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Pitchfork Economics with Nick Hanauer
The Wage Standard: What’s Wrong in the Labor Market and How to Fix It (with Arin Dube)
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A
The rising inequality and growing political instability that we see today are the direct result of decades of bad economic theory.
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B
The last five decades of trickle down economics haven't worked. But what's the alternative?
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Middle out economics is the answer because
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the middle class is the source of growth, not its consequence.
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A
That's right.
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This is Pitchfork Economics with Nick Hanauer, a podcast about how to build the
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C
economy from the middle out. Welcome to the show,
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A
Goldie. I am so fired up today because we get to talk to our old friend Aaron Dube.
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B
What a geek you are. You're all fired up to talk to a University of Chicago trained economist.
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A
Oh, my God. No. But Aaron Dubay is my hero. Aaron Dube is the godfather of the empirical study of the minimum wage and has been such an important.
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B
I just can't tell you how many other labor economists you've just defended.
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A
I'm sorry, everybody, but no, come on. The guy has made such a big contribution to our understanding of the impact of the minimum wage on jobs and has been at it for a really long time. And Aaron is an economist at the University of Massachusetts Amherst, and he's got this killer new book out called the Wage what's Wrong with the Labor Market and How to Fix It. And we're just very fortunate to get to spend time with Aaron and talk about all these issues. I know he'll have a very interesting perspective on it. I mean, I'm just psyched to talk to him.
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B
Well, I'd add in some pithy comment, but I'll save that for the outro. Nick, why don't we just go talk with Aaron?
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C
Hi, I'm Aaron Dube. I'm professor of economics at University of Massachusetts Amherst and the author of the Wage Standard.
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A
So, Aaron, we have got. We've known each other now for a long time. Yeah, goes back all the way to the early days of the $15 minimum wage.
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C
That's right.
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A
And you know, you've been grinding on all these wage issues for how long? Your whole career?
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C
Look, I went into grad school in economics because I wanted to understand how people get paid and why they get paid, what they do. So these are questions I've wrestled with pretty much since I was a student. I actually did my first work studying minimum wages when San Francisco became one of the first cities to pass its minimum wage back in 2004. So that was my entree into this literature and studying particularly what wage floors do.
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B
You came out of the University of Chicago, right?
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C
I did. University of Chicago, especially back at that time, the Idea that you may want to intervene in the labor market and set wages was not kindly looked upon. It was a very interesting time because, you know, this was like the late 1990s, early 2000s, and this was when the profession of economics was just really kind of shaken up somewhat by the early evidence from David Cardinal and Krueger.
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A
And that was 94, was it not?
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C
That's right. 94 was their paper. And then 95 they wrote a book and in 2000 they published a follow up responding to critics. And, and all of that made it a very exciting time to start thinking about it. But I also saw things around myself. When I was a grad student, I was actually, even though my degree is from Chicago, I ended up spending quite a bit of time at Harvard. And I in fact worked with Richard Freeman, who is an economist there. And during that time I actually saw there was a lot of effort to actually raise wages for Harvard service workers. The book in fact is dedicated to Frank Morley, who was a janitor who worked at the Department of Economics cleaning the Littauer hall, you know, as a janitor. But here's the really interesting thing. Frank being a contract janitor was paid less than in house janitors who worked at Harvard doing the same job sometimes cleaning similar buildings on campus but for different pay. And that was wild because you could just never expect that to happen. If you believe the market economist, the
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A
only people who would not expect that to be to happen.
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B
It's right, it's right there, black and white in Mankiw's book. If you. I mean, it can't happen. It's impossible.
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C
I'm trying to understand how workers like janitors can get paid differently because of contracting. But when I talk to my advisors at Chicago, they would say, what do you mean by that? That doesn't make any sense. And so this was very, very much of a learning experience. In many ways I learned more actually just seeing what was going on around me, but also how you could change things. Because as it turns out, after a year long campaign to raise wages, Harvard ended up very substantially increasing wages of service workers and in fact tying all pay to a floor negotiated by the unions. And in many ways it reflects a lot of the ideas that I actually propose in the book of how you build standards like that. So this was happening around me both in the classroom and outside, and, you know, has deeply affected my own thinking about it and seeing both what can go wrong, but also what can go right.
