# Joe Biden’s flawed logic of a 1968 minimum wage hike

In an op-ed in today’s Wall Street Journal, Michael Saltsman exposes the flawed logic of Vice-President Joe Biden’s selection of 1968 as the base year to justify his claim that a hike in the minimum wage is overdue.

According to one news report,

Biden said the real value of the minimum wage is much less then it has been in the past, specifically at its peak in 1968. In 1968, the minimum wage was \$1.60 an hour. In 2013, that wage would have the same purchasing power as \$10.71. “That’s all they’re asking here, is ‘just pay me minimum wage of what you paid folks in 1968,’ think in those terms. They’re not asking a whole heck of a lot,” Biden said.

Here’s Michael Saltsman:

The logic goes something like this: Had the minimum wage tracked inflation since 1968, it would today be more than \$10 an hour, so Congress should seek to bring it up to at least that amount. The federal minimum wage was first set in 1938 at 25 cents an hour. Had it tracked the cost of living since, it would today be \$4.07 an hour, based on Labor Department data and the Bureau of Labor Statistics’ inflation calculator (see blue line in the chart above for the year 1938). This is the only logically consistent “historic” value of the minimum wage, and it’s 44% less than the current amount of \$7.25.

Advocates of a higher minimum wage arbitrarily selected 1968 as the historical reference point. It’s no wonder: That’s when federal minimum wage hit its inflation-adjusted high point (see chart).

How about picking other arbitrary years to track the minimum wage and inflation? If you used 1948 instead of 1968, the minimum wage’s inflation-adjusted value would only be \$3.81 an hour. If you chose 1988, the adjusted minimum wage would be \$6.50 an hour.

MP: The chart above shows the history of the nominal and real minimum wage (in constant 2013 dollars) from 1938 to 2013, and reveals why Biden (and other supporters of the minimum wage) would pick the year 1968 to make a case for a higher minimum wage – that year’s inflation-adjusted minimum wage at \$10.66 per hour was the highest in the history of the minimum wage back to 1938 when it was first enacted.

But if you pick another year as the base year, like 2007 when the Great Recession started, the case for a minimum wage increase today weakens considerably. In real dollars, today’s minimum wage of \$7.25 per hour during the worst jobless recovery in US history is almost 11% higher than it was in 2007 when the recession started. Perhaps that explains why the jobless rate today for teenagers (the group most affected by the minimum wage law) is stubbornly stuck at 24%, more than seven percentage points above the 16.8% rate in December 2007 when the recession started?  If Joe Biden really cared about creating jobs for unskilled and low-skilled workers during a sub-par economic recovery, he should use 2007 as his base year, and not 1968, when considering the advisability of raising the minimum wage. Raising the minimum wage today, and increasing the cost of hiring unskilled and low-skilled workers, would be a disaster for the most vulnerable Americans struggling to find a job in a very tough labor market.

As Michael Saltsman concludes, “Entry-level employees can only move up the career ladder if they have experience. To get experience, you need a job in the first place. These jobs will be more difficult to come by if Congress embraces the flawed logic of a 1968 minimum wage.”

## 33 thoughts on “Joe Biden’s flawed logic of a 1968 minimum wage hike”

1. The U.S. economy was able to “absorb” a \$10 an hour real minimum wage in 1968, and since 1968, per capita real income has more than doubled, while the real minimum wage has declined over 25%.

• The teen labor force participation rate has collapsed, over the past 30 years, while the real minimum wage has declined.

Many teens won’t work for wages that are too low. Instead, they’ll mooch off their parents and government, while going into debt fueling the education boom.

And, given weak demand (in part, because of low income from workers with the highest marginal propensities to consume), after they finish school, they’ll mooch off their parents and government again.

• “Many teens won’t work for wages that are too low. Instead, they’ll mooch off their parents and government, while going into debt fueling the education boom.”

This is another good reason for corking up the flow of low skilled illegal immigration.

• Question (and I do not know the answer): is it because teenagers will not work or cannot work?

Has the labor participation rate collapsed because teens do not like the wages or because there simply are not the jobs out there being offered?

It seems to be this is a key question to answer: if it is because of not liking the wages, then it could be an argument for minimum wages. If it is because no jobs are offered, then it could be an argument against minimum wage.

