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Tuesday, July 15, 2014

Piketty on the minimum wage

A lot going on with the minimum wage lately, but I will contextualize it first with Thomas Piketty's analysis in Capital in the Twenty-First Century, pp. 308-313. I'll have more to say about other parts of the book later, but for now it's important to remember that one of the keys to the book's success is that it is built on a gigantic trove of long-term data. His French wealth data, for example, goes all the way back to the immediate aftermath of the French Revolution! (Speaking of which, it's Bastille Day as I write this.)

Piketty writes in this section about increasing labor income inequality in the United States and the importance of labor market institutions in affecting wages in the medium term even as education (though see Jeff Faux's dissent in The Servant Economy) and technology are the keys to the long-run wage possibilities. He counterposes the steady increase in the real (i.e., inflation-adjusted) value of the French minimum wage since 1950 to the decline of the real U.S. minimum wage since it peaked in 1969 at $10.10 in 2013 dollars. At $7.25 today, it is a full 28% below its peak, and 1/3 less than the current French minimum wage at purchasing power parity in 2013 (see, search "data by theme" and select "labour," then "earnings," then "real minimum wages," and set the series to "US$PPP" and the pay period to "hourly.")

This decline of the real value of the minimum wage is why Piketty argues that an increase in the U.S. would make sense, much more so than in France. At this low level, there is much less danger of a negative impact on the number of jobs. His key insight is that if wages are too low, that itself causes economic inefficiencies and can even create inefficiencies for the firm. In particular, if wages are too low, it can cause workers to acquire fewer firm-specific skills than would be optimal for the employer. This would seem to hold economy-wide as well: if the general wage level is too low, workers have less incentive to acquire skills that would make them and the economy as a whole more productive. Additionally, Piketty argues that employers' superior bargaining position and the absence of "pure and perfect" competition in labor markets justifies the limits on companies' power embodied in the minimum wage.

The minimum wage has also been in the news this month. The biggest story is that for the first time Germany has adopted a minimum wage effective in 2015, set at €8.50 ($11.60) an hour. This was the price Angela Merkel had to pay to bring the Social Democratic Party into her governing coalition. In addition, the minimum wage in the future will be set by a national commission made up of labor and business representatives.

Finally, a new study by the Center for Economic Policy Research finds that the 13 states that raised their minimum wage on January 1 had higher rates of job growth (0.99% vs. 0.68%) through May 31 than the 37 states that did not raise their minimum wage. While the study does not claim to be definitive, it is one further piece of evidence that the minimum wage is not a job killer at the levels seen currently in the United States.

Cross-posted with Angry Bear.


  1. First, the study does not look at growth before the minimum wage went into effect. Did growth increase after the minimum wage increase, or decline, but continue to be better than average.

    Second, if you actually plot growth vs. the increase in the minimum wage, there is a slight uptick with small increases, and then grown declines considerably with large increases -- completely crashing in the State with the largest increase, New Jersey.

  2. I find it odd that the expansionary effects of raising the MW are so under-stressed. Adding liquidity to an under-consuming market will only increase employment (and demand), even after some job shifting is accounted for. Not raising the MW would seem to be economic malpractice in the present circumstances.

  3. The appropriate minimum wage level is bracketed by two values: First is the per capita GDP, which is the average value of goods and services produced per person in the country. For the US this was $53,143 in 2013. This is the upper bound of the minimum wage as setting a value higher than this is mathematically impossible. For a 2000hr/yr work year, this would come to $26.57/hr. While this is of theoretical interest, it is not of practical interest as the minimum wage is no where near this value. The lower bound is of more interest because that is what the minimum wage is concerned with. Which goes to the question of: what is the purpose of the minimum wage? If it is to allow a standard of living for a full time job that keeps people out of poverty then that should be the lower limit. For a family of four the poverty income level was $23,550 in 2013. Interestingly this is just less than half the per capita GDP, so we're talking about a fairly narrow range here. If someone worked the supposed 2000hrs to earn this much that would be $11.78/hr. So, I would suggest that this is a reasonable value for the minimum wage.