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B
Yeah, that's where you went wrong. Being influenced by the real world because we all know that the more unrealistic the assumptions, the better the model.
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C
Well, I will say that the economics of today is in a much better place than the economics back when I was in grad school. It's hardly all problems are solved, but nonetheless, we can have arguments in a more useful fashion.
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A
That's right. And you are one of the bright lights of the modern economics, which is why we're so happy to have you on to talk about this stuff. So just tell our audience just a little bit about the book and you know, just kind of take us through the argument that you're trying to make.
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C
So the core proposition of the book may be of interest to your audience because it says most American workers deserve a raise.
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A
Yes.
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C
And research shows us why we haven't been getting one and how we can do it. Okay, so the starting point, you know, is to sort of go back to about 1980. And this is not new terrain, but it's useful to summarize. Look, since 1980, the economy grew by about 75% when it comes to productivity in this country. But wages in the middle grew maybe at most 25%, and wages at the bottom even less. So then the question that I really am trying to answer in the book is why did the labor market stop delivering for most workers? Because in the several decades prior to that, wages and productivities were growing together. So the answer turns out to be less about impersonal market forces, which often economists focus solely on like, like technology or trade. These things matter. But it also matters the choices we make. And it turns out the choices include corporate choices, policy choices, and even choices by the economics profession to decide what to pay attention to. The big idea is that wages are not just natural numbers set in some well oiled job market machine that supply and demand matter, but they matter in an environment that's teeming with all sorts of different business strategies, pay norms, institutional forces, and even the macroeconomic environment. And your paycheck and cultural influences too,
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A
Moral and cultural influences on top of that.
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C
Absolutely, absolutely. And ideological influences as well, as I talk about in the book. So your paycheck reflects this employer power. And that is a key thing that people have often overlooked because those employer power can be shipped by a lot of stuff, including corporate ideology. So do you share the gains broadly or do you maximize shareholder return at all costs? It also reflects institutions. Do you have unions that are strong enough to actually set the standards that get adopted? Perhaps even more broadly. And of course it reflects policy choices, as you know, Nick, knows very well when we stop raising the minimum wage, as we did starting in the 1980s for the first time, there are real consequences. And then finally, and the other part that I think is also quite important is to the extent that we want to make the market work well, having a commitment to being full employment is really critical. And it just turns out after 1980, we spent a lot less time at or near full employment than we did in the decades prior. And these things all kind of come together, as they did after 1980, to be a real perfect storm of sorts that really shifted against the workers, leading to that big gap in pay and productivity.
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A
Aaron, if you don't mind, would you just for our audience, refresh their memory about why it is that your colleagues at the University of Chicago believed that wages always reflect productivity?
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C
Yeah. So a basic model of supply and demand we usually teach in our Econ 101 courses sort of lays out a competitive labor market. And in that competitive labor market, if one employer decides to offer a lower pay, saying, well, I'm going to pay a little less, well, here's what happens. All their workers leave and they go somewhere else.
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Yes.
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And when that competition ensues, all employers are competing against each other to make sure they can attract workers. Wages will rise until workers are paid what they're contributing to the system, to the economy, and that's what we call the marginal product. So if the wage at all falls below that, this hyper competition will ensure that the wage comes back up. So everyone basically receives what they are contributing. So it's possible that some people are getting lower pay, but it's just that maybe they don't have the skills. So then if basically some people have not seen their pay rise for many years, the solution is you gotta train them. Maybe they have to learn how to code or whatever it is that will raise their skills so they can raise pay. It's never in that scenario because employers are choosing a low wage strategy.
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A
Yeah, interesting.
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B
Did it never occur to economists that maybe when one employer lowers their pay, that creates a competitive advantage that forces the other employers to lower their pay, since, in fact employers have more power in price setting than workers do?
