People. On all sides. Please.
Let's remember what we've got here. Productivity is output per labor hour.
On the left, you really don't want to argue that people should be earning their output per labor hour. Just stop and think of what that entails for other factors of production.
So why cite productivity? Because so far we have not come up with a good way to calculate the marginal revenue product of labor and publish regular statistics on it. We certainly don't have a good way to do that for the marginal revenue product of the group of workers earning around the minimum wage. But these metrics ought to grow together, right? Marginal revenue product of labor and productivity ought to move around in the same ways.
So I maintain (and Elizabeth Warren appears to maintain), that it's a good metric to keep track of. And indeed, productivity growth has been closely related to wage growth (until recently, where there have been some interesting divergences). I see the EPI graph looking at the growth of the minimum wage if it grew with productivity and think "Gee - that's really interesting. We always talk about the real minimum wage, but that's actually incomplete - productivity growth is important for thinking about whether a minimum wage is binding at a given point in time. A steady real minimum wage ought to be progressively less binding over time."
I don't agree with Warren on everything, but she's a smart cookie.
I don't think she wants a $22 minimum wage. Exhibit A in evidence is that (as far as I'm aware - correct me if I'm wrong) - she's never said she wants a $22 minimum wage. That's an awkward little factoid that no salacious post title at Huffington Post or Daily Kos is going to undo (again - correct me if I'm wrong on this).
She's a very intelligent person. I imagine she sees the EPI/productivity graph in much the same way I do - as indicative that workers have been losing some ground and that a given real minimum wage is less binding now than it was several decades ago when worker productivity was lower.
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as indicative that workers have been losing some ground, BECAUSE?
ReplyDeleteas indicative that workers have been losing some ground, BECAUSE?
ReplyDeleteJust a procedural comment - could you perhaps provide a bit of context in posts like this, for the benefit of your non-US readers? Disconnect between productivity and wage growth is an interesting issue, yet I don't follow US politics that closely (politics in my home country is screwed up enough), so I had to look up what's this all about :)
ReplyDeleteWe must be coming from very different colors on the economics spectrum--around these parts, productivity generally means TFP, or the residual of usually a Cobb-Douglas production function with capital and labor included. The classic way people measure productivity is in terms of value added (firm revenue = A workers^a capital^b), which gives you the marginal revenue product of labor. Also, I am too thick to understand what you are implying about why we wouldn't want to pay labor its marginal product, as would be the case in a frictionless market.
ReplyDeleteNo, we are coming from the same place. But the statistics that the BLS collects and labels "productivity" that have been used in these discussions is output per hour.
DeleteAs you rightly point out - that is not what we think about as economists as being equal to the wage rate for a profit maximizing, competitive firm.
That's the issue here - the data we collect isn't really the same as the theory we would presumably use to make bolder pronouncements.
So think of what the measured "productivity" is.
It's [A*L^a*K^b]/L. This is not equal to a*A*L^a-1*K^b. Indeed, the latter is a stable fraction of the former in the Cobb Douglas case.
I still think the BLS productivity measure is useful, but people need to be careful about taking it as what people should be earning.
Ok, I see. Thanks for the clarification.
DeleteWhere are you from, Ivansml?
ReplyDeleteAnd you make a good point, Daniel Kuehn. While Senator Warren did her homework on economics, the point about her making an observation (that the U.S. minimum wage should be US$22 an hour in 2012 if it had kept up with productivity from the 1960ies onwards, and citing the testimony of an economist from UMass Amherst for support) and not a policy recommendation was totally overlooked by me. Even though I'm sympathetic to her political dispositon.
I come from a country far away across the seas and mountains, a land of magic and wonders where governments bring growth by imposing austerity and stop bank runs by reneging on deposit insurance, a.k.a. the Europe (one of smaller central-European countries to be more precise).
DeleteOK let me try it this way Daniel:
ReplyDelete(1) You and Warren are arguing that a minimum wage right now of $22/hour would arguably be no more "interventionist" or mess up the labor markets more, compared to the actual minimum wage in place in 1968, right? And since we didn't see a huge unemployment problem in 1968, presumably it wouldn't be awful right now, right?
(2) So I conclude that either you think there should have been a lower minimum wage in 1968, or you don't see what the big deal would be if right now we had a minimum wage of $22/hour.
Do you agree with the above? If so, I will amend my future complaints and specifically say you are nuts for believing (2).
(1.) no (well at least I'm not arguing that) - and I don't think she is. I think you're assuming she is interested in the same questions and claims that you are and I don't think she is.
Delete(2.) It would be a huge deal. Minimum wage increases of the scale we've been seeing don't seem to have a big effect. That means in reality they have a positive effect in some local labor markets and a negative effect on others. If we are sort of in that negligible effect region (or more realistically - somewhat into the negative effect region), then a $22 minimum wage is going to pose unemployment problems pretty much everywhere.
