakdown. When the minimum wage falls far enough below what the market would bear the laws of supply and demand breakdown.  Doubling today's federal minimum wage should lead to a disproportionate explosion of demand for the goods of minimum to median wage paying employers.

If we cut today's minimum to median wages in half that wouldn't help McDonald's or Wal-Mart, would it? 
This wage cut has already taken place when we would have to triple today's minimum wage to catch up with doubled productivity since 1968 (and almost quadruple the early 2007 minimum wage -- the median wage stagnated while productivity doubled too).
Elizabeth Warren: Minimum Wage Would Be $22 An Hour If It Had Kept Up With Productivity  

Doubling today's minimum wage to $15 an hour would add 50% to Wal-Mart wages but only 5% to Wal-Mart prices – 100% to McDonald's wages but 33% to McDonald's prices.  $15 an hour being the median wage half the workforce would get raises percentage multiples of pass through price increases.

This win-win effect could not go on forever. At $30,000 a year consumers will buy a lot more fast food and retail items than they will at $15,000 a year – hugely pent-up demand. Going from a $30,000 year minimum wage to $40,000 would raise prices (3% at Wal-Mart; 11% at McDonald's) but not much to demand – though some people would have more money to spend -- a wash? Somewhere in between is the edge of the black hole.

 * * * * * * * * * * * *
 * * * * * * * * * * * *

The other day I was thinking that all the studies done on the minimum wage are about marginal increases when the minimum wage has shrunk one third while productivity has doubled -- making all the studies irrelevant to what might happen if any real catch up were attempted to what the minimum wage might conceivably be: doubled to add 43% to LJB'S 1968, $10.50/hr minimum -- tripled to catch up with doubling of productivity since 1968 if you ask Elizabeth Warren. Lawyers get paid twice as much in a doubly productive economy -- not because they doubled productivity but because the labor market can bear more.

Even the big anti-minimum wage book by Neumark and Wascher seems to admit upfront (haven't read the whole thing yet) that the results of the studies are close and could be upset by unseen factors.
Minimum Wages

So I came up with a thought experiment of what might happen if we doubled or tripled the minimum wage which is what we should desire to do -- and came up with this doozy.


Denis Drew said...

Thanks for (actually) replying.

Imagine that the minimum wage had never dropped below $10.50/hr (adjusted) -- which it was in 1968. That would be 45% higher than today. Imagine that the 1968 minimum wage had increased 45% since 1968 -- over 45 years -- to match 100% increase in productivity in that time. Would anyone have even noticed?

Some counter that minimum wage work has not increased much in productivity over that time -- but neither have lawyers (or baseball players). A lawyer in Poland makes less than a lawyer in the USA because consumers in a richer economy can afford (and are willing -- always the big question) to pay more.

The minimum wage has actually fallen by a third by now as productivity doubled. That's why I say the normal laws of supply and demand have broken down. If and angel could have appeared to Americans of 1986 and told them that by early 2007 the minimum wage would drop almost in half, to $5.75/hr (adjusted), they would have asked what was going to happen: a comet hit, a limited nuclear exchange?

The "big economists" never think in terms of doubling the minimum wage -- just incremental increases. My Ph.D. is in taxi driving (NY, Chi, SF -- started as a car service and gypsy in the Bronx) so maybe I catch on to the proportionality of what is hitting us than they do. If the median wage stagnates for 40 years while per capita income doubles they call it "inequality" -- I call it the "Great Wage Depression"!

Denis Drew said...

As of Friday, April 19, I had emailed (spammed!) 1,892 copies of the "black hole" theory, 4,516 copies of my earlier "$15/hr minimum wage" pitch and 3,702 copies of the "open letter" -- adding up to a neat total 10,110 copies.

The general pattern has been to hit the two of three largest newspapers in a state (have hit almost every state now) with the the longer "open letter" and hit the state legislature with the shorter (attention span required) $15/hr minimum wage message.

Since I came up with the "black hole theory" I have sent that out exclusively.

Hit the Massachusetts papers all over again with the "black hole" as their new US senator is talking the federal minimum wage would be $21.70 if it had kept up with productivity gains since 1968 and their Ralph Nader is pushing $15/hr.