Must-Reads: July 29, 2016

Posted on by Brad DeLong

Should Reads:

Must-Read:John Maynard Keynes (1936): The General Theory of Employment, Interest and Money

Posted on by Brad DeLong

Must-Read: John Maynard Keynes (1936): The General Theory of Employment, Interest and Money:

Whilst, therefore, the enlargement of the functions of government, involved in the task of adjusting to one another the propensity to consume and the inducement to invest, would seem to a nineteenth-century publicist or to a contemporary American financier to be a terrific encroachment on individualism, I defend it, on the contrary, both as the only practicable means of avoiding the destruction of existing economic forms in their entirety and as the condition of the successful functioning of individual initiative.

For if effective demand is deficient, not only is the public scandal of wasted resources intolerable, but the individual enterpriser who seeks to bring these resources into action is operating with the odds loaded against him. The game of hazard which he plays is furnished with many zeros, so that the players as a whole will lose if they have the energy and hope to deal all the cards. Hitherto the increment of the world’s wealth has fallen short of the aggregate of positive individual savings; and the difference has been made up by the losses of those whose courage and initiative have not been supplemented by exceptional skill or unusual good fortune. But if effective demand is adequate, average skill and average good fortune will be enough.

The authoritarian state systems of today seem to solve the problem of unemployment at the expense of efficiency and of freedom. It is certain that the world will not much longer tolerate the unemployment which, apart from brief intervals of excitement, is associated and in my opinion, inevitably associated with present-day capitalistic individualism. But it may be possible by a right analysis of the problem to cure the disease whilst preserving efficiency and freedom…

Must-Read: Cosma Shalizi (2014): Review of Oliver Morton (2008): Eating the Sun: How Plants Power the Planet

Posted on by Brad DeLong

Must-Read: Cosma Shalizi (2014): [Review of Oliver Morton (2008): “Eating the Sun: How Plants Power the Planet”][]:

Of Heliophagy: I cannot remember the last time I read a popular science book with such enjoyment, or learned so much from it….

Photosynthesis… relayed by telling the story of how we came to… understanding… the lives of its discoverers… biochemistry… isotopes and radioactive decay… molecular bonding and the interaction of light and electricity, the biophysics of free energy flow through cells and through molecules, crystallography, the molecular biology which let us isolate and manipulate individual enzymes, and so on…. discovery, rivalry, insights and false paths, human and biological ingenuity, and ultimately a deep understanding of one of the fundamental processes of life as we know it….

The evolution of photosynthesis… everything from the origin of life to plate tectonics to the spread of grasses over the last few million years. Again, much of it is told through stories of discovery and the history of the science. It is necessarily more conjectural than the very settled science of how photosynthesis works, but none the less fascinating for all that. The… “climate/carbon crisis”. Agriculture already had non-trivial impacts on climate, but our real change began with the Industrial Revolution and the vast growth in consuming fossil fuels…. Atmospheric carbon dioxide concentration has already drastically increased… is good at trapping heat radiated back from the ground… warm[ing] the Earth. The exact effects depend on incredibly complicated and ill-understood feedback processes…. To take these uncertainties as ground for complacency, though, seems grotesque.

Our global civilization runs at something like 40 terawatts…. Tidal and geothermal energy are too localized and small-scale…. Nuclear fission looks more attractive when one compares long-lived radioactive waste to long-lived carbon dioxide as a pollutant, but there are very real practical obstacles. All our other options are ultimately solar…. Morton is very hopeful about the last two, and especially about what real molecular engineering might be able to do in the space intermediate between photovoltaic plates (high efficiency, but also high cost) and naturally-occurring leaves (low efficiency, but they grow)…. A marvelous book, filled with wonders: I strongly urge you to encounter them for yourself.

Can This Capitalism Be Saved?

Posted on by Brad DeLong
Robert reich saving capitalism Google Search

Here is piece of mine left on the cutting room floor elsewhere. So I might as well throw it up here.

Reviewing: Robert Reich: Saving Capitalism: For the Many, Not the Few http://amzn.to/29Viz6w

Robert Reich’s Saving Capitalism: For the Many, Not the Few http://amzn.to/29Viz6w is an excellent book. It powerfully argues that America needs once again—as it truthfully reminds us that we did four times in the past—restructure its institutions to build both private and public countervailing power against the monopolists and their political servants in order to right the distribution of income and boost the pace of economic growth.

Reich wants to remind us Americans of our strong record of “expanding the circle of prosperity when capitalism gets off track.” We have in our past no fewer than four times built up countervailing power to curb the ability of those controlling last generation’s wealth and this generation’s politics to tune institutions, property rights, and policy to their station. This repeated, deliberate construction of countervailing power kept America a high-wage economy—the world’s highest-wage economy, in fact—for ordinary (white, male) guys.

