By Carlos Maciel, a member of the first class of the Levy Institute MS program. His thesis work is a framework for a environmentally friendly Job Guarantee program. Originally published at The Minskys.
It is official, the unemployment rate in the US has dropped to its lowest level in 16 years. Economists all around the country must be tapping themselves in the back and buying each other drinks in congratulations, right? Wrong. Despite the official drop in joblessness, we have a decline in labor participation, an increase in the “skill gap” in the labor force (i.e. unemployed workers’ skills do not match those needed by open jobs) and, arguably most importantly, wages that fail to rise fast enough.
For starters, the latest reports show that the year-over-year wage growth rate has been stagnating; it reached 2.5 percent since last year, which is just marginally above inflation. It is difficult to determine exactly why people drop out of the labor force, but we can speculate that some do so because of the lack of pay increases. Whatever the reason, the dropout is a significant part of the declining unemployment rate—e.g. the May report shows that 429,000 people dropped out of the labor force. A nation with a population that is actively leaving the labor force and that deals with stagnant wages is a nation facing serious socioeconomic problems.
The problem at hand, then, is a question economists have been dealing with for ages: how can we increase earnings and employment at the same time? Common economic understanding would argue that we have to choose between higher wages and more jobs. The main argument against minimum wage hikes is that it would increase unemployment. That claim is factually untrue (just look at Seattle) and there are a number of ways to address the issue. At The Minskys we have tackled this topic several times, and shown that a decent minimum wage does not have to reduce the number of jobs out there. One way to have both is with a Job Guarantee (JG) program.
One of the more interesting consequences of a JG program is that it would create a de-facto minimum wage without the need of actually raising the minimum wage. The JG wage would become the minimum wage for the entire economy. Workers receiving less than the JG wage would be inclined to take a JG job, and employers would have to raise their salary offers in order to keep their workforce. Given the impact of the pay offered by the program, it is important that the JG wage rate be thoroughly discussed.
The JG literature has a large number of works focused on the topic of wages. Some suggest the pay to vary with skill-level. Others advocate for JG wages to be the same as they would be in the market. But having multiple compensation packages would make the logistics and application of a JG program much more complicated.
To find the best wage rate for JG jobs, a few parameters should be considered. First, the JG framework is to create jobs that provide at least a minimum “subsistence” rate, so that workers can live a decent life. As such, it is clear that the JG wage should at least be the current federal minimum wage of $7.25 an hour. Second, the goal of the JG is not, and should never be, to replace the private sector. So, the JG wage should not exceed the average wage paid in the private sector ($25.31 in 2016). This creates an upper limit.
With these lower and upper limits in place we can raise the floor or lower the ceiling, ultimately arriving at the proper wage rate paid by this full employment policy. Recent polls show that Democrats, Republicans and Independents—in their majority—all support raising the minimum wage to $10.10 an hour, which suggests that there may be widespread political support to increasing the minimum wage.We can raise the lower limit further after we consider the per capita income in the US, which would put the fair minimum wage at $12.00 an hour. The lower limit of $12 an hour is appropriate since it is marginally above the poverty rate of $11.53 for a household with two children where only one of the parents is employed.
A good point within that range is the $15.00 hourly wage rate. Legislation regarding this wage rate has recently been approved in cities such as Seattle, Los Angeles, and the state of New York. There is also a movement by workers demanding that it becomes the floor in the fast food and retail industries. It seems appropriate, therefore, to follow these cities and movements by determining the going wage rate for a JG program to be set at $15.00 an hour. After all, a national JG cannot pay less than locally established minimum wages. On the other hand, the guarantee of a job in, for example, Seattle paying $15.00 per hour, while surrounding areas are offering lower pay could saturate one area in detriment of another.
As previously discussed, the JG wage would become the minimum wage to the entire economy. Consequently, workers who currently earn less than the $15.00 an hour rate would receive a raise. In total, accounting also for the ripple effects faced by workers in the $15.00 to $19.00 range, roughly 64.7 million workers would receive a wage increase, which means 43.5 percent of the labor force would see their wage income go up. To avoid inflationary pressures, allow for seamless implementation, and contain possible—albeit historically improbable—negative employment effects from the minimum wage hike, the transition to this wage through the implementation of the JG program will have to be done incrementally.
The Job Guarantee is an effective way to solve the three major problems currently facing the American labor market: the skill gap, the dropout of workers from the labor force, and most importantly the stagnant wages. We have empirically observed that wage increases not only do not increase unemployment, but they also serve as a catalyst for economic growth and towards social equity. The US economy has plenty of needs that can be fulfilled by giving well-paying jobs to its unemployed. The $15/hour wage is not only fair, it is a necessary measure to ensure the prosperity of this nation.