Reports from the Economic Front

a blog by Marty Hart-Landsberg

Monthly Archives: July 2009

The Minimum Wage Goes Up

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The national minimum wage rose by 70 cents to $7.25 an hour on July 24.  Set by Congress, the minimum wage was unchanged from 1997 to 2006, which meant that workers earning the national minimum suffered real and substantial declines in their standard of living.  Finally in 2006 Congress agreed to raise the wage by increments in each of the following three years; this is the final increase.

This increase, while welcome, is still limited.  For comparison purposes, in real terms the new minimum wage is still some 25% below what it was in the late 1960s.  Yes, that is right—in terms of purchasing power, the minimum wage now buys some 25% less than it did some 40 years ago.

The decline in the real value of the minimum wage means that full time workers earning the current minimum wage will find themselves living in poverty.  As the Center for Economic and Policy Research explains:

While significant, this month’s increase in the minimum wage will still leave a full-time worker receiving it with income far below what they need to make ends meet. Of course, what it takes to “make ends meet” is subject to much debate among experts, but regular Americans have a more definite opinion. Surveys conducted by Gallup over the last several decades have asked people to name the minimum amount of money that a family of four would need to “get along in your local community.” For much of the 1950s and 1960s, the typical response to this question was around $32,000 in today’s dollars. In 1969, a woman working in a minimum-wage job and supporting two children earned an amount not far below this basic “get-along” standard (adjusted for family size).

Today, such a worker would be nowhere near it. In 2007, the “get-along” amount was $45,000. Even after this week’s increase, a minimum wage worker will still earn less than $15,000 a year. Moreover, most will have no health insurance, no retirement plan, no paid vacation, or even sick days.

This increase, despite its limitations, couldn’t be more timely.  It means money in the hands of people who will spend it, thereby helping to stimulate our economy.  The Economic Policy Institute estimates that the 70-cent increase will boost consumer spending by $5.5 billion over the next year.

Sadly some economists dismiss the minimum wage as irrelevant, arguing that it only helps middle class teenagers working part-time for spending money.  In reality, 76% of all workers earning the national minimum wage are over 20 years of age.  And even teenagers need the money to help themselves and their families in this period.

Moreover, the gains extend significantly beyond the 2.2 million workers currently earning the minimum wage to include a large percentage of the almost 8 million workers who earn wages just slightly above it.  This happens because most companies have found it beneficial to maintain a wage scale and an increase in the minimum wage forces them to increase the wages of those who previously earned above the past minimum.

Seems all to the good right?  Well, not according to the logic of some.  According to these analysts, this increase is dreadful.  The reason: raising wages of those at the bottom will push up labor costs, hurt profits, and prolong the recession.  Interesting isn’t it—when the economy was going up, most of these people defended policies that produced a real decline in worker earnings.  They are doing the same now, even though the economy is going down.

Capitalism is often defended as the best means to a desirable end.  But in reality it has become the end itself.  We are now told what compromises we must make (in wages, working conditions, social services) in order to sustain profits.  Seems like it is time for us to pursue the creation of a system that can help us get to where we want to go.

Who Doesnt Have Health Insurance?

Who are the uninsured?  According to the results of a June 2009 Gallup survey,  as reported by the New York Times, 16% of the US adult population have no health insurance. More specifically, as the chart below highlights, Hispanics, the poor, and the young are most at risk of being uninsured.

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The Politics of Health Care Reform

OK class—last time we discussed the need for health care reform.  Now we are going to have a lesson on the politics of health care reform.

Click HERE for a chart that shows (1) how much money every US senator, by state, received from HMOs and the health insurance industry last election cycle and (2) the state by state growing gap between health care premiums and median wages over the period 2000-2007.

There are even review questions to make sure that you are paying attention!

The Need for Health Care Reform

How good is the US health care system?  Here is what the conservative British Economist magazine recently had to say:

America’s health-care system is the costliest in the world, gobbling up about 16% of the country’s economic output. Comparisons with other rich countries and within the United States show that its system is not only growing at an unsustainable pace, but also provides questionable value for money and dubious medical care.

And some people wonder whether we really need major reform?

The market has had its chance, producing high costs and low value for the great majority (although high profits for a powerful minority).  It is time for single payer.

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Unemployment hits 23.5% in Oregon–

How bad is the unemployment problem in Oregon (and the rest of the US)?