• it seems to me that you need to add a third factor which is “do they want jobs?”.

in a more affluent society teens do not need to pitch in and earn for the family as they used to. they are more likely to get an allowance etc.

we also have higher graduation rates from high school which would seem to imply higher participation rates.

this keeps more teens busy doing somehting other than working.

http://www.ncbi.nlm.nih.gov/pmc/articles/PMC2900934/figure/F1/

i’m not sure this is really anyhting other than a structural change in youth behavior as a response to wealth.

• Would teens more likely work, and stay employed (reducing the costly turnover rate) at \$10 or \$7.25 an hour?

Instead of your best choice of hiring a new employee being a high school dropout, who smokes marijuana, it can be the high school graduate, who’s twice as productive.

• But if there are no jobs at that price point (like in the Wal-Mart example), then it’s a moot point.

• Stronger demand, from the higher wage, higher productivity, from better workers, and reducing an expense, e.g. turnover cost, will create jobs. I stated before:

A rise in the minimum wage can increase real economic growth.

The higher wage attracts better workers, with higher reservation wages, to increase productivity.

Minimum wage workers have high marginal propensities to consume. So, a higher minimum wage increases consumption.

Only a portion of the higher minimum wage may be passed along in higher prices, because portions will be absorbed by “excess” wages of other workers and “excess” profits.

Weak or poorly managed firms will lose business or fail. However, stronger or better managed firms will gain their business, and also gain from the increased demand.

Also, I may add, a combined increase in higher wages and unemployment benefits (if unemployment rises) can facilitate a virtuous cycle of consumption-employment.

Or, the income effect may be stronger than the employment effect. to have a net positive effect on growth and employment.

• That stuff may happen, but none of that matters if a business, like Wal-Mart, doesn’t offer any jobs at that wage.

Again, which is better:

600 jobs at \$8.25/hr or 0 jobs at \$12.50/hr?

• I know you’ve already said all that stuff, but Ron, Morganovich, and I already responded to that. Merely repeating it doesn’t change our objections.

Work with me here. Address our concerns

• Then, Americans can move to Canada for better jobs, like Mexicans move to America.

• You gotta work with me here, man!

I have two major concerns with your argument, neither of which you’ve attempted to address:

What if there are no jobs available at the asking minimum wage (This is hardly an academic question)?

Why would minimum wage lead to high economic activity if employment and demand are lagging, not leading, economic indicators?

• Jon, there are really no economics in your statement. It’s static at best.

When the real minimum wage was above \$10 an hour (and even higher compared to per capita income), the unemployment rate was below 5% and the teen labor force participation rate was much higher.

I’ve answered your questions. Apparently, you don’t understand them, like you don’t understand the paradox of thrift.

• There is lots of economics in my statement:

At \$12.50 an hour, the marginal cost for Wal-Mart to open their six stores in DC was too great, and therefore there will be no new jobs.

At \$8.25 an hour, the marginal cost was less than (or equal to) the marginal benefit for Wal-Mart, and they would have opened six stores and added 600 jobs to DC, not to mention the money multiplier effect that could have created many more jobs.

That is economics and is exactly what basic economic theory predicts.

So, back to my first question: What are the economic benefits if the minimum wage is so high there are no new jobs added (or, in this case, jobs are lost)?

Now, for my second question:

Historical evidence shows that employment and other demand indicators lag, not lead, economic activity (if you desire such evidence, I will gladly provide it). Generally speaking, employment lags economic activity by a quarter. Retail Sales lag by about 2-4 months. This is economic analysis based on decades of research and consistent across countries and economic systems.

So, back to my second question:

Given these economic relationships to be true, how can demand-side economics drive economic growth when, historically, it lags growth?

If I have missed your answers to these questions, please point them out to me so that I might be aware of my folly. But I haven’t seen an attempt to answer them.

• Actually, I guess there is a third question I asked that wasn’t answered:

Is the teenage labor force participation rate falling because teenagers do not want the wages being offered, or is it falling because teenagers cannot find work?

You seem to argue that it is because they do not want to work at the given wages. I would love to see some evidence to that effect.

• Jon, if you look at all my prior comments, none of them had anything to do with singling out Walmart for a higher minimum wage, and I already answered all your questions.

One way to look at it is as a tax. Unless, you raise taxes too high, all firms won’t go out of business. If you raise taxes 10%, perhaps 1% of firms will go out of business.

