Slow Growth and Low Wages

The Federal Reserve’s recent change reducing the significance of the percent of unemployed may be connected to the fact that employment and unemployment, as statistics are less predictive of economic growth than twenty and thirty years ago. The increase of economic activity due to the addition of a low wage job versus the wages of factory jobs decades ago is not comparable. Merely adding or losing a low wage job, or thousand of them makes less difference than job increases of the past. Wages have dropped, or remained stagnant for millions of Americans over the last thirty years. Manufacturing jobs were once the mainstay of hundreds of U. S. Cities. The wages and benefits of similar jobs today are about half, adjusted for inflation than they were thirty years ago.

If Federal Reserve economists, or other economists were to come up with a wage adjusted employment statistic that might be more useful. FED Chair, Janet Yellon ought to mention to Congress that low wages do not a fast recovery make. Merely adding jobs, is not enough to make a strong economy, these need to be better wages and better benefits to make substantial progress at economic growth. We need to make wages and benefits, vis-a-vis the costs of living a major concern for policy makers, if we want the United States to return to the country with the highest standard of living on Earth. We are far down the list today.

Another factor slowing U.S. economic growth is lower profitability of some small business categories, which one may also link to the lower wages workers are able to pay for goods and services. Major corporations may well do independent studies regarding American wages and benefits versus their, the corporations’ own future growth. Often it is the major corporations, and we can name Walmart, who promote the idea of a low minimum wage. But others and their executives support think tanks, and PACS which support low wages, low minimum wage, as a trade off for more jobs. This is not always objectively true. More, but lower wage jobs does not always equate to economic growth, or growing profits for individual corporations. Independent economists as well as corporate economists need to study and report their findings in this regard.

The idea that a higher minimum wage, such at the $10.10 proposed by President Obama, will increase the prices of things people buy are a ruse. Many newspaper editors writing against such a raise have noted how prices will rise as a result of an increased minium wage. They do not mention that as the minimum wage has been held steady, prices have risen, and so the buying power of those working for minimum wage has declined, and so economic growth has been reduced as those workers have cut back on spending. Newspaper subscriptions are one cut made by a person with declining purchasing power.

Minimum Wage

It is claimed that increases in the minimum wage cause jobs loses. This may well be true in the short run. But what is the public policy concern or reason to encourage low wage jobs?

If persons interested in starting or expanding businesses, have to pay a minimum wage, they will then look for kinds of business, and ways of improving productivity so they can meet the cost of labor.

Over the years since 1980, the minimum wage has lost purchasing value and also the cost of labor for minimum wage workers has gone down in real terms. In real terms if adjusted for inflation, the minimum wage would be about $9 per hour if adjusted from 1980. I wonder what the maximum value the minimum wage has had, and what the economic growth was during that time period.

Has any one done a s study to see whether this reduced cost of labor has increased the number of jobs, or caused economic growth? My suggestion is that it is a factor in the slow growth of our economy, and encourages if anything, an increase in low wage jobs.

Wages are only one cost any business faces, and so if the minimum wage increase, that does not equate to an equal percent overall price increase the business must change to its customers. To list a few other costs, there are utilities, insurance, taxes, building maintenance, and rent or mortgage payments, et cetera.

A Walmart executive being interviewed said that the minimum wage is a starting wage, as a way of saying that it is not important to raise it, that instead people can start at that wage and move up. OK, that is a true statement, but it is not a practical one for millions of Americans who will find it difficult to gain new skills, and find higher paying jobs. As a starting wage, the minimum wage also sets a starting point for other wages, so that other wages are held down due to a lower minimum wage being used as a starting point for wages.

While it can be said there can be a very small lose of jobs due to an increase in wages, we must also recognize that in real terms the cost of labor, wages, has gone down since the last increase in the minimum wage. So how many jobs were created as a result of slowing cutting wages? As the minimum wage, in real terms went down, so did other low wage jobs, since those wages often are influenced by where the minimum wage is set. Since wages of millions of low wage earners have declined or stagnated, it is not right to expect the economy to grow. This is like store owners thinking they will make more this year, if their customers have less money this year.

A Second Thought

In addition to low wages and benefits, a factor not discussed in newspaper commentaries has been the costs of credit card transactions. While credit card debt is often discussed the transactions fees charged by credit card companies is not. These charges are in a sense a tax on every charge made for goods and services and can be as high as three percent. Imagine an increase of sales tax by that amount. Americans are increasingly using credit cards to pay for everything that can be charged. They get points on their credit cards, but really the cost of the transaction fee is not offset.

Persons who pay by debit or cash are subsidizing the transaction fees, since the stores must increase their prices to cover the transaction fees. All customers pay those increased prices, whether they pay by credit card or cash. Only a few merchants and service providers provide a cash discount to offset the increase.

Are Interest Rates Too Low?

The interests rates commonly available for savings are below the rate of inflation, so the purchasing power of persons saving money is being reduced. The low interest rates reflect reduced earnings for the Social Security, and Medicare Trust funds. The effect can be to create an increased force for far right agendas.
In late January (2012) or early February we started to see negative interest rates from the U. S. Treasury on Inflation Protected Treasuries. I hope this does not mean a trend to negative interest rates. The money supply increased by 17.4% (M-1), and 9.5% (M-2) for the 12 months ending in late April (2012).
The far right can make more compelling arguments that something must be done to “save” Social Security and Medicare. The far right plans to “save” these programs amount to changing them to the point that all which would remain of the programs are the program names.
Interest rates are being held low, we are told, to give economic activity a boost. Having interest rates below inflation; however, also sets a drag on the economy and can artificially push equity prices higher. A person may see that they are being lead to become an investor in the stock market, instead of a saver at a bank or credit union. Many of these are persons who do not have practice or experience with stock market investing, and are so have in increased likelihood of losing money. They would do better losing buying power by saving at a bank or credit union than investing in the stock market.
When interest rates on savings are below inflation, then do banks and credit unions have financial reason to make loans? First there will be less deposited at banks due to savers looking for better returns elsewhere. Second, the interest rates for loans are low, while above inflation in most cases, still the interest rate difference with inflation is below the expected return banks and credit unions have had in the recent past.
A person might think that a bank can make money on the spread between the amount of interest the bank pays to depositors, or to the Federal Reserve, but when interest rates are very low, the value of compounded interest also declines, when the spread is the same versus the cost of money to the bank. So calculate the compounding on a mortgage at 3.75% versus 5.75%.

While interest rates for savers, and for financial institutions making loans are low, why do credit card and other interest rates remain high? It could be the case that since banks cannot get higher rates on mortgages, they are then push credit cards where the return is much higher. This is bad for the economy, since it is a repeat of the mortgage crisis, where people who should not have been given credit, got it. And os getting credit cards is too easy now, because the interest rates can be so high.

I am looking for information on how the Domestic per capita money supply correlates to the overall economy and jobs.