Until now.

Thus Reich wants us here in America to fix our future by recalling our past.

The first piece of our past Reich wants us to remember is Andrew Jackson’s Age: the period starting in 1828 when America removed:

accrued unwarranted privileges… [keeping] average citizens… [from] gain[ing] ground…. The Jacksonians sought to abolish property requirements for voting and allow business firms to incorporate without specific acts of the legislature, and they opposed the Second Bank of the United States, which they believed would be controlled by financial elites. They did not reject capitalism; they rejected aristocracy. They sought a capitalism that would improve the lot of ordinary people rather than merely the elites…

In what may be the only favorable citation of Roger B. Taney I will see in this decade, Reich remembers not the Supreme Court Chief Justice of the late 1850s but the Attorney General of the early 1830s. He remembers the Taney of:

It is a fixed principle of our political institutions to guard against the unnecessary accumulation of power over persons and property in any hands. And no hands are less worthy to be trusted with it than those of a moneyed corporation…

Yes, Reich says, that Taney shared the same body with the Taney who wrote the opinion in Dred Scott vs. Sanford: Jacksonians believed that no laws that endowed the Cherokee or other native Americans with any property whatsoever should be enforced, and that no African American—slave or free—had any “rights which the white man was bound to respect” at all. But in Reich’s the Jacksonian Revolution prevented America’s drift toward a more English form of political-economic organization, in which restrictions on westward migration coupled with political grants of economic monopoly rights lead to a lower-wage economy.

Of course, that drift came after the Civil War, with the coming of the Gilded Age and then of the second piece of history that Reich wants us to remember: the 1901-1916 Progressive Era of Teddy Roosevelt and Woodrow Wilson as a response to Gilded Age inequality and political corruption of the system. The response to the Great Depression took the form of Franklin Delano Roosevelt’s 1933-1939 New Deal and the partial construction of the great arch of American social democracy, which was then extended with Lyndon Johnson’s 1964-1966 three-part legislative program of the 1964 Civil Rights Act, the 1965 Voting Rights Act, and the 1965 Medicare Act.

All of these, Reich argues, show that:

We need not be victims of impersonal “market forces” over which we have no control. The market is a human creation… based on rules that human beings devise. The central question is who shapes those rules and for what purpose…. The coming challenge is not to technology or to economics. It is a challenge to democracy. The critical debate for the future is not about the size of government; it is about whom government is for. The central choice is not between the “free market” and government; it is between a market organized for broadly based prosperity and one designed to deliver almost all the gains to a few at the top… how to design the rules of the market so that the economy generates what most people would consider a fair distribution on its own, without necessitating large redistributions after the fact…

The key for Reich is the proper construction of institutions that provide, in a phrase he borrows from John Kenneth Galbraith, countervailing power to that power over political-economic arrangements provided by the oligarchic inheritance of last generation’s wealth and the oligarchic building up of political influence.

We today see a much gloomier future–at least a much gloomier economic future than the one 2006 seemed to offer us. Lower asset returns and lower profit opportunities. Greater “headwinds”. Slowed technological progress. Slower growth in living standards. More income and wealth inequality. A political economy chained by ideological propaganda in which making good win-win policies has gone out the window.

Reich sees this context, and so he writes to remind us that we have successfully dealt with the problems of creating institutions to support equitable and inclusive growth before. But his book seems more cheerleading than sober assessment. It feels to me like an optimism of the will. But when I look around me, the reality I see seems to weigh heavily on the side of a pessimism of the intellect–in economic affairs, at least.

Thinking About “Premature Deindustrialization”: An Intellectual Toolkit I

Posted on by Brad DeLong
End of export led growth would not be good for post crisis Asia Asia Pathways

OK. Popping the distraction stack again. The very sharp Matthew Yglesias writes about:

Matthew Yglesias: Premature Deindustrialization: The New Threat to Global Economic Development:

In the popular imagination, the old industrial landscape has moved abroad to Mexico or to China, perhaps due to bad trade policies or simply the vicissitudes of changing circumstance… [and] the migration of factory work to much poorer countries has been a boon to those countries’ economic development…. [But] ‘premature deindustrialization,’ in which countries start to lose their manufacturing jobs without getting rich first…. [Dani Rodrik:] “Developing countries… have experienced falling manufacturing shares in both employment and real value added, especially since the 1980s.’…

