If Worker Pay Had Kept Pace With U.S. Productivity Gains Since 1968, Today’s Minimum Wage Would Be $24 an Hour

A full-time minimum wage worker would be earning $48,000 a year in the United States if they made $24 an hour.

If the minimum wage had kept pace with inflation since 1968, it would be close to $12 an hour today, more than 65 percent higher than the national minimum wage of $7.25 an hour. While this would make a huge difference in the lives of many people earning close to the national minimum wage, it is actually a relatively unambitious target.

Until 1968, the minimum wage not only kept pace with inflation, it rose in step with productivity growth. The logic is straightforward; we expect that wages in general will rise in step with productivity growth. For workers at the bottom to share in the overall improvement in society’s living standards, the minimum wage should also rise with productivity.

This is an important distinction. If the minimum wage rises in step with inflation, we are effectively ensuring that it will allow minimum wage earners to buy the same amount of goods and services through time, protecting them against higher prices. However, if it rises with productivity that means that as workers are able to produce more goods and services per hour, on average, minimum wage earners will be able to buy more goods and services through time.

While the national minimum wage did rise roughly in step with productivity growth from its inception in 1938 until 1968, in the more than five decades since then, it has not even kept pace with inflation. However, if the minimum wage did rise in step with productivity growth since 1968 it would be over $24 an hour today, as shown in the Figure below.[1]

Graph (1)

It is worth considering what the world would look like if this were the case. A minimum wage of $24 an hour would mean that a full-time full year minimum wage worker would be earning $48,000 a year. A two minimum wage earning couple would have a family income of $96,000 a year, enough to put them in the top quintile of the current income distribution.

It is worth noting the standard counter to the argument that the minimum wage should keep pace with productivity growth. It would be claimed that the productivity of minimum wage workers has not kept pace with average productivity growth, so that it would not be feasible for minimum wage workers to earn pay that rises in step with average productivity growth.

There is some truth to this claim, but only at a superficial level. The productivity of any individual worker is determined not just by their skills and technology, but also by the institutional structure we put in place. In a world without patent and copyright monopolies, the skills of bio-technicians and software designers would likely be much less valuable than they are today.

Similarly, the skills of experts in stock trading and designing complex financial instruments would have much less value if we had a financial transactions tax in place and allowed large banks to fail when their mistakes made them insolvent. And, the skills of doctors and other highly paid professionals would have much less value if our trade policy was as committed to subjecting them to international competition, as has been the case with auto and textile workers.

Lower pay for those at the top increases the real pay for those at the bottom and middle. A $15 an hour wage goes much further when all drugs are selling as low costs generics, the financial sector is not sucking 2 percent of GDP ($230 billion a year) out of the economy, and doctors get paid the same as their West European counterparts.

If the productivity of less-skilled workers has not kept pace with average productivity, this was by design. It was not the fault of these workers; it was the fault of those who designed policies that had the effect of devaluing their skills.

This raises a final point: we can’t imagine that we can just raise the minimum wage to $24 an hour without serious disruptions to the economy, many of which would have bad effects (i.e., unemployment) for those at the bottom. While there is certainly room to raise the minimum wage, and many states have done so with no measureable impact on employment, there clearly is a limit to how far and how fast we can go.

It is quite reasonable to have a target where the minimum wage returns to where it would be, if it had tracked productivity growth over the last 50 years. But we will have to reverse many of the institutional changes that have been put in place over this period to get there. This is where the sort of policies described in Rigged (it’s free) come in, but that is a much longer story.


[1] This calculation uses a productivity growth figure that is economy-wide, is based on net output, and adjusts for differences between the NDP deflator and the consumer price index. These issues are discussed in more detail here.

America’s Economy Outside of Unemployment and GDP

It’s rather striking that median male wages in America are 3 percent lower today than they were 40 years ago. Where the hell is the societal progress with damning statistics like that? And other stats worth mentioning are that 75 percent of Americans live paycheck to paycheck while their country’s child poverty rate is well over 20 percent. It is rather appalling that people are saying that America’s economy is booming.

As the world’s business elites trek to Davos for their annual gathering, people should be asking a simple question: Have they overcome their infatuation with US President Donald Trump?

