Labor Day: Of Nine OECD Members with a Higher Minimum Wage than U.S., Seven Have Lower Unemployment Rates

When Michele Bachmann says she would “consider” lowering the minimum wage, she tapped into the long-standing theme of conservative economists that the minimum wage is a job-killer. The only problem is, careful statistical research has shown that this simply isn't true. In the 1990s, economists David Card and Alan Krueger demolished the methodologies of prior statistical studies showing a negative impact as well as conducting original research comparing low-wage employment within a two-state metropolitan area when one state raised its minimum wage, finding no negative impact. (A useful summary of Card and Krueger's long-run influence on the debate can be found in a post by Arindrajit Dube at Rortybomb [h/t Mark Thoma].)

 

But another way of showing the lack of a negative effect, following my “Labor Day” theme of international comparisons, is to look at the minimum wage and unemployment rates among the industrialized democracies of the Organization for Economic Cooperation and Development (OECD). Only 21 of the OECD's 34 members have economy-wide minimum wage rates, as shown in the table below. This shows the “real” (inflation-adjusted) hourly minimum wage for each of the 21 countries, expressed in 2005 U.S. dollars and adjusted for each country's price level in a measure called “purchasing power parity” or PPP. (Under straight exchange rates, Belgium, France, Ireland, Luxembourg, and the Netherlands all have minimum wages above $10 per hour in 2005 dollars.) The data are for 2008, the most recent year available. Unemployment data are for June 2011, the most recent month available for most of the countries (exceptions are noted in the table).

In this list, the United States comes in with only the 10^th highest minimum wage of the 21 countries. This is true even after the increase to $7.25 in 2009, which comes to $6.26 in 2005 dollars. In addition to the five countries mentioned above, Australia, Canada, New Zealand, and the United Kingdom have a higher minimum wage than the U.S. If the story told by Michele Bachmann and conservative economists were true, we would expect that they would all have higher unemployment rates than the U.S. In fact, however, only France (9.8%) and Ireland (14.3%) are higher, while the other seven have lower unemployment rates, ranging from 1.4 points lower (UK) to 5.1 points lower (Netherlands). We should remember from my last two posts in this series that all of these countries have stronger employment protections than does the United States, and that only France has lower union density.

Real hourly minimum wages

Data extracted on 09 Sep 2011 00:21 UTC (GMT) from OECD.Stat

Frequency		Annual
Series		In US$PPP
Time		2008
Country
Australia		8.59   4.9%
Belgium		8.23   7.4%
Canada		6.43   7.4%
Czech Republic		2.99    6.5%
France		8.79   9.8%
Greece		4.86   15.0% (March 2011)
Hungary		2.61   9.9%
Ireland		7.55   14.3%
Japan		5.22   4.6%
Korea		4.36   3.3%
Luxembourg		8.95   4.3%
Mexico		0.79   5.8%
Netherlands		8.22   4.1%
New Zealand		6.99   6.5% (Q2 2011)
Poland		3.21    9.5%
Portugal		3.31   12.5%
Slovak Republic		..        13.4%
Spain		4.07   21.0%
Turkey		2.96   9.3% (May 2011)
United Kingdom		8.06   7.8% (May 2011)
United States		5.59   9.2%

Notes: Unemployment rate is for June 2011 unless otherwise noted. U.S. minimum wage rose to $6.26 in 2005 dollars with the 2009 increase to $7.25 in nominal dollars. The Slovak Republic's minimum wage was $1.36 in 2006, the most recent year available.

Source: http://stats.oecd.org/Index.aspx

For 2008 real minimum wage in US$ purchasing power parity, click on “Labour,” then “Earnings,” then “Real hourly minimum wages,” then adjust the “Series” to “In US$PPP.”

For June 2011 unemployment rates, click on “Labour,” then “Labour Force Statistics,” then “Labour Statistics (MEI),” then “Labour Force Statistics (MEI),” then “Harmonized Unemployment Rates and Levels (HURs),” then adjust the “Subject” to “Harmonized Unemployment Rate (HUR).”

 

Raising the minimum wage would add to the purchasing power of many people who will spend their money at a time when the economy sorely needs demand, as economist Heidi Shierholz of the Economic Policy Institute points out. Meanwhile, the best research shows that a higher minimum wage does not destroy jobs as economists generally thought before Card and Krueger's work. The data presented here shows that American workers at the bottom of the wage scale earn less than their counterparts in a number of other countries, and overall those countries do not see more unemployment as a result. We should, therefore, resist any calls to lower our minimum wage.

Labor Day: U.S. Has Fifth Lowest Union Density in the OECD

As was reaffirmed by Vice-President Biden on Labor Day, the American middle class was originally built by the labor movement. That unions have been declining in this country for decades is not exactly news. But where does the U.S. stand relative to the other industrialized democracies of the Organization for Economic Cooperation (OECD)? The obvious measure of the strength of the labor movement is the proportion of the workforce that is unionized, usually referred to as union density (although it is well known that the French labor movement is far stronger than its low union density would suggest).