Jana Remes… economy-wide productivity growth in Mexico has been dismal… [because] Mexican manufacturing sector has… remained quite small…. The dynamic manufacturing sector, in other words, simply isn’t big enough to employ many people. And it’s not really growing much…. [Future] manufacturing enterprises will increasingly look more like software companies–where designing, programming, maintaining, and debugging the machines will be more important than staffing them. A country like the United States with a very robust high-tech sector will be a strong contender for those technologically intensive manufacturing jobs, even if there aren’t very many of them. Countries that haven’t yet industrialized, meanwhile, may be left out in the cold…

And:

Let me back up and quickly sketch the argument that manufacturing matters, and manufacturing exports matter a lot for industrialization and economic development in the Global South. And let me make the argument in what I regard as the proper way–that is, dropping far back in time and running through the economic history…

I do not, all thing considered, think that, absent the luck and randomness that gave us the British Industrial Revolution, a permanent or semi-permanent “Gunpowder Empires” scenario was the third-millennium likely historical destiny of the Sociable Language-Using Tool-Making Big-Brained East African Plains Ape.

However, this does not mean that the historical destiny looking forward from 1750 or so in the Global South was bright. World population had quintupled in the 2000 years to 1750, carrying with it a notional five-fold shrinkage in average farm sizes, or at least in the amount of land supporting the typical family. The slow pace of technological progress from -250 to 1750 had made up for–indeed, had caused–this rise in population. And the biotechnologies of agriculture were indeed mighty: to 1750 we have the creation and diffusion of maize, of double-crop wet rice, of the combination of the iron axe and the moldboard plow that could turn northern temperate forests into farms, of domesticated cotton, of the merino sheep, and of the potato.

But a human population growing at 10% per generation required more such innovations, lest living standards fall in order to curb population growth via children so malnourished to have compromised immune systems, women who were too thin to ovulate, or increased female infanticide. People in 1750 were as well fed and clothed as they had been in -250. But what would have been the next agricultural miracles? You would have needed a number of them to attain continued total factor productivity growth at 0.02%/year to compensate for the further quartering of farm sizes that would have been inevitable for population growth to continue and human numbers topped 3 billion by 2050. And draft animals are not that much help in a densely populated near-subsistence society: they have large appetites, and the land their foodstuffs grow on is subtracted from that available for people. Only a relatively rich society can afford to replace human backs and thighs with those of horses and oxen.

However, these problems in the economic growth of the Global South ought to have been solved by Britain’s Augustan Age industrial breakthrough. Let’s rehearse the story briefly:

(1) The Protestant Wind that blew in 1688 and a century before in 1588 created in Great Britain an ideologically mobilized ruling class willing to commit previously unheard-of resources to first defensive and then imperialist war. (2) The resulting fiscal-military state coupled with the fact that Great Britain is an island created the first British Empire and funneled the maritime trade profits of the world into the island. (3) The resulting high wages coupled with the extremely low price of coal made the R&D to invent and deploy the first generation of technologies of the coal-steam-iron-cotton-machinery complex profitable. (4) The first generation of this complex of technologies are barely profitable even in the most favorable regions of Britain. (5) But the third-generation technologies are wildly profitable in Britain and profitable in selected other regions like New England and the lower Rhine valley. (6) And by the fifth generation–1850 or so–British-style industrial technologies would have been profitable anywhere in the world the resources could have been brought together, as long as there was large enough market demand to serve.

Thus as of 1850 the problem of finding the agricultural and industrial technologies needed to move the Global South to wealth and prosperity appeared solved. The technologies existed–in Britain. They could be easily transported–they were embodied in the capital goods made in the machine shops of Lancashire. Writing around 1850, Karl Marx saw 50 years as the time span for his bourgeois economic and political revolutions to spread as far as India–and thus set the stage for global socialist utopia.

Writing around 1850 and still writing so in the 1870s, John Stuart Mill saw the big economic problems as not ones of innovation and technological diffusion but rather of the demographic transition: The conscious human management of fertility was essential if technology was going to win its Malthusian race against population even in the Global North, and that required widespread cheap artificial birth control coupled with the dropping of the Victorian modesty that prevented public discussion of such “things”.

But Marx and Mill were wrong. The problems of the demographic transition turned out, in the long sweep of things, to be easy presuming successful development and income growth: They solved themselves within two generations after girls attained the leisure to learn how to read.

It was, rather, the problems of technological and institutional development and transfer that turned out to be the nastiest and most stubborn ones for the Global South. The U.S. was about twice as rich as China and India in 1800. It was 30 times as rich as they were at purchasing power parities come 1975. And, at least according to Hans Rosling and company, China and India were no richer in 1975 than they had been in 1800.