Two years ago, a few rare corporate leaders were concerned about climate change, or upset at Trump’s misogyny and bigotry. Most, however, were celebrating the president’s tax cuts for billionaires and corporations and looking forward to his efforts to deregulate the economy. That would allow businesses to pollute the air more, get more Americans hooked on opioids, entice more children to eat their diabetes-inducing foods, and engage in the sort of financial shenanigans that brought on the 2008 crisis.

Today, many corporate bosses are still talking about the continued GDP growth and record stock prices. But neither GDP nor the Dow is a good measure of economic performance. Neither tells us what’s happening to ordinary citizens’ living standards or anything about sustainability. In fact, US economic performance over the past four years is Exhibit A in the indictment against relying on these indicators.

To get a good reading on a country’s economic health, start by looking at the health of its citizens. If they are happy and prosperous, they will be healthy and live longer. Among developed countries, America sits at the bottom in this regard. US life expectancy, already relatively low, fell in each of the first two years of Trump’s presidency, and in 2017, midlife mortality reached its highest rate since World War II. This is not a surprise, because no president has worked harder to make sure that more Americans lack health insurance. Millions have lost their coverage, and the uninsured rate has risen, in just two years, from 10.9% to 13.7%.

One reason for declining life expectancy in America is what Anne Case and Nobel laureate economist Angus Deaton call deaths of despair, caused by alcohol, drug overdoses, and suicide. In 2017 (the most recent year for which good data are available), such deaths stood at almost four times their 1999 level.

The only time I have seen anything like these declines in health—outside of war or epidemics—was when I was chief economist of the World Bank and found out that mortality and morbidity data confirmed what our economic indicators suggested about the dismal state of the post-Soviet Russian economy.

Trump may be a good president for the top 1%—and especially for the top 0.1%—but he has not been good for everyone else. If fully implemented, the 2017 tax cut will result in tax increases for most households in the second, third, and fourth income quintiles.

Given tax cuts that disproportionately benefit the ultrarich and corporations, it should come as no surprise that there was no significant change in the median US household’s disposable incomebetween 2017 and 2018 (again, the most recent year with good data). The lion’s share of the increase in GDP is also going to those at the top. Real median weekly earnings are just 2.6% above their level when Trump took office. And these increases have not offset long periods of wage stagnation. For example, the median wage of a full-time male worker (and those with full-time jobs are the lucky ones) is still more than 3% below what it was 40 years ago. Nor has there been much progress on reducing racial disparities: in the third quarter of 2019, median weekly earnings for black men working full-time were less than three-quarters the level for white men.

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And despite Trump’s vaunted promises to bring manufacturing jobs back to the US, the increase in manufacturing employment is still lower than it was under his predecessor, Barack Obama, once the post-2008 recovery set in, and is still markedly below its pre-crisis level. Even the unemployment rate, at a 50-year low, masks economic fragility. The employment rate for working-age males and females, while rising, has increased less than during the Obama recovery, and is still significantly below that of other developed countries. The pace of job creation is also markedly slower than it was under Obama.

Again, the low employment rate is not a surprise, not least because unhealthy people can’t work. Moreover, those on disability benefits, in prison—the US incarceration rate has increased more than sixfold since 1970, with some two million people currently behind bars – or so discouraged that they are not actively seeking jobs are not counted as “unemployed.” But, of course, they are not employed. Nor is it a surprise that a country that doesn’t provide affordable childcare or guarantee family leave would have lower female employment—adjusted for population, more than ten percentage points lower—than other developed countries.

Reducing the Very Overpriced Cost of Healthcare

As is known to many people, American healthcare is far more expensive than necessary.

One of most enduring, economically and socially damaging, downright frustrating facts about life in the United States is how expensive health care is here. Not only does U.S. health care cost far more than in other advanced economies, but compared with the nations that spend less, we have worse or equivalent health outcomes. In fact, U.S. life expectancy now lags behind that of all the advanced economies.