However, by taking advantage of loopholes, you can lower the tax and create more business, which I’ve shown with the minimum wage (e.g. reducing turnover cost).

An income effect, e.g. a higher wage, has an immediate effect on consumption, like reducing taxes.

You don’t seem to believe in concepts, e.g. reservation wage and opportunity cost, when you ask me about teens working, and a higher minimum wage will generate a multiplier effect or a virtuous cycle of consumption-employment.

• I have looked at your prior comments and I see nothing that answers my questions! That is the problem here!

Higher minimum wage = less jobs. This has been empirically shown

Higher economic growth proceeds higher consumption and higher employment. this has been empirically shown.

Therefore, I don’t see your logic that higher wages lead to higher economic growth when, historically, it is the other way around.

I understand minimum wage as a tax. That’s my whole bloody point. You tax something, you get less of it. You lower the tax (or remove it) you get more of it. You say so yourself and then say “let’s raise the tax!” Give me something concrete I can work with, historical evidence, data, something that you can point to and say “here, look!” Not these random and half-baked theories.

Don’t be snide and condescending to me about not “understanding concepts” when you cannot even provide answers to what should be bloody simple questions! You have provided me nothing but a theory (and I emphasize theory,) to which three of us (Morganovich, Ron H. and I, at least two of which are professionals who deal with this stuff every day [sorry, Ron, I do not know what you do for a living]) have legitimate qualms with, and some nonsense about teenagers running off to Canada to find better jobs!

If you are an analyst, than prove it to me. Give me some analysis! Just like I have done. I gave you the theory (higher minimum wage = fewer jobs) then provided you with evidence (Wal-Mart). Then, I provided another theory (production must lead demand which leads employment) and provided further evidence (historical timing relationship between production, demand, and employment through business cycle highs and lows). Finally, I posed an academic question (why is the teenage labor participation rate decreasing?)

This is the conversation I am trying to foster. Provide me with something, anything, concrete that either supports your view of demand proceeding production or higher minimum wage equaling similar or higher jobs, or teenagers fleeing to Canada because they cannot get work here for the wages they want. But if you cannot do anything like that…

2. Hard to believe after 50 years of increasing free enterprise and economic expansion, the USA cannot maintain the minimum wage levels of the 1960s….

Actually, today but a minute fraction of the workforce (less than 2 percent work) at the minimum wage.

Far more important are the detrimental impacts of the many professions into which entry is limited by licensing, such as law, accounting and medical.

As of April 2011, there were 1,225,452 licensed attorneys in the United States.

Each lawyer benefits from a “guild” that requires seven years of college eduction and then state licensing to enter.

But…beating up on minimum wage workers is more fun than pointing the finger at lawyers who make up most office holders of both parties…

Really? Is this what we want to do? Beat up on minimum wage workers and let the lawyers skate?

And btw, there are times in your life when you are compelled to hire a lawyer. If you are sued in civil court, you must respond. You can defend yourself “pro per” but you will be told if you make any procedural mistakes in the dense, impenetrable and generally incomprehensible legal system, they will be held against you….

But it is that 1.5 percent of the workforce earning minimum wage that is killing the USA.

“The Bureau of Labor Statistics reports that lawyers earned an average of \$130,000 per year as of May 2011. But this figure accounts for all lawyers, regardless of experience. Robert Half Legal, the premier provider of skilled legal professionals for law firms and corporate legal departments, estimates that lawyers with 5 years of experience can expect to earn an average \$116,000 to \$169,000 at midsize law firms of 35 to 75 lawyers.”

Which angers you most? Some guy sweeping up gets \$10 an hour? Or some guy in a white-collar guild makes \$75 an hour?

And the GOP wonders why it is shrinking into oblivion….

• after 50 years of increasing free enterprise

In what fantasy land are you living? Free enterprise in the US has been on the defensive for a century and has been on the decline for the last 50 years.

You’re right, though, that throughout the world free enterprise has been on the rise. It has been spectacularly beneficial to all the billions it has affected.

Beat up on minimum wage workers and let the lawyers skate?

What are you talking about? This post is beating up the idiot lawyers who want to make life harder for those who earn very little by making it harder to get a job.

Which angers you most? Some guy sweeping up gets \$10 an hour? Or some guy in a white-collar guild makes \$75 an hour?