Why should this be the case in a world in which the technology was embodied in large hunks of metal shaped in the machine shops of Lancashire–hunks of metal that could be cheaply transported all over the world? Why did the 20th century see a world sharply divided between a Global North and a Global South, with productivity in the Global North growing at 2% per year while the Global South fell further and further behind?

What I believe to be the correct answer was given by W. Arthur Lewis (1977): The Evolution of the International Economic Order:

Lewis’s first step first step is to note nineteenth-century labor mobility. Between 1850 and 1914 more than 50 million people left Europe to settle elsewhere, and more than 50 million people left China and India to settle elsewhere. Racism and imperialism exclude Chinese and Indian migrants from settling in the temperate zone colonies and ex-colonies with agricultural profiles familiar to the relatively rich Europeans. Thus the need to pay wages high enough to attract migrants from Europe kept living standards in what Lewis calls the temperate zones of European settlement high, and kept the prices of the temperate-zone commodities that they alone could produce high as well.

Migrants from China and India went to the tropics. China and India were both then in the down-phase of the Malthusian cycle, with emigrants thus being willing to accept barely more than raw biological subsistence wages to move to the world’s Malaysias and East Africas. Their pressure pushed wages in tropical migrant-recipient economies down, and pushed the world market prices of the tropical-zone commodities that they made and sold down. That meant that even tropical economies that did not receive immigrants from China and India found their relative wage levels collapsing as well. Manaus, the capital of Amazonas in Brazil, looked to be getting rich providing services for the prosperous rubber tappers of the Amazon basin–until the British Empire brought Brazilian biologics and Chinese workers to the Malay Peninsula, and the world price of rubber collapsed.

Thus when Modern Economic Growth began in the last third of the nineteenth century, the world was then being rapidly divided by migration and the world labor market into a Global North producing high-price temperate and a Global South producing low-price tropical agricultural products. And it was in this world that first the fifth-generation technologies of the coal-steam-iron-cotton-machinery complex and then the knock-on Second Industrial Revolution technologies of modern metallurgy, internal combustion, electricity, and organic chemistry diffused.

And here something peculiar happened.

The overwhelming bulk of the labor required for Industrial Age factory-floor work is not high: “semi skilled” is the buzzword–which means a degree of familiarity with machine technology and the operations of the particular system, plus a willingness to accommodate your motions to those enforced by the system as a whole. It is the kind of thing but almost anyone can pick up any few months at most. No deep knowledge or understanding of the underlying processes and engineering mechanisms is required to be a productive assembly line worker. The high technology is embodied in the machines. And the machines can be cheaply shipped anywhere on earth. Yes, you do need a few engineers who understand the machines at a profound and comprehensive level. But, ever since the day in 1789 that the 21-year old [Samuel Slater][] sailed for America, finding qualified engineers willing to work as expatriates has not been an insurmountable problem.

You would imagine, therefore, that once the iron-hulled ocean-going screw-propellered steamship and the submarine telegraph cable had made their appearance, factory work worldwide would have rapidly gone to where labor was cheap. Yet from 1850-1980 that was not the case. Factory work by and large stayed where labor was expensive. And those economies that did manage to figure out how to utilize British Industrial Revolution and Second Industrial Revolution technologies at near-frontier levels of efficiency rapidly joined the club of rich economies that was the Global North.

In fact, up until the 1980s, with the important exception of the move of the textile industry from New England and Old England to the U.S. South and the European Mediterranean, outsourcing and offshoring were simply not things putting downward pressure in aggregate on the wages and prosperity levels of old industrial districts. For every job that left for, say, low-wage Korea or Taiwan putting downward pressure on wages, there was another job where rapidly rising wage levels in Japan or Italy putting upward pressure on Global Manufacturing wages. Before the 1980s it was rapidly increasing productivity in manufacturing coupled with a less than unit price elasticity of demand for staple manufactures that hollowed out the Global North’s old industrial disticts–not globalization.

So why was it that manufacturing stayed in the Global North for so long, given that the machines could be shipped anywhere, the skill required of the workers was not so high, and expatriate engineers (and managers) were cheap relative to the scale of operations?

Lewis (1977) provides his explanation:

In a closed economy, the size of the industrial sector is a function of agricultural productivity. Agriculture has to be capable of producing the surplus food and raw materials consumed in the industrial sector, and it is the affluent state of the farmers that enables them to be a market for industrial products…. If the smallness of the market was one constraint on industrialization, because of low agricultural productivity, the absence of an investment climate was another. Western Europe had been creating a capitalist environment for at least a century; thus a whole new set of people, ideas and institutions was established that did not exist in Asia or Africa, or even for the most part in Latin America, despite the closer cultural heritage. Power in these countries—as also in Central and Southern Europe—was still concentrated in the hands of landed classes, who benefited from cheap imports and saw no reason to support the emergence of a new industrial class. There was no industrial entrepreneurship.