An MRI scan that cost $1,400 here went for $450 in Britain and $190 in Holland. Thirty tablets of a drug to reduce the risk of blood clots (Xarelto) cost $380 here, $70 in Britain, $80 in Switzerland and $60 in Holland. Hospital admission for angioplasty is $32,000 here, $15,000 in Australia, $12,000 in Britain, $7,000 in Switzerland, $6,000 in the Netherlands.

Add to those differences the latest outrage in health-care costs: surprise medical billing, when even well-insured patients can wake up from surgery finding that they owe thousands of dollars, because someone treating them while they were unconscious was out of their insurance network.

Princeton economists Anne Case and Angus Deaton (a Nobel winner) recently summarized the problem by labeling it an $8,000-a-year annual health-care tax paid by U.S. families. This is the difference in costs between what we pay for health care and what people in other countries pay. As Case put it: “We can brag we have the most expensive health care. We can also now brag that it delivers the worst health of any rich country.”

Why call this expense a tax? Well, for one, if you want health coverage, you can’t escape it. But even if you don’t — and good luck with that — you still can’t escape the tax, as both employer- and government-provided health care extract payments through lower paychecks and public financing.

Case and Deaton may be erring on the low side in their $8,000-per-family figure. The Organization for Economic Cooperation and Development puts per-person spending in the United States at $8,950 a year. That compares with $5,060 in Germany, $3,470 in Canada and just $3,140 in Britain. If we assume a family of three, we would get an annual health-care tax of $11,670 compared with Germany and more than $17,000 compared with the cost of health care in Britain.

How can such differences persist, especially in a service where consumption is so essential to well-being? If ice cream were that much more expensive here, we’d have a lot to squawk about, for sure. But it wouldn’t be a matter of life and death.

An obvious, and correct, answer as to why U.S. health care is so expensive is because we do so little, relative to other systems, to control costs. But it’s worse than that. We do a fair amount to make health care more expensive.

First, our system of private insurance costs far more than single-payer systems like Canada’s, and also more than countries with private but heavily regulated insurers like Germany. OECD data show that as a share of health spending, our administrative costs are three times that of Canada’s and twice that of Germany’s. Getting our administrative costs closer to those in other countries would require regulating private insurers and expanding public coverage, but it could save us at least 10 percent of our total health-care bill.

Next, we pay twice as much to our health-care providers and for prescription drugs as everyone else. The latter costs us more than $3,000 per family per year. We pay more than twice as much for medical equipment, costing us a bit less than $1,500 per family per year. Doctors and dentists cost us close to an extra $750 per family per year.

One reason for the outsize costs of these inputs to U.S. health care is that government policy protects our providers. When it comes to manufactured goods, like cars and clothes and almost everything on the shelves of Walmart, economists and policymakers push for “free trade” and more competition. But when it comes to health-care providers, these same authorities turn protectionist.

In areas like prescription drugs and medical equipment, this protection is explicit: Manufacturers are granted patent monopolies. The government will arrest anyone who sells protected items in competition with a patent holder.

In the case of doctors, we have maintained or increased barriers that make it difficult for qualified foreign physicians to practice in the United States. We also prevent other health-care professionals, such as physicians’ assistants and nurse practitioners, from doing many tasks for which they are entirely competent. There is a similar story with dentists and dental hygienists.

Other countries directly control drug prices. In France, the government determines whether a new drug is an improvement or a copycat, and, if the drug is deemed useful, the government negotiates drug prices with the manufacturers and caps their revenue. When sales exceed the cap, the manufacturer must rebate most of the difference back to the government.

Here in the United States, we give drug companies and medical equipment manufacturers’ patent monopolies and allow them to charge whatever they want. We don’t even let the government use its massive leverage to negotiate lower drug prices for Medicare beneficiaries. That’s what makes these goods expensive; they’re almost always relatively cheap to produce.

This is fixable. It would take regulating costs, reducing reimbursements to providers and increasing competition.

The pharmaceutical industry’s rationale for cost-exploding medical patents is that it helps incentivize research and innovation. Without them, it’s likely that pharmaceuticals and medical equipment companies would do less speculative research. But it would take a fraction of the savings from reducing such protectionism to replace patent-support research with publicly supported research (for which we already spend $40 billion a year).

In terms of boosting competition, allowing foreign doctors whose training meets our standards to more easily practice medicine here would bring U.S. physicians’ pay in line with international standards. Of course, our doctors pay much more for their education than doctors trained elsewhere, so part of this new structure would also require reducing the domestic cost of medical education and alleviating some of the educational debt burden that U.S.-trained doctors have acquired.

Increasing competition would also require using antitrust measures to push back on the pricing power engendered by the consolidation of both hospital groups and medical practices. An analysis by the New York Times of 25 metro areas found that hospital mergers “have essentially banished competition and raised prices for hospital admissions.”

Even if we succeed in raising competition and reducing protectionism, health care will still be too expensive for many low- and moderate-income families, many of whom have suffered stagnant incomes in recent decades. Like every other wealthy country, we will need to get on a path to universal coverage. But whatever form that takes, if we can significantly reduce our current health-care tax, the savings will easily be large enough to extend quality, affordable coverage to every American.

Modern Free Trade — Instituting Protectionist Barriers on Services

The reality of trade today and what it has been — the debate has been framed so that “free trade” deals are actually about installing protectionist measures. Any form of government intervention, good or bad, is a form of protectionism.

The NYT had a piece describing the departure of the UK from the EU as the end of an era:

“The notion that global economic integration amounts to human progress had a good run, dominating the thinking of the powers that be for more than seven decades. But a new era is underway in which national interests take primacy over collective concerns, with trading arrangements negotiated among individual countries.”

This fundamentally misrepresents past trade policies and totally misrepresents the crux of recent trade deals, like the Trans-Pacific Partnership (TPP).

Past trade deals were about making it easier to trade manufactured goods, making it as easy as possible for corporations to take advantage of low-cost labor in the developing world. This has the predicted and actual effect of putting downward pressure on the wages of less-educated workers.

The impact of trade was devastating for large segments of the U.S. workforce. It cost 3.4 million manufacturing jobs (20 percent of the total) between the years 2000 and 2007. (It cost almost 40 percent of all unionized manufacturing jobs.) Note, that this was before the Great Recession, which began in December of 2007.

The argument that this was technology and not trade is truly Trumpian and deserves the same sort of derision as Trump’s claims about his “perfect” phone call with Ukraine’s president. We lost relatively few manufacturing jobs between 1970 and 2000, and we have gained a small number since 2010. So the Trumpers arguing for the technology story want us to believe that technology only cost us manufacturing jobs in the years when the trade deficit exploded, but not in the years prior to that or in the years since. Right.

It is also worth noting that the “free traders” have pretty much zero interest in free trade in professional services. Even though we could save on the order of $100 billion a year ($700 per family per year) if we liberalized rules for physicians, and allowed qualified doctors in places like Canada and Germany to practice in the United States, the people who think that “global economic integration amounts to human progress,” have little interest in global integration when it might reduce the living standards of highly paid professionals.

It is also important to point out that the liberalization of trade in goods is largely a done deal. Tariffs are already zero or near zero in the vast majority of cases. The potential gains from further liberalization are limited, especially since goods are a rapidly falling share of total output.

Instead, deals like the TPP are largely about locking in rules on items like intellectual property protections and preserving Mark Zuckerberg’s dominance of the Internet. The TPP, like other recent trade deals, calls for longer and stronger patent and copyright monopolies.

These protections are 180 degrees at odds with free trade. They are about shifting more income from the bulk of the population to people who benefit from rents on patents and copyrights, by making them pay more for drugs, medical equipment, software and a wide variety of other items.

The deals also look to lock in existing rules on the Internet, making it more difficult for both the United States and other countries to regulate Internet behemoths like Facebook and Google. Perhaps most importantly, these deals enshrine Section 230, which protects Facebook and other Internet intermediaries from facing the same liability for circulating libelous material as print and broadcast outlets. This has nothing obviously to due with economic integration, but it is likely to make Mark Zuckerberg richer.

Restructuring Markets to Give People Better Lives

Markets are always somehow structured by government policy, and it matters significantly whether those markets are structured to benefit the wealthiest at the expense of everyone else.

The standard liberal approach to economic policy is to support government programs that counteract the inequities gen- erated by the market. Unfortunately, this narrow focus on government programs has effectively given the right free rein to restructure the market to redistribute an ever-larger share of income to the rich and very rich. While tax and transfer policies are important, if liberals had not ignored, or in many cases supported, the ways in which the right was restructuring the market, the existing levels of poverty and inequality that the government needs to address would be far lower.

In other words, liberals need to spend at least as much time on the rules that structure the market as they do on government programs that redress the problems it creates. This is because the idea that the extremes of wealth and poverty we see are inherent outcomes of the market is wrong. These extremes are the result of the way in which the market has been structured by the government.

Let’s start off with, perhaps, the most explicit example of this structuring: patent and copyright monopolies, which are entirely a government invention. There is nothing “free market” about Bill Gates’s enormous fortune. It’s because the government will arrest anyone who mass produces computers with Microsoft software without first paying the company licensing fees.

The Microsoft story is not unique. Huge sectors of our economy exist in their current form because of government-granted patent or copyright monopolies, including the pharmaceutical industry, the medical equipment industry, and the entertainment industry. These monopolies are not just long-fixed rules of the game. Government policy has made them both longer and stronger over the last almost four decades.

This government hand is seen clearly in the prescription drug industry, which has caused renewed outrage among the public in recent years. Spending on prescription drugs hovered near 0.4 percent of GDP, with no discernible trend from 1960 to 1980, when the Bayh-Dole Act was passed into law. It passed the Senate by a huge, bipartisan 91-4 margin and was signed into law by President Carter.

Bayh-Dole allowed private companies to obtain patent rights on research sponsored by the government. Prior to Bayh-Dole, the government retained control over research that it funded. The change was especially important for the pharmaceutical industry, because the government funds a large amount of bio-medical research through the National Institutes of Health (NIH) and other agencies. Since Bayh-Dole became law, spending on prescription drugs has skyrocketed to more than $440 billion in 2018 (2.2 percent of GDP); more than five times the share of GDP it took up in 1980.

We have benefitted from increased private spending on research as a result of Bayh-Dole, but granting these monopolies was only one of many possible mechanisms to provide incentives for new innovations. This is simply not the free market; it is deliberate government policy.

The implications of this point are enormous. Another important example: We continually hear the refrain that workers need more education and skills to succeed in the modern economy, but the extent to which the economy rewards education and skills is also a matter of government policy, not the endogenous course of technology. If we envision a world with no patent and copyright protection, we would not have a slew of Silicon Valley millionaires and billionaires nor NIH alumni becoming biotech tycoons.

Of course, it is important that we have incentives for innovation and creative work, but the point is that government policy can make those incentives greater or smaller. If we want more equality, and arguably a more efficient economy, we could make patents and copyrights shorter and weaker and have more direct funding to put research and creative work in the public domain immediately after it is produced. The Human Genome Project is one model, where results are posted nightly. If we did this with research into drug development, new drugs could be sold as generics, costing a tiny fraction of the price of patent-protected medicine.

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Finance is another area where government policy structured the market to support a bloated industry, one that creates large fortunes for a small number of people. The most dramatic incident in this respect was the massive bailout for the industry after the financial crisis. The magic of the market would have sent Goldman Sachs, Citigroup, and other financial behemoths into bankruptcy.

Instead, Congress and the Federal Reserve Board raced to supply the necessary loans and guarantees to keep the major banks afloat. (No, we did not risk a second Great Depression without the bailout. The Federal Deposit Insurance Corporation could have kept the normal flow of payments going. And we learned the secret to escaping a severe depression almost 80 years ago with the start of World War II. It’s called “spending money.”)

Beyond the bailout, government policy has structured finance to support an incredibly inefficient industry that unnecessarily makes some people very rich. Government policy literally rewrote the rules on bankruptcy to support mortgage-backed securities and derivative trading. Also worth noting is the fact that the financial industry would be dramatically downsized if financial transactions were not exempted from the sort of sales tax imposed on most other items in the economy. Again, it is clearly the rules that government puts in place that give so much money to the big winners in finance, not anything intrinsic to the market.

Trump’s Failure on Trade, The Issue His Working-Class Voters Largely Elected Him With

One way to increase the American economy’s demand — or the power to buy things in the economy, which is something that most workers (their wages largely stagnant) could have used much more of in the last 40 years — is through lowering the trade deficit. A trade deficit is currently reducing demand because that gap in American spending is creating jobs and demand in a foreign country such as China instead of the U.S.

Lowering the trade deficit to 1 percent of GDP from 3 percent of GDP would grant about the same increase to demand as a $400 billion stimulus package would.

Trump told his working-class voters that he’d improve trade inequities and therefore help them by reducing the trade deficit, which of course like many of his declarations turns out to have been a sham.

The latest data from the Commerce Department shows that the trade deficit rose again in 2018. The full–year trade deficit was $621.0 billion (3.0 percent of GDP), up from $552.3 billion in 2017, and from $502.0 billion in 2016, the last year of the Obama presidency. If we pull out oil and other petroleum products, the trade deficit looks even worse, increasing by more than $77 billion from 2017 to 2018.

The picture doesn’t look any better if we look at the specific countries that Trump has vilified. The trade deficit in goods with Mexico has increased by $17.6 billion or 27.5 percent since Obama left the White House in 2016. The deficit with Canada, Trump’s “enemy“ to the north, has increased by $8.8 billion, an increase of 80.0 percent. The trade deficit in goods with China has risen by $72.2 billion since 2016, an increase of 20.8 percent.

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The new China agreement does almost nothing about currency values, the most important determinant of the trade balance. After running around the country for two years complaining about China’s currency “manipulation,” there are no provisions in his new pact that would force China to raise the value of its currency against the dollar.

The sharp rise in the trade deficit in the last decade had a devastating impact on manufacturing workers and whole communities in large parts of the Northeast and the Midwest. We can’t hope to reverse this damage, as those jobs will not come back.

However, we could design a trade policy that would move us toward more balanced trade and create millions of relatively good-paying manufacturing jobs. Unfortunately, Trump’s policy seems to be going in the opposite direction.

Instead of Only Taxing the Rich More, Change Pre-Tax Income Distribution So They Receive Less

Instead of just trying to tax the rich more, it would be better to prevent the distribution of income from being so unjust to begin with. Markets have been rigged in numerous ways to redistribute income upward to the wealthiest members of society.

Given the enormous increase in inequality over the last four decades, and the reduction in the progressivity of the tax code, it is reasonable to put forward plans to make the system more progressive. But, the bigger source of the rise in inequality has been a growth in the inequality of before-tax income, not the reduction in high–end tax rates. This suggests that it may be best to look at the factors that have led to the rise in inequality in market incomes, rather than just using progressive taxes to take back some of the gains of the very rich.

There have been many changes in rules and institutional structures that have allowed the rich to get so much richer. (This is the topic of the free book Rigged.) Just to take the most obvious — government-granted patent and copyright monopolies have been made longer and stronger over the last four decades. Many items that were not even patentable 40 years ago, such as life forms and business methods, now bring in tens or hundreds of billions of dollars to their owners.

If the importance of these monopolies for inequality is not clear, ask yourself how rich Bill Gates would be if there were no patents or copyrights on Microsoft software. (Anyone could copy Windows into a computer and not pay him a penny.) Many other billionaires get their fortune from copyrights in software and entertainment or patents in pharmaceuticals, medical equipment and other areas.

The government also has rules for corporate governance that allow CEOs to rip off the companies for which they work. CEO pay typically runs close to $20 million a year, even as returns to shareholders lag. It would be hard to argue that today’s CEOs, who get 200 to 300 times the pay of ordinary workers, are doing a better job for their companies than CEOs in the 1960s and 1970s who only got 20 to 30 times the pay of ordinary workers.

Another source of inequality is the financial sector. The government has aided these fortunes in many ways, most obviously with the bailout of the big banks a decade ago. It also has deliberately structured the industry in ways that facilitate massive fortunes in financial engineering.

There is no reason to design an economy in such a way as to ensure that most of the gains from growth flow upward. Unfortunately, that has largely been the direction of policy over the last four decades.