The New York Times offers a graphic that allows you to see the value of the two main unemployment indicators (U-3 and U-6) for every state in the country.  U-3 is the official rate; it is 9.5% nationally and 12.2% in Oregon.  U-6 is the adjusted rate (which means it takes into account involuntary part-time employment and discouraged workers).  It is a crushing 16.5% nationally and an even higher 23.5% in Oregon.

That’s right—23.5% in Oregon.

According to the Times, the U-6 rate “was 21.5 percent in both Michigan and Rhode Island and 20.3 percent in California. In Tennessee, Nevada and several other states that have relied heavily on manufacturing or housing, the rate was just under 20 percent this spring and may have since surpassed it.”

I think we are moving beyond the “Great Recession” to the “Great Depression 2.”

Those arguing about whether we need a bigger or smaller stimulus are missing the point–we need a new economy.

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Learning From China?

What words come to mind when you think of the Chinese working class?  If passive was one of them, think again.

The China Labor Bulletin just released a major report on the state of the Chinese workers’ movement called Going it Alone: The Workers’ Movement in China.  After analyzing collective labor protests during the years 2007 and 2008, the report identifies the following three major trends:

  • Workers took matters into their own hands. Bypassing the largely ineffectual official trade union, they used public protest as a means of forcing local governments to intercede on their behalf. And, in many cases, workers were successful.
  • Strikes ignited other protests in the same region, industry or company subsidiaries. The wave of taxi strikes that swept the county at the end of 2008 exemplified both the spread of industry-wide protests and the willingness of local governments to negotiate with the workers.
  • Workers’ demands became broader and more sophisticated. Previously, disputes were mostly related to clear-cut violations of labor rights, such as the non-payment of wages, overtime and benefits, but in the last two years collective interest-based disputes came to the fore, with workers seeking higher wages and better working conditions, and protesting arbitrary changes in their employment status and pay scales. One of the major causes of discontent was, for example, attempts by managements to circumvent the new Labor Contract Law by forcing employees to relinquish long-term contracts and rejoin the company on short-term contracts or as temporary labor.

How would we measure up if a similar report were done in the US?

Action Gets Results

From the Wall Street Journal, June 29, 2009:

British Workers Recover Jobs After Mass Protests
By ANGELA HENSHALL and LANANH NGUYEN

LONDON — Hundreds of laid-off U.K. workers got their jobs back this week after organizing mass protests at energy plants across the country, coordinated through text messages and social-networking Web sites.

The contractor companies at Total SA’s 200,000-barrels-a-day Lindsey oil refinery met nearly all the striking workers’ demands, which had become a rallying cry of sympathy strikes across the U.K.’s engineering-construction industry. More than 8% of the industry’s work force walked out, although the protests didn’t have an impact on production.

“Total are pleased the contractors and their work force were able to reach a positive conclusion,” a spokeswoman for the French oil major said. The strikes bypassed official trade-union channels as they weren’t called after a vote by members and didn’t go through the U.K.’s legal requirements for industrial action.

Employers agreed to reinstate the entire 647-strong work force at Lindsey and, on Monday, a full return to work on a £200 million ($331 million) construction project to build a refinery unit, according to a joint statement late Thursday.

The speed and scale of the wildcat strikes, unprecedented in the U.K., caught energy companies by surprise, with protests organized by assembling large groups of people at specific sites through mass text messages.

“The idea of spreading it by text messages was just instinctive, you get your mate on the phone,” said Alistair Tice, a regional secretary for the U.K. Socialist Party in the Yorkshire and Humberside region. The engineering-construction industry is largely composed of itinerant workers with networks all over the country, making it easier for strikers to mobilize, he said. For years, U.K. governments have taken a hands-off approach to industrial disputes. However, as the U.K. recession has deepened, the government has appeared more willing to assert its views.

“I’m sure the government was concerned and was closely monitoring the situation, but there was no direct pressure,” said Mike Hockey, managing director of the Engineering Construction Industry Association.

On Friday, Prime Minister Gordon Brown’s spokesman welcomed news of the deal. “It is a positive step forward,” he said. “We’ve made clear on a number of occasions over the last week or so that it’s important that talks do resume.”
—Laurence Norman contributed to this article.

More Action Is Needed

The following comes from the July 6 Beat the Press blog written by Dean Baker:

The Timing of the Stimulus’ Impact

The economists who missed the housing bubble seem to be having a hard time understanding the timing of the stimulus. While the vast majority of the money has not yet been spent, the economy has already felt the bulk of its impact.

The reason is simply, more than 60 percent of the stimulus takes the form of lower tax rates and higher benefit levels for programs like unemployment insurance. The lower tax rates and higher benefit levels already went effect at the start of the spring. This means that people already have higher take-home pay or government benefit checks. The stimulus will not increase further in future months, which means that there is no reason to expect spending to increase further.

More than a quarter of the remaining stimulus is devoted to state and local government stabilization funds. This spending will limit the cutbacks at the state and local level, but will not lead to additional growth. The remaining funds are projected to be spent out at an $80 billion annual rate over the course of 2010.

Even if we assume that we are starting from zero spending at the moment, this is boost of just over 0.5 percent of GDP. By contrast, the collapse of housing construction trimmed $450 billion or 3.0 percentage points of GDP from annual demand. The decline in consumption due to the loss of bubble wealth is in the range of $600 billion to $800 billion a year.

In other words, the remaining stimulus is an order of magnitude too small to give much of a boost to the economy. Economists who know arithmetic would be aware of this fact.

The Need For Real Structural Change

It is getting harder to sell the “recovery right around the corner” story.  I have been stressing the structural nature of current problems because there is a lot riding on our understanding of what is happening.  If we remain passive, hoping that existing policy is sufficient to nurture the alleged “green shoots” of recovery, we are likely to end up with an economy largely unchanged from the past.  That outcome, while attractive to the few with power and wealth, largely guarantees a future of steadily worsening living and working conditions for the great majority.

So, how bad are things?  As the Financial Post describes:

The U.S. economy has lost the equivalent of every job created in the past nine years.  All job growth since the final year of the dot-com bubble, its recovery from the bust, and the ensuing six years of consumer-driven boom is now gone, leading some economists to fear an outright decline in wages will be next. Others believe the United States is on track for a painful “jobless recovery.”

“This is the only recession since the Great Depression to wipe out all jobs growth from the previous business cycle, a testament both to the enormity of the current crisis and to the extreme weakness of jobs growth over the business cycle from 2000 to 2007,” said Heidi Shierholz, an economist at Washington-based think tank The Economic Policy Institute. . . .

Since the recession began in December 2007, the jobs market has shrunk by 6.5 million positions, pushing the unemployment rate up 4.6 percentage points to 9.5% — the highest rate since 1981. Nine million part-time workers are in want of full-time jobs, and a record 29% of unemployed have been jobless for more than six months. . . .

The employment market’s problems do not end at job losses. Earnings are under pressure. Average hourly earnings rose an annualized 0.7% in the past three months — the smallest gain since records began in 1964. The annual change in hourly earnings slipped to a rise of 2.7% from 3% the previous month.  “Wages will soon be falling outright, a classic deflation signal,” said Ian Shepherdson, the chief U.S. economist at High Frequency Economics.

Compounding problems, average hours worked fell further in June to be down 0.8% to a cyclical low of 33 hours a week. The average workweek has shrunk 8.2% since the start of the recession, placing added pressure on household cash flows. It also means employers will be slow to hire because there is ample room to increase work hours.

The administration needs to be pushed to take much stronger action—its modest stimulus program is not enough to reverse downward pressures and, once its effects dissipate, those pressures are likely to intensify—this could be 1937 all over again.

We need real structural change—in how work is organized and compensated, in how social programs are financed and delivered, and in how the economy is organized and directed.

The Continuing Debt Burden

Savings rates are on the rise—job losses combined with wealth destruction (from collapsing housing and stock prices) have forced people to reduce spending and boost savings.  Savings as a percent of disposable income has risen from below 0% to the 5-6% range.  In fact the 5.7% savings rate in April was the highest in 14 years.

Some commentators argue that with savings rates now close to historical norms (of 6-7%) we should soon see renewed spending, providing another boost to recovery.  But this makes little sense—in this environment, people cannot maintain higher savings rates and increase spending at the same time.

An even more telling argument against a revival of spending is the continuing heavy household debt load.  The chart below (which comes from Business Week),  shows household liabilities (mortgage and consumer debt) as a percent of aftertax income.  Recent spending cutbacks have indeed produced a decline in the debt ratio—from 138.6% in the fourth quarter of 2007 to 131.1% in the first quarter of this year.  But as the chart makes clear, this process has a long way to go.

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