Of course the agricultural countries were just as capable of sprouting an industrial complex of skills, institutions, and ideas, but this would take time. In the meantime it was relatively easy for them to respond to the other opportunity the industrial revolution now opened up, namely to export agricultural products, especially as transport costs came down…. And so the world divided…. It came to be an article of faith in Western Europe that the tropical countries had a comparative advantage in agriculture. In fact, as Indian textile production soon began to show, between the tropical and temperate countries, the differences in food production per head were much greater than in modern industrial production per head….

Trade offered the temperate settlements high income per head, from which would immediately ensue a large demand for manufactures, opportunities for import substitution, and rapid urbanization…. The factorial terms [of trade] available to them offered them the opportunity for full development in every sense of the word.

The factorial terms available to the tropics, on the other hand, offered the opportunity to stay poor-at any rate until such time as the labor reservoirs of India and China might be exhausted…

The key is that the technologies of the first British and the Second Industrial Revolution, as they developed, rapidly grew in productivity, scale, and capital intensity. You needed a large market in order to support an industrial complex at a scale capable of near-efficient production. And a poor economy with a poor middle class could not do the job from demand at home.

To recapitulate: If you were a rich, temperate zone economy with a high wage level, the market for your nascent manufacturing sector was all around you. As long as you could keep Britain (or later the United States) from sucking up all of the oxygen, your manufacturing sector could grow organically. And so you can gain the learning-by-doing expertise needed for successful industrialization, growth, and development to carry you to the world’s productivity and living standard frontier.

But if you were a poor, low-wage, tropical country, you could not. Your own citizens were too poor for your middle-class to be a source of mass demand for manufacturers. Thus successful economic development would require much more than import substitution.

It would require export promotion, and successful export promotion at that. You could not industrialize and develop by relying on your own home market. You had to borrow someone else’s. And as the twentieth century proceeded that turned out to be a tricky and a delicate task indeed.

TO BE CONTINUED

[Samuel Slater]: https://en.wikipedia.org/wiki/Samuel_Slater (Wikipedia: Samuel Slater

Must-Read: Jacob Vigdor et al.: Report on the Impact of Seattle’s Minimum Wage Ordinance

Posted on by Brad DeLong

Must-Read: Jacob Vigdor et al.: Report on the Impact of Seattle’s Minimum Wage Ordinance:

The typical worker earning under $11/hour in Seattle… earned $11.14 per hour by the end of 2015, an increase from $9.96/hour at the time of passage….

We estimate that the minimum wage itself is responsible for a $0.73/hour average increase…. The minimum wage appears to have slightly reduced the employment rate of low-wage workers by about one percentage point…. Hours worked among low-wage Seattle workers have lagged behind regional trends, by roughly four hours per quarter (nineteen minutes per week), on average…. Seattle’slow-wage workers did see larger-than-usual paychecks… but most… of that increase was due to a strong local economy…. At most, 25% of the observed earnings gains… can be attributed to the minimum wage….

For businesses that rely heavily on low-wage labor, our estimates of the impact… are small and sensitive to modeling choices…. Moreover, if there has been any increase in business closings caused by the Minimum Wage Ordinance, it has been more than offset by an increase in business openings.

Must-Reads: July 28, 2016

Posted on by Brad DeLong

Should Reads:

Must-Read: John Fernald (2014): Productivity and Potential Output Before, During, and After the Great Recession

Posted on by Brad DeLong

Must-Read: John Fernald (2014): Productivity and Potential Output Before, During, and After the Great Recession:

U.S. labor and total-factor productivity growth slowed prior to the Great Recession.

The timing rules out explanations that focus on disruptions during or since the recession, and industry and state data rule out ‘bubble economy’ stories related to housing or finance. The slowdown is located in industries that produce information technology (IT) or that use IT intensively, consistent with a return to normal productivity growth after nearly a decade of exceptional IT-fueled gains. A calibrated growth model suggests trend productivity growth has returned close to its 1973-1995 pace. Slower underlying productivity growth implies less economic slack than recently estimated by the Congressional Budget Office. As of 2013, about ¾ of the shortfall of actual output from (overly optimistic) pre-recession trends reflects a reduction in the level of potential.