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C
Well, I think the starting point is if you really have this market where employers are just competing so fiercely with each other, the idea that they can go awry somehow and in fact compete downwards just is ruled out sort of as a logical aspect. But, but that's because the starting point is flawed. The starting point is it's absolutely easy for workers to just replace their jobs as it turns out, that is absolutely not true. In fact, you can start by something really simple. You can just go ask people how easy it is for you to find a job about as good as you have. It turns out only about a third of people say that it's very or somewhat easy. Okay, that's a kind of a shockingly low number. And that turns out to be true even when you ask during periods of low unemployment rate and tight labor markets. Even then it's not all that easy for you to actually change your job. And when that happens, that means if you that company paying, let's say, 10% lower pay, you don't have a mass exodus of workers out the door. Yeah, yes, you have a higher quit rate, but it turns out if you're paying 10% less, your quit rate may be about 2% higher. So it is higher, but not very much. That also means then you have a good amount of discretion of what kind of wage strategy to pursue. And you see this. So you see, for example, UPS and FedEx do you know, workers do similar job. Both employ around half a million workers. Workers and generate something like $150,000 in annual revenue per worker. But they pay very differently. Walmart pays about 25% lower than Target. That I can go on and give you many examples. But this is, this is very sort of, you know, apparent just looking around. And as it turns out in even when you follow the same worker going company to company, their pay, not surprisingly, varies by the company they're working in. And that is the example of what, you know, has a funny name in economics. We call it monopsony power. But it's a funny name.
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A
Evil twin of monopolies.
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C
That's right, yeah. So monopoly, of course, is when you have, you know, a single seller. A monopsony literally would be if you had a single buyer. No, in reality that's not the case. What it means is that the buyer hire or the employer has a degree of market power that they have a choice. They're deciding, well, I could pay a higher wage and have lower turnover and quits, or I could choose a lower pay. And if I'm not bound by any other forces or countervailing power, right. Like for example, a union or policy, then I'm going to choose a wage strategy that is going to be, you know, reflecting either my profit or some other value that I have. Right. Because. Or some ideology that I have. And what's really interesting is how those pacesetting ideologies really changed over the 80s and 90s one of the most compelling examples comes from a study by Darunajamaglu, who's who's an economist at MIT Co authors who studied what happens when companies started to hire CEOs who had an MBA. Now that might seem funny because don't CEOs always have MBA and it just turns out that they're much more likely to today than they were 40 years ago. Yeah, and this is relevant because, you know, in the, especially Starting in the 80s, the idea of the sort of shareholder revolution was really spreading. And so if you actually had a CEO who used to be a worker and they sort of climbed up the ranks, they had a different value system than someone who's just a freshly minted mba. As it turns out, when the company switched with a CEO with the MBA, pay fell by about 6% and by almost 10% for lower wage workers. While basically profits rose, executive comp went and executive pay went up. Exactly. So this is like the same company compared to other similar companies. Just it, you know, choosing a different strategy based on essentially sort of a business ideology that led to a different outcomes in profits in, you know, wages. But it didn't change productivity, it didn't make the company work better, didn't get
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A
better, the products didn't get cheaper.
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There's, there's a classic example here in our backyard of Seattle, and that's Boeing, which historically had been run by engineers.
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A
Yes.
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Until the McDonnell Douglas acquisition. And essentially the, the finance guys at, from McDonnell Douglas took over the company.
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And then the planes started falling out.
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And then the plane started falling. Right. And, but, and they, you know, they went after the unions and suppressed pay and you had all these other deadly consequences that came from it. But that was a totally different business philosophy.
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C
Right.
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B
Then what, what had built Boeing to be the world's largest aircraft maker at the time?
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A
So, Aaron, I want to zoom in on an area that you have made, I think, almost an unparalleled contribution to, which is the study of the effect of the minimum wage, raising the minimum wage on job loss. Because I don't think there's a human alive that's done more or better work on this than you have. And that's basically what you devote chapter six of the book to. Can you just speak to this a little bit?
