How Does Sumner Explain Australia?

     If you've read Sumner for any length of time you surely realize that he like many conservatives admires Australia and sees it as a free market model with a high standard of living. It also has a much lower unemployment rate than we do.

     Here's something Sumner and company either don't know or choose not to talk about: it has a much higher minimum wage than ours-about $15 an hour and, again, they have a low unemployment rate. They also, had a much larger fiscal stimulus than we did to boot. Rather than bailout banks they sent taxpayers an average check of almost $1000 each.

    "To me, one of the great frustrations in Obama’s failure during most of his first term to communicate, effectively or at all, the basic premises of Keynesian and other liberal economics-related arguments (including on healthcare) was his apparent resistance to mentioning--early, often, or ever--specific other countries’ successes or failures that illustrate the point."

     "But there’s no time like the present for him and the congressional Dems to start to do do this, by maybe mentioning these facts: that Australia’s minimum wage is $15 U.S. and that its unemployment rate is 5.4%, and that the United States has (surprise!) the largest gap between the minimum wage and the median wage of any advanced economy in the world."

     http://www.angrybearblog.com/2013/02/john-boehner-should-travel-more-to.html

     It's not really the point of the post, but why is it that so many liberals have to endlessly belabor the President's "failures" which in any case I think are mostly in their own minds. Obama got as much as he could have done during those two years. He did, granted, come in way too optimistic about the prospects of "postpartisan Washington" and learned this the hard way. Still naivety about the GOP's treacherousness at least is a forgivable mistake that was made in good faith, unlike the obstruction of the GOP that was not done in anything but pure bad faith.

     Anyway, it is certainly worth looking at Australia as the counterweight to Boehner and Sumner's claim that raising the minimum wage is going to make unemployment rise and productivity fall.   

     As it happens, for a long time productivity and the minimum wage moved in the same direction. Until 1969-its peak-the minimum wage kept up with productivity increases. 

     http://www.cepr.net/index.php/press-releases/press-releases/new-paper-finds-modest-minimum-wage-increases-have-little-impact-on-employment

      Actually, House Republican Marsha Blackburn made an inadvertent case for the minimum wage yesterday, though she had meant to do the opposite. 

     "Tennessee Rep. Marsha Blackburn (R) chose a different reason to oppose the proposal today. A stronger minimum wage, Blackburn said, would negatively affect the ability of young workers to enter the workforce as teenagers, and would prevent them from learning responsibility like she did when she was a teenage retail employee making a seemingly-measly $2.15 an hour in Mississippi:

     BLACKBURN: What we’re hearing from moms and from school teachers is that there needs to be a lower entry level, so that you can get 16-, 17-, 18-year-olds into the process. Chuck, I remember my first job, when I was working in a retail store, down there, growing up in Laurel, Mississippi. I was making like $2.15 an hour. And I was taught how to responsibly handle those customer interactions. And I appreciated that opportunity.

    http://thinkprogress.org/economy/2013/02/14/1596051/blackburn-minimum-wage-oops/

     As it happens, though, she would have actually had this job at the retail store during the 1969 period when the minimum wage had its highest purchasing power.
    "Making $2.15 an hour certainly does sound worse than today’s minimum wage, which federal law mandates must be at least $7.25 an hour. But what Blackburn didn’t realize is that she accidentally undermined her own argument, since the value of the dollar has changed immensely since her teenage years. Blackburn was born in 1952, so she likely took that retail job at some point between 1968 and 1970. And according to the Bureau of Labor Statistics’ inflation calculator, the $2.15 an hour Blackburn made then is worth somewhere between $12.72 and $14.18 an hour in today’s dollars, depending on which year she started."
   "At that time, the minimum wage was $1.60, equivalent to $10.56 in today’s terms. Today’s minimum wage is equivalent to just $1.10 an hour in 1968 dollars, meaning the teenage Blackburn managed to enter the workforce making almost double the wage she now says is keeping teenagers out of the workforce."
    As to the idea that the minimum wage costs jobs there's no evidence to support it. Sumner sometimes points to the hike in 2008 as being a contributing casue-though of course not the main casue which he thinks is failure to maintain NGDP-of the Great Recession. How do you explain the 1997 minimum wage hike then?
    "A new paper from the Center for Economic and Policy Research finds that modest increases in the minimum wage – such as the one proposed by President Obama in his State of the Union address - have little impact on employment, due to adjustments by employers and workers. The paper, “Why Does the Minimum Wage Have No Discernible Effect on Employment?” by economist John Schmitt reviews evidence on eleven possible adjustments to minimum-wage increases that may help to explain why the measured employment effects are so consistently small. It finds that the strongest evidence suggests the most important adjustments are: reductions in labor turnover; improvements in organizational efficiency; reductions in wages of higher earners ("wage compression"); and small price increases."

