This is going to be a strange post. I’ve been battling a flu, so my mind is a little less rule-bound, a little more fluid (no pun intended). I stumbled upon this article at ECONLOG: Robert Murphy on the Minimum Wage. From a liberal perspective, the minimum wage guarantees a bare minimum income so you can survive with a job. From a conservative (and economic) perspective, set that wage too high, and some people will be out of work. To use an extreme example, think of the minimum wage at $100,000/year. You’ll see a lot more automation in fast-food restaurants and supermarkets (among other places); and a lot less hiring.
We think of a job as good for you. It builds confidence, gets you out of the house, helps you keep your skills. A minimum wage as low as $5/hour wouldn’t throw anyone out of work though, would it? Well, that’s if you think in terms of national averages. But there are depressed areas in the country where low-skilled jobs may pay less than $5/hour per the market. Wouldn’t it be good to get them at least working? I wouldn’t be so cold-heart-ed as to allow full-time workers to subsist at $5/hour. We should make the earned-income-tax credit robust enough that a super-low-wage job can still allow someone to live, but not destroy the incentive to gain skills and move up the wage chain. This used to be the situation in Germany before July 2014 (no minimum wage, lots of subsidies).
Remembering a post I did yesterday on inflation in asset prices vs. labor, central bank policy influences nominal gross domestic product (NGDP). But if the Fed grows NGDP by 5% per year as Scott Sumner wants, and unlike it has been able to do since 2008, then asset prices could skyrocket. Lots more labor (China and India) and not-much-more capital (share buybacks) will mean stocks inflate a lot while wages inflate a little. NGDP is a closer measure of wage inflation, so continuous 5% NGDP growth could mean much-higher stock prices (maybe the market already expects this, which is why valuations are soaring).
But that increased income won’t go equally to everyone. If you’re unskilled living in Appalachia, your wages may remain stagnant. If you’re a software engineer in Silicon Valley, your wages could jump (unless we get better at connecting Indian software engineers to our economy). In a sense, we each have our personal rate of inflation. I know a lot of people whose wages have stayed the same or remained stagnant since 2008. Mine are more than double. Why? My skills as a data analyst are in solid demand. That means I increase my debt (hey, the good times keep getting better), buy more house (why not? things are good) and buy more equities (what else will I do with all that extra cash?).
On the other hand, someone just scraping by without any wage increases will be doing the opposite. Downsize house, sell assets (if he even has them) and pay down any debt (or just keep afloat).
What should you do in this environment?
You want your personal rate of inflation to be higher. Make sure you’re getting the right skills (or combination of skills) to demand premium wages. That means classes, that means reading, that means side-gigs to work on stuff you already know how to do well (and learn to do it better). It also means you need to save enough to own a variety of assets. If the return to labor is bad, then become an owner of capital. Recently it has been a pretty decent gig.
What should the government do in this environment?
First and foremost, stay out of the way. Trying to arrest economic development is folly. The winds of change are blowing, and you can’t stop them. Nor do you want to. If wage adjustments are to take place, then let them. If people have to educate themselves in the right skills to make it, then let them. But for God’s sake, stop subsidizing everything. Everything the government subsidizes becomes insanely expensive (health care, education). This isn’t chance. The less you feel the price mechanism at work, the more you’re willing to pay for something with other peoples’ money. But it turns out that you only get those subsidies with a decent lobby or the savvy to take advantage of them.
When I went to Georgetown, the allotment of grants and loans meant that I paid around $4k out of yearly costs of $30k. While I cherished the time I spent at university, I didn’t learn any of the skills I apply now to make my salary — data visualization, business analysis, web analytics. I learned those on the job. Code academies are springing up all over the country to teach us ruby, java, python; with no government subsidies. The demand for skills is there, now the supply needs to be manufactured. America is still one of the most flexible economies in the world. So while the old, subsidized universities churn out liberal arts majors (I was one of them, I sympathize), new, private companies are educating coders and technologists.
There is an aside in that the government does need to provide a decent and efficient safety net. Hayek is known for praising capitalism’s creative destruction, but even he thinks some sort of social insurance good. In The Road to Serfdom, he says:
Nor is there any reason why the state should not assist individuals in providing for those common hazards of life against which, because of their uncertainty, few individuals can make adequate provision. Where, as in the case of sickness and accident, neither the desire to avoid such calamities nor the efforts to overcome their consequences are as a rule weakened by the provision of assistance, where, in short, we deal with genuinely insurable risks, the case for the state helping to organise a comprehensive system of social insurance is very strong. There are many points of detail where those wishing to preserve the competitive system and those wishing to supersede it by something different will disagree on the details of such schemes; and it is possible under the name of social insurance to introduce measures which tend to make competition more or less ineffective. But there is no incompatibility in principle between the state providing greater security in this way and the preservation of individual freedom.
What should the central bank do?
The central bank has some choices. They could try to:
- Maintain moderate growth asset prices –> which means wages for most forms of labor would need to drop (or stagnate for some time) to make up for the major increase in supply of workers due to trade
- Maintain moderate growth in aggregate demand –> which means asset prices would soar and different types of labor would experience different rates of growth
- Maintain moderate growth in wages for lower-skilled jobs –> which means headline inflation might soar, causing a major redistribution of wealth
I don’t think option 1 –wage stagnation– would be good for the economy. Most of us pay our debts from our wage income. Letting aggregate wages decline would tank our economy, and the Fed would need to resort to QE over and over again as it kept hitting the zero bound.
Maintaining moderate growth in lower-skilled wages would lessen the incentive for us to improve our respective lots. A lot of what keeps America going is the constant churn of people in and out of professions and training. Any gain in efficiency will mean an increase in inequality. But we should accept that inequality as the price of building a more prosperous society. Steve Jobs got very rich, but we all got amazing iPhones. That’s not a bad trade.
That leaves us with Scott Sumner’s option – maintaining moderate growth in aggregate demand as a whole, or targeting NGDP growth. This let’s our aggregate wages rise, let’s us have winners and losers to keep us on our toes, and may only look a little scary with bubbly-looking asset prices. But fear not, its just the world in which we live. And the best of a poor set of options.