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C
Yeah, yeah. So, you know, we have had a federal minimum wage in this country since the 1930s, and from then until about 1980 or so, we most years we raised the minimum wage at the federal level. And so the minimum wage kept up with Overall cost of living and actually more than that, overall productivity. And then it stopped because President Ronald Reagan decided he did not want to raise the minimum wage and he didn't. And as a result, we started, as I see it, a long stretch of extremely dysfunctional way of setting wages in this country. So without a federal standard, what happens is that states had to actually step up. So this is the sort of silver lining of this dysfunction is that it gave nerds like myself and nerds before me like Carter and Krueger, a really great way of studying the causal effect of this policy.
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A whole bunch of natural experiments.
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C
A whole bunch of natural experiments. Natural experiments is the silver lining of dysfunction. And so there we have it. So we can now study what happens if New Jersey raises its minimum wage. Well, how do we know what would have happened? Maybe New Jersey would have done something else. Maybe jobs would have risen or something. Oh, let's look right next door in Pennsylvania. And that's exactly what Card and Krueger did in their famous 1994 study. Following up on that, we sort of, I think basically our contribution in some ways was summarized by the word many say let's do many New Jersey and Pennsylvania cases. Why do one when you can do many? And we now have the data to do many. And we did that in our 2010 work that compared border counties. And we basically found that, look, the minimum wage goes up, pay goes up in the, in the restaurant sector, which is a major source of employment for minimum wage workforce. And then employment, what happens, let's look at both sides for four or five years afterwards. It doesn't change. It doesn't really change at all. So this is a win, win for low wage workers. And that was really, I think, unemployment,
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but an inconvenient fact for the National
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Restaurant association that that is true. But it is, it is interesting because, you know, what happened after that, as Nick played such an important role in, is to really push us to do, to do more. Right? And, and this is important because, look, I believe in evidence based policy making, but I also know that when the evidence only comes from fairly limited experiments or we don't know what would happen if we actually do something more bold, we can't simply avoid doing things that are bold because we have never tried it, right? So we have to balance between those. And in some ways, that's exactly what happened with the Fight for 15 movement. Ironically, we engaged in an even more egregious national experiment, the natural experiment, where half, roughly half the country now has gone for more than A generation without raising its minimum wage to the point where we actually, for the first time, 20 states in this country effectively have no minimum wage because the 725 is economically not very different from a zero. Okay, so that means that basically $22.13
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plus tips is effectively zero.
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C
Yeah, right.
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It's just.
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Yes.
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A
Why not just say zero plus tips like. Well, let's just call it slavery.
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Well, Nick, because the, the, the employers get to keep the difference between the 213 and the 725 in tips. So this is a way of actually subsidizing employers. Yeah, that's why we keep it.
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C
But at the same time, you know, we have now states that have taken more ambitious approaches and, and then that actually allows us to see what happened for these higher minimum wages. And you know that in a more recent work, that's what we did. Just again look at these natural experiments, including the more recent period with higher minimums and continuing to find virtually the same answer. And that is again reassuring. And this is where I think the learning that's happened has really affected pace setting. And not just here in the US also around the world, you know, so, so in 2019, I was asked by the Conservative Chancellor of United Kingdom to look into the evidence in UK and they wanted to use that to sort of inform what kind of minimum wage or as they call it, the national living wage they wanted to set. And I looked to see there was a significant increase also in the 2010s in UK and when I reviewed the evidence, I found that it was actually quite successful. Following up on that, the British government decided to move the minimum wage to about 2/3 of their median wage, placing the United Kingdom as one of the higher standards around, around the world. You know, one of the things I point out in the book is that none of our states today, none of them actually reach a 2/3 of a median wage standard. This would require and it would allow us to actually go higher than we have even in some of the higher states. And this sort of highlights to me that there's more work to be done when it comes to the minimum wage.
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B
So what you're telling me, and I never knew this before, is that we have Ronald Reagan to thank because we never could have changed our thinking about the minimum wage without the opportunity for all these difference indifference studies to actually compare what happens across borders.
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C
Unintended consequences are real, man.
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A
Okay, so Aaron, tell us a little bit about the glorious future.
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C
So one of the things that I also talk about in the book is try to sort of build on what we have learned from the minimum wage experiments to try to sort of tackle in some ways a broader problem. Because, you know, like I started with saying that productivity and pay has really not gone together for the typical American worker. It's true at the bottom, but it's also true at the middle. The question is, what can we do to help increase and rebuild the middle class? Now one thing we could do is push the minimum wage even more, which I think we can do some more of, but there's a limit to that. But here's what I argue is that in fact that we should consider having wage standards for lots of jobs. And if that sounds like a radical idea, it turns out most of our high income peer countries do some variant of that. In some ways we are an exception. We are an exception where most jobs just don't have any wage pay standard. And so, you know, the good news is we're actually starting to see this even here in America. For example, nursing homes in Minnesota have actually a wage board based on representatives from employers, from unions that actually have set a wage floor for different types of nurses. This is actually a great example of how we can start to rebuild and wage standards again, using sort of our understanding and knowledge of what we have seen with minimum wages, but taking it more to scale in a variety of contexts. And I argue that in fact, experimentation like this, it doesn't require us to solve the broken politics in D.C. right. We can do this at the state level.
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A
Yeah.
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C
And we are starting to see this.
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A
Just to be clear, it's a good thing. We can do it at state level, but it is suboptimal.
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C
Absolutely. Look, one of the things that we should do is to really change our labor law and have the kind of sectoral approach that has worked well in many places. I think we should absolutely strive to do that. But we don't have to simply say until we get there, there's nothing to do because there's a lot to be done at the state level. We can start today.
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A
Okay, answer me one thing. There must be hundreds of academic studies on the impact of raising the minimum wage on job creation.
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C
Yeah, we actually compiled nearly 100 studies that basically show what happens to both pay and wages. And then, you know, you can kind of ask, well, what do most of those studies find? We actually have put together a database. You can go look at it, it's online. We try update it pretty regularly. It has a wonky name, the own wage elasticity, but you know, it's A simple idea. The idea is this. When the minimum wage rises, how much does it increase pay for some group of workers, like maybe fast food workers, and how much does it change employment? Of course, if you look at the studies, it turns out there are some studies that suggest very large job losses. There are also studies that suggest substantial positive job gains. Yeah, if you take the average, the average is pretty darn close to zero. Okay. It suggests that the typical study has found very small changes in employment for the kind of weight changes that we've gotten. As it turns out, I would argue that the studies that are particularly more careful and actually just studies that have been done more recently where there's better data, those studies tend to find even closer to zero effect or more positive effect in some cases.
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A
Yeah, I mean, I know our opponents would disagree, but I have looked very carefully at the studies that show that there are big job losses, and they are super suspect because. Because the parameters that they use and the. And the assumptions that they make are just not there.
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C
There's a good example that's relevant. It has to do with Seattle. Yeah, okay.
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B
Right.
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C
And so I talk about this in the book. So there was a study from the University of Washington that was released that actually found very substantial job loss. Okay. The initial working paper, the unpublished version, is one of the, you know, in that database of nearly 100 studies. It's probably the second most negative estimate, you know, compiled. But here's the thing, and just to be clear, the researchers who did the work there were definitely very solid economists and they used very solid methods. But here's the issue. The issue is that they were comparing what happened to the number of jobs paying less than $19 in Seattle, and how did that change? And then how did the number of jobs paying less than $19 change in rest of Washington state?
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A
Yes.
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C
Okay. And they found that compared to rest of the state, after the policy change, the number of jobs paying less than $19 actually in Seattle fell quite a bit. And they interpreted that as job loss because the minimum wage was under $15 at the time. So they thought. Now here's the issue. There are two reasons why you can have fewer than $19 an hour job. One is that there are less jobs. The other reason is maybe because they're paying more than $19.