Neither one angers me, much less on angering me more than most. My anger is at the idiot lawyers, and those who cheer them on, who prevent the guy who could productively sweep the floor at \$9/hour from getting a job because at \$10/hour it’s simply cheaper to not hire him.

And the GOP wonders why it is shrinking into oblivion

Said many many in 2008. Remind me, what happened in 2010?

• “Neither one angers me, much less on angering me more than most. My anger is at the idiot lawyers, and those who cheer them on, who prevent the guy who could productively sweep the floor at \$9/hour from getting a job because at \$10/hour it’s simply cheaper to not hire him.”

like ken, i am not angry about any wage that people get through consensual, non coercive contract.

some people’s services are worth several hundred dollars an hour. some are worth \$7. the best person to determine what is good value for my money (or what is good compensation for my time) is me, not some distant bureaucrat or politician.

what makes me angry are third parties claiming that they know what is best for everyone and taking away their liberty “for their own good” and then ignoring all the consequences of this.

• “And the GOP wonders why it is shrinking into oblivion….”

Uh, meat head, the Democrat party is pretty much a wholly owned subsidiary of the trial lawyers. Lawyers have overwhelmingly given to your boyfriend compared to his GOP challengers, and Obama’s HHS Secretary Sebelius was director the Trial Lawyers Association for 8 yrs. According to opensecrets.org, “Each cycle, the contributions significantly favor Democrats. In the 2008 election cycle, the industry contributed a massive \$234 million to federal political candidates and interests , 76 percent of which went to Democratic candidates and committees”

In short, yet another ignorant post by Benji.

3. Mark,

The text of Michael Saltsman says that the inflation adjusted minimum wage in 1948 was \$3.81 but your chart says it was well above \$4 (around \$4.50, I can’t tell exactly from reading the chart)

It seems you use different inflation numbers.

• My original graph was wrong for a few years in the 1940s, I’ve updated the data and updated the graph. Thanks for letting me know.

4. The important thing to remember here, and is lost on non-economists and sometimes even economists, is we are talking about what happens on the margin.

Whether or not a company or economy can absorb artificially higher labor costs is irrelevant. The question, rather, is whether or not these higher labor costs will make them marginally better off, marginally worse off, or no change.

Let’s take, for example, the Wal-Mart article Mark posted yesterday. On the whole, Wal-Mart could certainly absorb the higher costs imposed on them by Washington DC. I doubt the extra \$5.3 million in payroll ([\$12.50 an hr * 600 employees * 40 hours a week * 52 weeks a year] – [\$8.25 an hr * 600 employees * 40 hours a week * 52 weeks a year] someone want to check my math on this?) would greatly impact a company who pulls in approx \$16 billion a year.

But will the minimum wage hike make Wal-Mart marginally worse off? The answer is apparently yes, given the actions taken by Wal-Mart.

• I don’t have any background in economics, but I feel like Wal-Mart’s decision not to open stores that pay \$12.50 an hour didn’t have as much to do with the marginal cost of those six DC stores as it had to do with the effect it would have on all of their other stores. I believe Wal-Mart execs realized that paying DC employees \$12.50 an hour would hurt their standing with employees they’re only paying \$7.25 an hour. They’ve had enough protests as it is, so they’ve chosen to stand their ground.
That’s only a guess, but it makes more sense to me than the explanation that they just couldn’t afford \$12.50 an hour.

5. One other more general comment and one I’d love to hear feedback from other analysts:

An argument made for minimum wage hikes (and other demand-led legislation) is that the increased employment will lead to more economic growth. This does not make sense to me for a simple reason:

Employment is a lagging economic indicator, not a leading one. How, then, can increases in employment lead to higher economic activity? The historical evidence shows that higher economic activity precedes higher employment. Therefore, higher economic activity must come first; it is the cause, rather than the effect, in the production-demand relationship (which further seems to validate Say’s Law).

So, given this historical evidence and relationship, how can minimum wage boost economic activity?

• Jon,

Why would min. wage increase employemnt? If you believe in downward sloping demand graphs, min. wage decreases employment. Or did i miss something in your statement?

• I missed a jump in the logic. Sorry.

So the argument goes:

1) Raise minimum wage

But, the way the historical chain of events tends to go is like this: