The last thing anyone would have expected in 1970 is for the lowest paid workers in the US, UK and Australia to have their relative positions deteriorate over the next fifty years. Yet, this is exactly what has happened. In an economy which has for many years been productive enough to end absolute poverty for good, millions of people have been left in financial hardship, for reasons rooted not in economics, but ideology.
The US federal minimum wage has been $US 7.25 per hour for almost a decade. A full-time minimum wage job pays about $US 15,000 a year. It is impossible to live with independence, security and dignity on that wage, even for a single adult with no dependents. In the UK, and especially in Australia, statutory minimum wages are well above the US level, but even in Australia, the minimum wage is not high enough to be a just social wage. This is obvious, if we look back to the days before neoliberalism had taken hold.
Trapped by ideology
The last thing anyone would have expected in about 1970 is that the lowest paid workers in each of these countries would have seen their relative positions deteriorate over the next fifty years, and yet this is exactly what has happened.
The real minimum wage in the USA in 2016 was 27% below its 1970 level.
In an economy which has for many years been productive enough to end poverty for good, millions of people have been left in financial hardship, for reasons rooted not in economics, but in ideology.
Figure 1: US Labor Productivity and the Federal Minimum Wage (1970 = 100)
To raise the real federal minimum wage in line with increases in US labour productivity, the wage should now be about $US 16 per hour, and over $US 33,000 a year. In other words, the federal minimum wage needs to be more than doubled.
Turning in Figure 2 to the case of Australia, things look rather little better for the lowest paid, than they do in the US, but they still don’t look entirely fair.
Figure 2: Australia Labour Productivity and Minimum Wage Rates (1970 = 100)
In Australia, for the lowest paid to have maintained their relative position from 1970 would have required a minimum annual wage in full-time employment of about AUD 47,000 in 2016, which is close to $A 24 an hour. Australia needs to increase its minimum by more than 30%. In terms of spending power, $A 24 is about the same as $US 16.
The case of the UK is shown in Figure 3.
Figure 3: British Labour Productivity and Estimated Minimum Wage Rates (1970 = 100)
Taking productivity per hour worked into account, a just full-time minimum wage in the UK by 2017 would have been about ₤20,000. This equates to an hourly rate of ₤ 9.50, or $US 13.70. It is slightly lower than for the USA or Australia, since the UK is a lower productivity economy. Nonetheless, it involves a more than 25% increase in the UK’s national minimum living wage.
Dictatorship levels of poverty
Australia and the UK have since 1980 become more unequal societies than even the USA was in the 1970s, and inequality in the USA has increased to a level comparable with that of a low-income country dictatorship. All this must be reversed. This is shown in Figure 4, which is based on the best internationally comparable data, with an increase in the so-called Gini statistic equating to an increase in inequality.
Figure 4: Comparable Disposable Income Gini Statistics for Australia, the United Kingdom and the United States
An essential tool for restoring the relative position of low income groups in all these societies must be a significant, and in the case of the USA very dramatic, increase in national minimum wage rates. However, the minimum wage isn’t the minimum at all if you are in an excluded occupation, young, unemployed or underemployed. For a radical increase in the statutory minimum wage rate in a country to transform the lives of the lowest paid, it must be combined with a guarantee of employment at that minimum wage.
A job guarantee at the minimum social wage is a requirement for a just and sustainable society.
That job guarantee should set a minimum socially acceptable floor for wages and working conditions, eliminate involuntary unemployment, contribute towards the elimination of involuntary poverty, and play a major part in reducing income inequality.
The case for a job guarantee
We know that involuntary unemployment, underemployment and insecure employment have major negative consequences on well-being over and above any loss of income. We know that healthy societies, by a variety of metrics, are more equal and equitable ones, rather than those with the highest average incomes. We know a job guarantee is affordable in all three countries. We know there is a great deal of work to be done. We are not short of ideas and plans. Many of us also believe the range of activities deemed worthy of remuneration should be extended. We know the minimum wage is inadequate in the UK and Australia. We know it is a national disgrace in the USA.
In US dollars, the US and Australia should have legal minimum wage rates of at least $16 an hour. In the UK, that minimum should be close to US$14 an hour. In local currency terms, the minimum should be ₤9.50 in the UK and $A24 in Australia.
The real value of this minimum social wage should be set immediately at a level which restores to the low paid their fair share of national income distribution, accounting for increases in both the cost of living and the benefits of technological change and rising labour productivity over the past half-century. It should not be seen as a mechanism to keep wages down, as is the case with the threat of unemployment at the moment. Instead, the goal should be to raise the relative wage of the low paid, and by doing so to engineer a much greater degree of income equality.