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A
Exactly.
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B
Aaron. There were literally job ads from Jimmy John's not even in Seattle across the border at the time that study came out where they were paying over $20 an hour for delivery drivers.
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C
And Seattle, like many cities like Seattle, have seen wage and and price growth much more than rural areas. And this is going to mean that even if nothing had changed, like even if there were no minimum wage in general, you would have had less jobs paying $19 or fewer in Seattle. So if you are, I mean, just
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A
to be clear, as I recall, the economist who did that study withdrew it.
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B
Well, he recanted the later studies.
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A
So what happened is bigger recanted in
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C
their published version, they actually do still have that estimate, but they have a very different estimate as well. And that very different estimate is quite sensible. You just follow low wage workers to see did they actually lose jobs in Seattle versus outside of Seattle. And doing the second method suggested an employment effect close to zero.
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A
Yes.
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C
Okay, so in the published version, the authors say that they don't take a stance on which of these either very close to zero or one of the largest negative estimates in the literature is more correct. I have my very strong view because in follow up work we actually looked at nearly 40 cities that passed minimum wages and showed why if you took an approach like the less than $19 measure, you would again a similar problem and suggesting job losses when it was really just wage growth was faster in major large cities like Seattle in this period. So I think that's an example when, when, when a study has found very substantial negative effect. Look, the reality is there's sometimes they're going to get a lot of publicity and you know, as they did then and then over time. However, it's quite useful to recognize that when we learned more, we actually found that maybe that was not really what actually happened. And maybe the effect of the minimum wage in Seattle was more effective than the original results seem to suggest.
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B
Another conclusion from the Seattle minimum wage study was they looked at prices because we get this a lot, that oh, if you raise the minimum wage, that's why things are so expensive here. And what they found was no impact on any industry except for the restaurant industry where there was a small increase in prices.
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C
That's right.
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B
Not in retail, not in hospitality, the hotels, it was just the restaurant industry. How have other studies followed up on that?
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C
That's a great question. I mean, so I take the perspective that at a certain level, most people, most voters, if you ask them, are you willing to pay a bit more to make sure that we have a strong minimum wage? By and large, most voters say yes, I'm okay paying a bit more if that means, you know, substantial pay growth for people. People at the bottom. The studies, when you look at minimum wage effects, they absolutely do find some price effect in the restaurant sector. But you're also absolutely right. There's, it's, if you look at the overall price level, it's a very small impact. It's largely in the restaurant industry. That's where you actually see the prices. But these are relatively small price increases compared to any of the wage gains that occur. So as a result, you can take in any price effect. Most consumers don't really notice much. Right. And even as the wage gains at the bottom are very much noticed by the workers and their families and just
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A
a level set for the audience. I think what's really important in this price discussion is to keep in mind the fact since 1980, more or less, the wage share of the economy has gone from something like 52% to 45% while the profit share of the economy has gone from something like 5% to something like 11 or 12%. So it's a 6ish 7% share of the economy that went from wages to profits. And 6% of 24 trillion is. That's a lot.
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B
It starts to add up.
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A
Right, it's a trillion and a half dollars or something like that. And what that means is that you could take, take a trillion and a half dollars of corporate earnings, give it to workers in wages and prices would not have to change $0.01. So there's a lot of room in the economy for working people to earn more without consumers having to pay more. We have just gotten used to a world in which corporate profits are outsized.
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B
But there's other factors as well. There's lots of studies showing, particularly in the restaurant industry, that when you increase wages, you get less turnover, higher productivity, it actually lowers other costs.
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A
If you were king and you could do one thing, anything, what would you do?
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C
Yeah, I think one thing that I would certainly do is commit to full employment. And in the last five years, we've actually seen pay gap between the 10th and the 90th percentile. That gap actually shrink by about a third of the increase in that gap that happened between 1980 and 2019. So if that's a little confusing, what I'm saying is that this one measure of pay inequality, the gap between the 90th and the 10th percentiles, a third of the increase that occurred in that inequality in the post1980 era was reversed. And, and that happened because of two reasons, full employment and minimum wage.
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A
Okay, no, I'm going to push back on that. The reason that happened is because the top 1% left everyone else behind. If you were to compare that Gap between the bottom and the real top. It expanded.
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C
Oh, I. Absolutely. Now I said one measure. You're right. The 1% share of income is definitely not something that has fallen.
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A
No. And that gap, however, that gap is
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C
w. Has it not the pay gap between. In wage gap between the bottom 10th percentile and say the 90th or the 95th percentile? Even that has shrank largely because we saw very strong wage growth at the bottom during a very tight labor market. Okay.
- [38:56]
A
Relative to the 90th percentile, but not relative to where the real money is being made in the economy, which is in the top 1 or 2%.
- [39:06]
C
This is the way what I would say. I would say that, look, full employment and tight labor markets can be very effective, but they will only work. They will only work for periods of time. And even in the best case scenario, they will not deliver all the things that we want. And this is where, if I really could and really institute different governance system in this country, I would absolutely move towards sectoral bargaining, having sectoral standards that make sure that we're really building a strong middle class in this country, because that can really happen.
- [39:45]
B
You had used earlier the. You had compared UPS and FedEx, and one of the big differences between those two companies is not just their payment, but the fact that UPS is unionized.
- [39:58]
C
And that's right, absolutely.
- [40:01]
B
Absent a strong organized labor movement, sectoral bargaining is the next best thing.
- [40:09]
A
Well, we have gone over our time, but this has been an amazing conversation. Why do you do this work?
- [40:19]
C
This is what really gets me up in the morning. I want to understand why people get paid what they do and how we can give more people a raise.
- [40:33]
B
One of your words of wisdom, Nick, that I have repeated often is, do
- [40:41]
A
I have words of wisdom?
- [40:42]
B
Yeah, you do. You come up with these pithy phrases, you know, like when workers have more money, businesses have more customers and hire more workers. And that's a great one.
- [40:52]
A
That is why they pay me the big bucks after. That's right.
- [40:54]
B
But here's another one, speaking of being paid big bucks, okay, you have said repeatedly, employers don't pay you what you're worth. They pay you what you negotiate.
- [41:07]
A
Yeah. What you have the power to negotiate.
- [41:09]
B
Right. And I bring that up with Zach every year during our annual review to no avail, because I don't have any power.
- [41:17]
A
Yeah, right.
- [41:20]
B
But you still pay me well.
- [41:23]
A
Yeah.
- [41:23]
B
And it turns out that when you look at the minimum wage, when you look at the wage standard, that is just absolutely.
- [41:31]
A
As much as I love Aaron and value his work what drives me bananas still is the fact that he has to do the work. Now. I think the best and funniest part of that conversation was when he told us that that the silver lining of the debacle, which is the American economy over the last 40 or 50 years, is it provided all this opportunity for people like him to do really interesting studies.
- [41:56]
B
That's so good in the end. And I think there's this deep irony here that it's Ronald Reagan who set this in motion, Ronald Reagan who put an end to the routine increases in the minimum wage. Remember, Aaron says that he would start off, he would try like 2/3 of median wage, setting the minimum wage to that. Historically, when the minimum wage was first implemented and this was picked out of thin air, it was 50% of the median wage.
- [42:31]
A
Yes.
- [42:32]
B
The minimum wage was set at 50% of the median. And the overtime threshold was three times the minimum wage. And these were just random numbers with no empirical evidence to support it. But decade after decade after decade, and I think I did the right number of decades at that point because it really was for at least three, three and a half decades. We raised the minimum wage to keep it. You know, it would jump ahead and then fall back, but we were shooting for that 50%. And then Reagan comes along and is like, nope, we're not gonna raise the minimum wage anymore.
- [43:08]
A
Screw the poor.