DK wrote: "(1.) no (well at least I'm not arguing that) - and I don't think she is. I think you're assuming she is interested in the same questions and claims that you are and I don't think she is."
DeleteI don't quite understand what it is that you and/or Warren *are* arguing. I don't mean this rhetorically or anything: I really don't quite understand what you are trying to say in/with your posts.
"So I maintain (and Elizabeth Warren appears to maintain), that it's a good metric to keep track of."
DeleteOkay, but she appears to be saying more than this, no? If it was just this, okay, but it would be a weird thing for her to just make this point. It'd be like in the middle of an argument she were to point out that whales are mammals, not fish. Yes, it's true, but also uncontroversial and not particularly relevant for the discussion at hand.
I guess it just seems to me that with what she is saying she is suggesting or implying that a 2013 $22 minimum wage would in some important sense be similar to the actual 1968 minimum wage. I mean, what else could she be saying or intending (this too I don't mean rhetorically).
Throw me a bone here Narrator. What's unclear? A lot has been written on the minimum wage, the EPI report, Warren - both here and over at Bob's blog (do you follow him?).
DeleteSurely you're not completely in the dark as to what I think. If you're completely in the dark I don't know what else I can do.
As for Warren and productivity:
DeleteI don't know if she actually understands that productivity is not the same thing as the marginal revenue product of labor and why that's significant.
But she sure doesn't seem like she's proposing a $22 minimum wage, so it seems to me she's just saying productivity growth is important to consider as well as the real value of the minimum wage if we're going to talk about whether or not increasing the minimum wage is a major imposition of labor on employers.
"I imagine she sees the EPI/productivity graph in much the same way I do - as indicative that workers have been losing some ground"
DeleteThat's possible, but it's not very clear to me in what way and to what extent the EIP/productivity graph is evidence for a reasonable answer to that question.
"she's a smart cookie.
DeleteI don't think she wants a $22 minimum wage. Exhibit A in evidence is that (as far as I'm aware - correct me if I'm wrong) - she's never said she wants a $22 minimum wage. That's an awkward little factoid that no salacious post title at Huffington Post or Daily Kos is going to undo (again - correct me if I'm wrong on this)."
a less charitable reading would be: "Yes, she is really smart, so smart that she knows not to *say* that minimum wage earners shouldn earn $22 an hour or even just that the 2013 equivalent of a 1968 minimum wage truly is $22, but still wanting to be able to provoke the moralistic / populistic outrage that would follow if that claim were actually true.
In this interpretation, she'd be using her smarts for the sake of being a very careful but very effective moralistic / populist politician
Its sort of unfair that she framed this around 1968 when real minimum wages hit there high (see http://www.infoplease.com/ipa/A0774473.html) and takes it forward from there. Any other starting point makes the gap between real minimum wages and productivity growth narrower. The actual data since 1968 is a 3.5% nominal growth and a -0.8% real growth in minimum wages. If you truncated that to since 1989 (Bush I) you get 3.4% nominal growth and 0.7% real growth, so some meaningful compensation for productivity growth. Stated that way, she really is trying to correct for a problem that happened more than 20 years ago between 1968 and 1989 when the minimum wage fell by 2.4% per annum. I would argue again that since she frames the discussion around the high in real minimum wages, any time horizon from there is going to have negative real growth and that will seem unfair because we will also have had positive productivity growth over that horizon.
ReplyDeleteObviously, I meant that minimum wages fell by 2.4% in real terms between 68 and 89.
DeleteThanks for doing the leg work on some of that.
DeleteI imagine she picked 1968 because CEPR and EPI did, but perhaps they could have picked a better year. It's not because that's the start year of productivity... those stats go back to 1947.
in the other thread you wrote: "Actually advocating a minimum wage of $22 would require the translation of economy-wide average productivity rates to the marginal productivity of a much narrower class of workers. That is quite a stretch, which I think is precisely why nobody has advocated a $22 minimum wage."
ReplyDeleteYes, but Warren isn't as careful as you are here in separating *economy-wide average* productivity rates and growth from productivity growth at the minimum wage level. She says: "As productivity goes up, that is, as workers are producing more, then the minimum wage is gonna go up *the same*. And if that were the case, the minimum wage today would be about $22 an hour. So my question mr. something, with a minimum wage of $7,25 an hour, what happened to the other $14,75?"
So she herself ties the average productivity growth to the productivity growth at the minimum wage level by saying the minimum wage would go up the same. So she's not saying for example that if the economy-wide average productivyt goes up by e.g. 100% it may still be the case that the productivyt at the minimum wage level only goes up by about say 10$, no, she says the minimum wage goes up "the same", and then in the next sentence she makes this even more explicit by aksing what then happened to the $14,75.
It seems to me that it is perfectly natural to interpret her as saying that the actual 1968 minimum wage when raised by the same rate in productivity growth would be $22 today, and from that it seems quite reasonable to interpret her to mean that a $22 would not be unreasonable right now.