The short answer is that the U.S. ranks 30^th of the 34-member OECD. U.S. union density stood at only 11.4% in 2010, significantly below the OECD average of 18.1% last year. The only OECD countries with a lower proportion of labor organized are Estonia (8.0%), France (7.6% in 2008), South Korea (10.0% in 2009), and Turkey (5.9% in 2009).

Examining some of the data, we see that the U.S. is not alone in seeing a decline in union density:

Country                       Density 1999          Density 2010

G-7

Canada                       28.1%                    27.5%

France                          8.1%                      7.6% (2008)

Germany                     25.3%                    18.6%

Italy                            35.4%                     35.1%

Japan                          22.2%                     18.4%

United Kingdom           30.1%                     26.5%

United States               13.4%                     11.4%

Other Countries

Australia                      24.9%                     18.0%

Finland                        76.3%                     70.0% (highest density in 2010)

Ireland                         39.0%                      30.7% (2009)

Sweden                       80.6%                      68.4% (highest density in 1999)

OECD Average             21.0%                     18.1%

Source: http://stats.oecd.org/Index.aspx, then click on “Labour,” “Trade Union,” and “Trade Union Density.”

The reasons for this general trend are in dispute, though globalization is one likely culprit. I'll have to leave that debate for another time.

For now, I simply want to emphasize how low the American unionization rate is, and how that bodes ill for the middle class. We are, of course, currently seeing an attack on public sector unions in many states, which threatens tens of thousands of middle class jobs and reduced pay and benefits for hundreds of thousands of workers.

To end on a more positive note, it's interesting that Canada, a country like the U.S. in many ways (in particular, economists would describe as both relatively “labor-scarce” by global standards, an issue I will discuss in more detail in future posts), has not seen the same sort of deterioration in union density that the U.S. has. Paul Krugman, in The Conscience of a Liberal, makes a great deal of this comparison to argue that union decline in the U.S. was not inevitable and could be reversed. I hope he's right.

Labor Day; U.S. Has Weakest Employment Protections Among OECD and BRICS

This is the first in a series of posts on the sorry state of American labor. International comparisons make this very clear. U.S. workers are more vulnerable than workers in any Organization for Economic Cooperation and Development (rich industrialized democracies) members or even the BRIC countries (Brazil, Russia, India, and China, with Estonia, Indonesia, and South Africa included as comparisons for good measure) to being fired unfairly, to not getting severance pay, to getting the least notice on mass layoffs or being fired, to being stuck on a mouse wheel of temporary positions, altogether a total of 21 measures that the OECD used to determine how well workers' rights at work are protected.

Not only is the United States in last place, it isn't even close. In the oldest version of the OECD's employment protection measure, for which data goes back to 1985, the U.S. score in 2008 was 0.21, unchanged since 1990. The next lowest were Canada and the United Kingdom at 0.75, while the other G-7 countries clock in with Japan (1.43), Germany (2.12), France (3.05), and Italy (1.89). Note that this measure uses only 14 elements; the full 21-element version begins only with 2008. The OECD considers the newer measure better, and the United States, while still last, does not lag quite so badly: U.S. (0.85), Canada (1.02), U.K. (1.09), Japan (1.73), Germany (2.63), France (3.00), and Italy (2.58). The unweighted OECD average on the new measure is 2.24 in 2008, while Brazil is 2.27, Russia 1.80, India 2.63, and China 2.80.

Employment Protection in 2008 in OECD and selected non-OECD countries*

Scale from 0 (least stringent) to 6 (most restrictive)

Source: OECD


The bottom line is that American workers enjoy the least protection out of all major economies in the world. Protections against individual firing, collective dismissals, and ability to get off temporary employment are as weak as they can be. Happy Labor Day!



Data notes: The basic methodology (with a link to the full methodology) is here. 

The raw data for these measures is at OECD StatExtracts, then click on “Labour” in the left-hand menu to expand the category, then “Employment Protection,” and finally “Strictness of employment protection – overall.”

Inflation is Neither as Boring Nor as Simple as it Seems

One nice thing about Dean Baker's new book, The End of Loser Liberalism, is that it puts the Federal Reserve Bank and inflation under the microscope. This is important and valuable, because too many people wrongly take it for granted that inflation is always a bad thing. To give an example, one graduate level textbook in international political economy that I use (Ravenhill, ed., Global Political Economy) has a chapter discussing theories of how different actors form their preferences about free trade (for or against), exchange rates (fixed or floating, high or low), etc. Notably missing is any discussion of why different people might favor higher or lower rates of inflation. The chapter author simply presumes that inflation is bad.

Yet once upon a time, average middle class people understood the significance of international monetary arrangements and inflation on their lives. These were the people to whom William Jennings Bryan's famous 1896 “Cross of Gold” speech was addressed. Farmers understood that the gold standard was harmful to their interests because it forced low inflation and even deflationary policies that made their debt burden worse. They wanted the dollar backed by both gold and silver (“bimetallism”) in order to have a larger money supply and higher inflation.