The employment effects of a much higher U.S. federal minimum wage: Lessons from other rich countries

Posted on by David Evans

Overview

Not long ago, most U.S. economists agreed that a statutory minimum wage with any “bite”—any meaningful effect on wages at the bottom of the labor market—would cause job losses and lead to a reduction in aggregate employment opportunities for low-wage workers. But as a result of path-breaking research by leading economists (first David Card at the University of California-Berkeley and Alan Krueger at Princeton University, and then by Arindrajit Dube at the University of Massachusetts-Amherst and Michael Reich at University of California-Berkeley and their associates, that has changed. Today, a vast majority of economists now understand that modest increases in the (currently very low) federal minimum wage would have little or no effect on overall job opportunities for minimum wage workers.

Download File
The employment effects of a much higher U.S. federal minimum wage: Lessons from other rich countries

Read the PDF in your browser

But what about the effects of a sizable increase of, say, more than double the current federal $7.25-an-hour minimum wage? What would a wage floor of $15 an hour mean for low-wage workers and U.S. economic growth?

This policy brief documents big differences in the national statutory minimum wage floor across several other affluent countries compared to the United States. The analysis shows how these differences translate into very large consequences for the incidence of low pay and the buying power of low-wage workers—using a wide variety of data, including workers’ starting pay and the famous “Big Mac” index of burger prices at McDonald’s restaurants in these countries—and concludes by reporting evidence that these substantial differences in approaches to low pay across the rich world show no correspondence to standard indicators of employment performance.

In short: Neither employment nor unemployment rates reflect the vast gap between the United States and other rich countries that have all but outlawed the payment of extremely low wages by establishing legal wage floors far above the U.S. federal minimum wage.

The minimum wage landscape in affluent nations

Rich countries have taken dramatically different paths on setting a lower boundary for wages. Some, including Denmark and the Scandinavian countries, have relied on extensions of collective bargaining agreements to set legal wage floors. This obviously is not how the U.S. labor market operates, so the focus of this issue brief is on those nations with statutory national minimum wages.

First, consider France. The French minimum wage climbed from about 35 percent of the median wage for full-time workers in the 1960s to 61 percent in 2014. In contrast, the U.S. minimum wage floor was around 50 percent of the median in the 1960s but has since fluctuated between 35 percent by the late 1980s and 37 percent in 2014. Then there is Australia, where the minimum wage also fell—from 65 percent in the early 1990s to 53 percent in 2014—but only because the country’s median wage rose faster than the statutory wage. Canada’s minimum-to-median wage rate followed about the same trajectory as the United States from the 1960s to about 1990 and has since ranged between 40 percent and 45 percent of the median wage, where it is today—well above the United States. The United Kingdom introduced a statutory minimum wage only in 1999, and as the chart shows, its value has increased relative to the median from about 40 percent in 2000 (like Canada) to 47 percent in 2014 (slightly above Canada and far above the United States). (See Figure 1.)

Figure 1

Another way to compare the minimum wage across national borders is in terms of purchasing power. The minimum wage in Australia and France buys a lot more than in the United Kingdom and Canada, and substantially more than in the United States. In Australia and France, the purchasing power of their minimum wage was equivalent to $10.90 in 2015. The wage floors in the United Kingdom and Canada are much lower—about $8.15 in 2015—but still considerably higher than the United States, where the federal minimum wage was $7.24 (below $7.25 because the figure uses 2014 constant dollars and there was slight inflation between 2014 and 2015). (See Figure 2.)

Figure 2

But the take-home pay of minimum-wage workers depends on both taxes and the effects on eligibility for benefits. A recent report on the minimum wage by the Organisation for Economic Cooperation and Development put it this way:

Without effective co-ordination, minimum wage hikes may not result in significant income gains for the targeted individuals, especially in countries where tax burdens on low-wage earners are sizeable, or where means-tested out-of-work transfers provide a comprehensive income safety net.

The OECD’s estimates of the weekly working hours a minimum wage worker needs to keep a family out of poverty varies enormously, from 50-to-59 hours in the United States (depending on the type of family) to 31-to-38 hours in France, to just 7-to-19 hours in Australia. Given taxes and benefits, Canada and the Netherlands are more like the United States, Ireland and the United Kingdom are more like Australia, and France and Germany fall in the middle. A one-earner couple with two children in the United States, for example, would require 59 hours of minimum wage work a week to keep that family out of poverty compared to 53 hours in Canada, 41 hours in Germany, 38 hours in France, 20 hours in the United Kingdom, and 19 hours in Australia. (See Figure 3.)

Figure 3

We can also get a good idea of the relative purchasing power of the minimum wage in different countries by comparing the starting wages at McDonald Restaurants, which is closely associated with the national minimum wage in each country, and by calculating the number of Big Mac burgers a minimum wage worker can buy for an hours work (at the pre-tax wage). The starting pay for a crewmember in these fast-food restaurants is, indeed, highly correlated with the nation’s minimum wage. In 2014, for example, starting pay at the restaurant chain in Australia averaged $13.33 compared to the minimum wage $11.31. This compared with $11.84 (and $11.64) in France, and just $8.22 (and $7.25) in the United States. The takeaway is that, not surprisingly, starting pay for fast food workers is far higher in countries that have a higher national minimum wage. (See Figure 4.)

Figure 4

Not only is starting pay at McDonald’s extremely low in the United States compared to other rich countries, but so too is the price of a Big Mac relatively high in this country compared to other affluent countries. The combination of low pay and high prices means that the number of Big Macs a McDonald’s entry-level worker can buy is 3.8 in Australia, 2.5 in France and only 1.7 in the United States. The pattern is the same for workers’ ability to buy Big Macs at the national minimum wage: 3.3 in Australia, 2.4 in France, and 1.5 in the United States. (See Figure 5.)

Figure 5

The employment effects of the minimum wage in the United States and other affluent countries

According to conventional thinking, there are big wage-employment tradeoffs associated with a high minimum wage. As a result, while there may be some low-wage workers in Australia and France who will benefit from higher wages, many will be “priced-out” of a job. In this view, a higher minimum wage, together with higher rates of collective bargaining (among other factors) explains cross-country differences not only in the incidence of low pay, but in employment and unemployment rates for minimum wage workers.

If these so-called “labor market rigidities” price workers out of the labor market, then reducing the low-wage share of employment (via a higher minimum wage) should also reduce the low-education employment rate because young, less-educated workers should have a harder time finding and keeping jobs.

Yet the data offer little support for this orthodox tradeoff view. Rather, OECD data show that while there is a huge 14-percentage point gap in the low-wage share of employment between France (11 percent) and the United States (25 percent), the employment rates for young, less-educated workers are only moderately higher in the United States (57.4 percent compared to 54.9 percent). Similarly, Australia’s incidence of low pay is more than 10 percentage points below the U.S. level, but the low-education employment rate is more than 4 points higher, illustrating the lack of any statistical relationship across affluent countries between the incidence of low pay and the employment rate for less-educated young adults. (See Figure 6.)

Figure 6

But what about youth unemployment rates? There are two alternative unemployment rates that enable comparisons across countries. One is unemployment measured as a share of the labor force; the other is unemployment as a share of the working age population. Comparing these two measures in the United States and France and in the United States and Australia among young workers ages 15 to 24 shows no obvious correspondence between either measure and the level or trajectory of the national minimum wage.

First let’s look at the United States and France. If the conventional wisdom were correct, then United States-French youth unemployment rates should have sharply diverged. But what we see instead is considerable convergence. From 1997 to 2007 the French unemployment rate for 15-to-24 year olds fell dramatically, from 30 percent to 19.1 percent, while the U.S. rate increased from 11.3 percent to 12.8 percent, and France continued to close the unemployment gap between 2007 and 2010 (see Figure 7). This 1997-2007 convergence took place as the French minimum wage increased from 54 percent to 62 percent of the nation’s full-time median wage while U.S. federal minimum wage fell from 39 to 31 percent—exactly half the French ratio (see figures 1 and 2). Over the entire 1997-to-2014 period, the conventional French unemployment rate improved by 6.8 percentage points and the U.S. rate worsened by 2.1 points.

Figure 7

Figure 7 also compares France and the United States on a much better measure of youth unemployment: the unemployment-to-population rate. This indicator shows that these countries have tracked each other closely since 1983, with the rate in both countries fluctuating between 6 and 10 percent. In short, neither unemployment measure shows any evidence of the predicted divergence in French-U.S. employment performance.

Comparing these two unemployment-rate measures for Australia and France also fails to confirm the conventional tradeoff prediction. As in France, Australia has legislated a high minimum wage by international standards. (See Figures 1 and 2.) Yet, by both indicators, youth unemployment fell sharply between the early 1990s and the global 2008-2010 economic crisis—to levels below the United States. (See Figure 8.)

Figure 8

Other affluent countries provide much higher and more universal support for working families than the United States, in the form of health care, housing, education, and child subsidies. This means the legal wage floor must carry a much higher burden for maintaining minimally decent incomes for working families than in other rich countries.

Yet, as the data presented in this policy brief demonstrates, the United States is at the extreme low-end among affluent countries on the level of the minimum wage, whether measured in terms of buying power or relative to the median wage. (See Figures 1 and 2.)
As a result, after taking into account taxes and benefits, it typically takes a minimum wage worker six to seven times as many hours of work per week to keep a lone parent or two child family out of poverty compared to the United Kingdom or Australia (50 hours versus 7 or 8 hours). (See Figure 3.)