- [43:09]
B
And based on this idea that you learn in your Econ 101 textbook, I mean, they literally still use the minimum wage as the textbook illustration of supply and demand, of that inverse relationship between price and demand, that if you raise the minimum wage above that equilibrium price, you will get unemployment, you will lose jobs. And nobody really studied it. And it turns out I didn't realize one of the reasons why was not just because there was a. And there was a kind of cultural prohibition within the field of economics to study something as basic as this. But also nobody could study it.
- [44:00]
A
Yes.
- [44:01]
B
In the way that Cardin Krueger eventually had an opportunity to do.
- [44:05]
A
Yeah, it never occurred to me. Yeah, yeah, yeah, you're right.
- [44:08]
B
I've used this story to just bad mouth the economics profession, but it turns out it created an opportunity to do this study. And the reason why I think this is so ironic, and we've talked about this before, is that the minimum wage is a wedge issue.
- [44:24]
A
Yes.
- [44:24]
B
In economics, because it proved one of the most fundamental assertions of economics, of neoclassical economics, that inverse relationship between price and demand. It proved that it was wrong, that economics was wrong about one of its core assumptions. A main principle that everything else is built on top of. And if it's wrong about this, what else is it wrong about?
- [44:56]
A
Pretty much everything. Yeah. Right.
- [44:58]
B
And I think it has, I think these minimum wage studies, these minimum wage hikes, these local, state and local minimum wage hikes and the studies that followed up that show no disemployment effect or very little, sometimes employment gains and no significant increase on prices. It's just opened up the entire field of orthodox economics to, you know, a reevaluation and reanalysis and a whole new way of trying to understand how the economy works. So thank you, President Reagan. We thank you for your service.
- [45:34]
A
Yeah, whatever. But anyway, you know, I mean, I just think that the frustrating part is, and, you know, the work that we're trying to do to make this different is to start with a framework that, with this massively asymmetric level of scrutiny, where anything that benefits poor people requires a massive amount of studies to prove that it'll do no harm. But no study has ever been done on the job killing effects of Wall street bonuses, which clearly kill more jobs than the minimum wage does. Right. Because if you took all that Wall street bonus money and gave it to working people, all of them would have twice as much money, they would buy twice as much stuff, and there would be twice as many jobs. Right. Like, I mean, that'. That's a little bit of an oversimplification. You know what I mean? Right. And it just. That is the neoliberal paradigm. That the neoliberal paradigm is Aaron Dube's source of permanent employment because it requires you to continue to prove that the most basic things to do to hold the society together do no harm. And it's just incredibly nuts. And, you know, like saying that, you know, the principle of marginal productivity obtains except if the economy isn't perfectly efficient would be like saying that the moon is made of cheese, except if the laws of physics obtain. Right. Like, you know, like, that's just not how the world works.
- [47:09]
B
Right. So, and, and it's. It's the. The difference, the standard of proof that's required for something that benefits workers versus something that benefits Wall Street. It's entirely different. It has been 35 years since that Card and Kruger study came out. And as Aaron said, there's been hundreds of studies since, most of them in the past decade, because that's when we've had this surge of local minimum wages. And the evidence, the empirical evidence is overwhelmingly clear that there is no disemployment effect. And yet there's a lot of people who still don't accept it because it's
- [47:51]
A
not convenient to accept.
- [47:52]
B
The theory just says otherwise and they're not going to accept it. In any case. We highly recommend the book It Is the Wage, what's Wrong in the Labor Market and How to Fix It. You can of course buy it from that big online monopolist who shall not be named, or from your local independent bookstore.
- [48:18]
C
Pitchfork Economics is produced by Civic Ventures. If you like the show, make sure to follow, rate and review us. Wherever you get your podcasts. Find us on other platforms like Twitter, Facebook, Instagram and Threads. Itchfork Economics Nick's on Twitter and Facebook as well. Ickhanhauer for more content from us, you can subscribe to our weekly newsletter, the Pitch over on Substack, and for links to everything we just mentioned, plus transcripts and more, visit our website, Pitchfork economics.com as always from our team at Civic Ventures, thanks for listening. See you next week.