The first modern work of which I am aware that discusses who wins and who loses from inflation is William Greider's Secrets of the Temple. (For a fairly recent interview with Greider, see here.) The first level of the story is the easiest. It's hard to see how hyperinflation benefits anyone (though the historical memory of Germany's hyperinflation gave us the Bundesbank with its constitutional mandate to control inflation with no reference to unemployment and ultimately gave us a European Central Bank blindly following deflationary policies). Extremely rapid increases in the price level are so destructive that they outweigh the second factor, which holds in normal times: inflation benefits debtors, who get to pay their debts with cheaper dollars; and it conversely harms creditors, who receive those cheaper dollars.

But who are the debtors and creditors? In general, of course, lenders are wealthier than borrowers. Broadly speaking, older people lend to younger people. Thus, moderate levels of inflation transfer wealth from richer to poorer and older to younger. They make it easier for the middle class to build up assets like home ownership, and more generally for the economy to expand to full employment.

As Greider argued and Baker agrees, the decision to target a particular inflation rate is a highly political one with Fed decisions making it generally more difficult to reach full employment or the bargaining power full employment would give to workers. While the Federal Reserve Board officially has a dual mandate to promote both employment and price stability (in contrast with most central banks which, Baker points out, are responsible for price stability alone), in practice it has done little to promote employment even in the current jobs crisis, whereas it has frequently moved to raise interest rates when unemployment rates were quite high. Baker, as did Greider before him, argues that it is crucial to bring the Fed under more democratic control. Baker concedes that institutional reform of the Fed is a long way off, but argues that in the meantime progressives need to step up public pressure on the Fed to do something about unemployment, comparable in volume to the non-reality-based screams from the Right that what little the Fed was doing would set off massive inflation.

What was news to me, though, is that the Fed refunds to the U.S. Treasury the interest it earns on its assets (primarily “government bonds and mortgage-backed securities”), to the tune of $80 billion in fiscal year 2010. Baker suggests that if, instead of selling these assets off as planned over the next 10 years, the Fed holds on to them, the Treasury will save about $600 billion in interest payments over the period. This is almost equal to the revenue that will be gained by letting the Bush tax cuts for the wealthiest 2% of Americans expire.

Baker's main point is quite sound: progressives need to pay a lot more attention to the Fed than they have, and they have to amplify the voices of the few economists who have called for the Fed to announce that it wants a higher rate of inflation than 2%. The stakes are too high, and the general lack of knowledge means that there is quite a bit of room for organizing to make progress if the information gap is closed.

Link to liveblog and video of yesterday's talk in Raleigh

One of the sponsors of my talk yesterday, NC Policy Watch, put up a liveblog and video from the event. The volume is a little low, so you will need to crank it up on your computer after the 30-second ad at the beginning. You can find the presentation here.

Thanks to NC Policy Watch and the NC Budget and Tax Center for organizing this lively event.

Speaking in Raleigh on Wednesday

Wednesday I'll be speaking at noon in Raleigh, NC, as part of North Carolina Policy Watch's "Crucial Conversations" series. This talk will focus on my book, Investment Incentives and the Global Competition for Capital, and emphasizing policies needed to control subsidies for investment. I would say that there are three main ones:

Transparency: Taxpayers have to be able to see what governments are spending to attract investment. North Carolina right now is suffering from a problem with a proposed investment seeking incentives, but there is no disclosure of the company or the nature of the project.

Anti-piracy rules: States need to prevent cities, and the federal government needs to prevent states, from giving subsidies to move an existing facility from elsewhere. See earlier posts on "job piracy."

Restrictions on incentives by prosperous areas: Keeping deep pockets jurisdictions entirely out of the bidding for investment helps channel new investment to poorer areas and reduces what poorer areas have to pay. Very ambitious, but I think it is an important long-run goal.

I'll be back to regular posting by Thursday.

$11 million per job? Is that even possible?

The Las Vegas Review Journal reports that Sempra Energy received $55 million in federal tax credits and state incentives to build its 48-megawatt Copper Mountain Solar Facility in Boulder City, Nevada. This is the largest facility of its kind in the country. While construction of the project required 350 people, both sources say that only 5 permanent jobs were created. That would mean each job cost taxpayers $11 million! I've never heard of a cost per job that high in all the time I've been writing about subsidies. A couple of million per job for data centers, I've heard of that. But over $10 million per job? I'm flabbergasted.

I wonder if that is even possible. How do you run a 48MW power plant with 5 people? I understand that it just sits there collecting the desert sun during the daytime. Doesn't it need 24-hour security? Doesn't it need maintenance from time to time? Couldn't some of the 775,000 solar panels suffer damage sometime? Even a few more jobs would quickly lower the per-job cost.

Consider this a plea for help. The energy industry is not my specialty. So, if anyone knows more about solar plants, or Nevada, or especially this project, please let me know what a reasonable level of employment would be, either in the comments of by email. Thanks in advance.