This gigantic gap in the payoff to working at the minimum wage for U.S. workers can also be illustrated by the much lower starting pay at McDonald’s franchises, and the far fewer Big Macs a U.S. worker at McDonald’s can buy with an hour’s work than her counterparts in other rich countries. (See Figures 4 and 5.) At the same time, standard measures fail to show the predicted worsening of youth employment performance between the United States and countries that set a much higher legal wage floor, such as Australia and France. (See Figures 6, 7, and 8.)

All of this international evidence strongly suggests that, properly designed and implemented, much higher living standards are possible for working families in the United States by setting the federal minimum wage far above the current level of $7.25 without affecting overall employment opportunities for minimum-wage workers.

—David Howell is a professor of economics and public policy at The New School in New York City. This note reflects and builds on the material that appears in the Washington Center for Equitable Growth working paper, “What’s the Right Minimum Wage? Reframing the Debate from ‘No Job Loss’ to a ‘Minimum Living Wage,” co-authored with Kea Fiedler and Stephanie Luce. Special thanks to Kea Fiedler for her work on the McDonald’s data.

Photo by Remy De La Mauviniere, Associated Press

Does a higher U.S. minimum wage hurt employment? A look abroad for answers

Posted on by Bridget Ansel

With a growing number of state and local governments in the United States raising their minimum wage, policymakers in Washington are once again examining the possible consequences of raising the federal minimum wage. While experiences of states and cities around the country will undoubtedly inform the debate, it is also helpful to look at other affluent countries where the federal minimum wage is much higher in order to better understand the effects on individual well-being and the economy on a national level.

A new issue brief by David Howell, a professor of Urban Policy at the New School, does just this. Drawing from recent his working paper (with co-authors Stephanie Luce of The Graduate Center, CUNY and Kea Fiedler of the New School) on the subject, Howell compares the U.S. minimum wage (which currently sits at $7.25 an hour) to those of other affluent, Western nations, using a variety of metrics before comparing these countries’ employment levels.

In his analysis, Howell first looks at the minimum-to-median wage ratio, which economists use to assess the strength of the minimum wage. A minimum wage that is substantially lower the the median wage means that the bottom of the wage distribution is falling further behind the typical worker in the middle of the wage distribution. While the United States is not alone in seeing a decline in this ratio, it does have the distinction of having the lowest minimum-to-median wage rate among the five countries Howell examines: The minimum wage in the U.S. is worth only 37 percent of what the median worker earns per hour. (See Figure 1.)

Figure 1

Howell also looks at the purchasing power of the minimum wage by comparing the starting wages at McDonald’s restaurants (whose starting pay tends to closely align with the minimum wage), calculating the number of Big Macs a worker can buy with an hour’s pay. He finds that starting pay is not only comparatively low in McDonalds in the United States, but the price of a Big Mac is also high. This means a U.S. worker can buy only 1.7 Big Macs an hour compared to 2.5 in France in 3.8 in Australia, for example. (See Figure 2.)

 Figure 2

On top of that, the United States lacks the kind of robust social supports that other countries provide for working families, meaning that one’s income plays a larger role in a family’s well-being in the United States compared to its affluent, Western counterparts. Minimum wage workers in the United States, therefore, have to work extraordinarily long hours—59 per week—to keep a two-child family out of poverty (if they are part of a single-earner couple). This long workweek is significantly higher than many other affluent nations (See Figure 3.)

Figure 3

But what does a low minimum wage mean for the overall economy? Howell points out that the “conventional wisdom” states that “there are big wage-employment tradeoffs associated with a high minimum wage.” Those who adhere to this kind of thinking believe that employers may compensate for the extra labor costs by hiring fewer people. That means that some low-wage workers, particularly those who are young and less-educated, are shut out of a job and overall employment levels are lower. Yet Howell’s international comparison finds scant evidence for such a tradeoff. (See Figure 4.)

Figure 4

 

And even when he looks specifically at the youth unemployment rate, Howell finds that there is no notable difference between the United States and other nations with much higher minimum wages. Discussing France and Australia, he notes that the two countries have “legislated a high minimum wage by international standards, yet, by both indicators, youth unemployment fell sharply between the early 1990s and the global 2008-2010 economic crisis—to levels below the United States.”

The only difference Howell finds is that, intuitively, the United States has a higher share of low-wage workers relative to the overall working populations. These results suggest that a country’s employment levels are more affected by other non-minimum wage related factors. As U.S. policymakers weigh the consequences of a higher minimum wage at the national level, a look at the experiences of other nations demonstrates that the minimum wage is one of many elements that affect a nation’s employment levels.