     “This is one of the most studied topics in economics, and the evidence is clear: modest minimum wage increases don’t have much impact on employment,” Schmitt said. “An increase to $9.00 per hour would be hugely important for the workers getting it, but the idea that this would lead to less employment is just not supported by the evidence.”

     " President Obama’s call for a minimum wage rise to $9.00 an hour would be a modest increase, and would keep the minimum wage below its peak, when adjusting for inflation. As CEPR’s Dean Baker and Will Kimball noted in a blog post yesterday, “The purchasing power of the minimum wage peaked in the late 1960s at $9.22 an hour in 2012 dollars. That is almost two dollars above the current level of $7.25 an hour.” They also noted that the minimum wage has not kept pace with productivity increases over the past 44 years, as it had from 1947-1969 – a period when economic “[g]rowth averaged 4.0 percent annually” and “the unemployment rate for the year 1969 averaged less than 4.0 percent.” But the link between productivity growth and minimum wage ended in the 1970s.

     http://www.cepr.net/index.php/press-releases/press-releases/new-paper-finds-modest-minimum-wage-increases-have-little-impact-on-employment
    If enacted it would still not bring the minimum wage as high as 1968 though it would be higher than its been since 1981. Dean Baker points out that if the minimum wage had kept pace with productivity growth as it did until 1969, it would now be $16.54-which is in line both with Australia and what Congresswoman Blackburn was making in the late 60s.
  "This link between productivity and the minimum wage ended with the 1970s. During that decade the minimum wage roughly kept pace with inflation, meaning that its purchasing power changed little over the course of the decade. The real value of the minimum then fell sharply in the 1980s as we went most of the decade without any increase in the nominal value of the wage, allowing it to be eroded by inflation. Since the early 1990s the real value of the minimum wage has roughly stayed constant, which means that it has further fallen behind productivity growth."
  "How was it decided to break the link between productivity growth and the minimum wage? It is not as though we had a major national debate and it was decided that low-wage workers did not deserve to share in the benefits of economic growth. This was a major policy shift that was put in place with little, if any, public debate."
      "If the minimum wage had kept pace with productivity growth it would be $16.54 in 2012 dollars. It is important to note that this is a very conservative measure of productivity growth. Rather than taking the conventional data published by the Bureau of Labor Statistics for the non-farm business sector, it uses the broader measure for economy-wide productivity.[1] This lowers average growth by 0.2-0.3 percentage points."
     "This measure also includes an adjustment for net rather than gross output. It also uses a CPI deflator rather than a GDP deflator, which further lowers the measure of productivity growth.[2] Even with making these adjustments the $16.54 minimum wage would exceed the hourly wage of more than 40 percent of men and more than 50 percent of women . We would have a very different society if all workers were earning a wage above this productivity linked minimum wage."
    http://www.cepr.net/index.php/blogs/cepr-blog/the-minimum-wage-and-economic-growth
     By the way, I think it's a little churlish to criticize Obama for proposing "only"raising it to $9. True this is lower than 1968 but it's still the highest since 1981 and he does also propose indexing it to inflation which will bring to to the 1968 level in a few years. The missing piece is what Baker suggests: having it keep apace with productivity growth. If this were done it would go a lot towards making it a really living wage.
      It might also call the question an idea I discussed yesterday from Evan Soltas: that the GOP can counter the call for a minimum wage hike with a call for raising the EITC.
       http://diaryofarepublicanhater.blogspot.com/2013/02/scott-sumner-gop-and-minimum-wage-laws.html
       Friedman proposed and got his wage subsidy. The period of the EITC runs roughly concurrent with the era when we begun to cut the minimum wage: it topped out in the late 60s and was flat in teh 70s, then dropped sharply in the 80s. So the time age of the EITC is concurrent with the falling minimum wage.
     How do the results look?
     The case for the minimum wage if you look at this way, couldn't be more clear. If low wage workers started with a $16 wage now there would be much less poverty and much more demand soaked up during this recession. It's an issue of fairness, but, it's also a matter of economics. The minimum wage is a very efficacious policy and we need a high minimum wage.