Any inflationary consequences should be negated by an increase in tax rates on those at the top of the wealth distribution, to create space for the low paid to spend more out of their higher incomes, without pushing the economy beyond its productive capacity. A movement towards a more progressive tax system, such as the one which existed fifty years ago, alongside a radical increase in real minimum wages rates, supported by a job guarantee, would play a major part in a transition to a future of sustainable prosperity.
This piece is an edit which was originally published in full by the Binzagr Institute and was reproduced with permission of the author.
Dr Hail holds a BSc and an MSc from the London School of Economics, in addition to a PhD from Flinders University.
How do you spend your days?
I spend my weekdays teaching financial economics at the University of Adelaide, and my weekends mostly in the Adelaide Hills.
Why is economics important to you?
Economics is important because in the end economists, for good or ill, rule the world. At the moment, it is largely for ill, because the economics profession has become increasingly dominated by the ideas of economists who misunderstand and misrepresent how the economy works, and even what governs human and social well-being. To make genuine progress towards building sustainable and equitable societies, we have to take economics back these people. This is vitally important. As Keynes' says, at the very end of his 'General Theory', "the ideas of economists and philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from intellectual influences, are usually the slaves of some defunct economist". And as Hyman Minsky said, in 1986 in his great work, 'Stabilising an Unstable Economy', "The game of policy making is rigged; the theory used determines the questions that are asked and the options that are presented. The prince is constrained by the theory of his intellectuals." The defunct economists are in control of the options presented to policy-makers at the moment, and there are a series of questions that are not being asked and options that are not being presented to policy makers, because they are listening to defunct economists, and are not even aware that there is another better way of thinking about the economy.
What drove you to focus on economics. Was there a particular moment you can remember that led you to this field?
As an adolescent, I wanted to understand the reasons for the rise of Thatcherism, and the causes and likely consequences of the changes going on around me in the UK. I think the election of the Thatcher Government in 1979 was the single biggest motivating factor for me to study economics.
What drives you professionally?
I enjoy my job. I don’t need anything to drive me, beyond that. I am a teaching specialist, and my job is to share an understanding of realistic macroeconomics and finance with as many students as possible.
In your opinion what are the three biggest problems facing the developed and developing world?
(1)Climate change (obviously)
(2) The fact that most of the economics profession, almost all politicians, almost all journalists, and almost the whole of the engaged public completely misunderstand macroeconomics, leading to unnecessary underemployment and relative poverty, excessive private debt and frequent financial crises.
(3) The prospect of further wars and terrorism, encouraged in part by the consequences of (2) and increasingly also by the consequences of (1)
If you hadn’t become an economist, what would you have done?
Been a maths teacher.
What led us to this moment in history?
The persistent and successful promotion and pursuit by the Right of a particular way of organising the economy and society, starting in the 1950s, but with sustained success only since about 1980. The craven submission and surrender of the establishment Left, which has more or less en masse accepted the disastrously misleading frame used by the Right for generating and evaluating policy proposals. The tame co-operation of journalists and other commentators in what has now been a long period in which the public have been gradually brainwashed into thinking there is no alternative to what has become known as neoliberalism.
What are the lessons we failed to learn during and since the 2008 crisis?
Fiscal policy works. Governments that issue their own currencies can’t become insolvent in those currencies. Monetary policy doesn’t work, Economies relying on private debt and bubbles in property and/or share prices to grow demand and pursue full employment will eventually face a severe recession. The approach used to manage economies since the early 1980s eventually created a very fragile financial system, and won’t work any more. There will be no return to the pre-2008 ‘normal’ times.
Can you list some ‘Baby Steps’ out of the current economic mess?
Stop talking about a ‘return to surplus’, and shift your concern away from government debt (which isn’t really debt in the conventional sense at all) and towards household debt. Start regulating banks and financial markets properly. Introduce a job guarantee, along the lines suggested by people like Bill Mitchell, at the University of Newcastle in NSW, and Pavlina Tcherneva, at the Levy Institute in New York.
If you were a global President what would your first three pieces of policy be?
To dissolve the world government, as it won’t work. That is the last thing we need. Then I would not be global President any longer, so there would be no need for two further pieces of policy.
Tell us something you have been wrong about?
Spoiled for choice. I used to be, until 10-15 years ago, a largely uncritical teacher of neoclassical (neoliberal) economics. I had started off as an idealist, but (like so many students down the decades) was brainwashed by the single school of thought presented to me, while at university. It took years for me to realise there is more than one school of thought regarding the way capitalist economies work, and that the modern orthodox neoclassical way of looking at the world has rotten foundations and is in many ways disastrously misleading. I try to be compassionate to those still thinking within a neoclassical frame, because for a long while I was one of them, and I know how very hard it is to escape that frame. In some words of Keynes, written in December 1935, ‘the difficulty lies, not in the new ideas, but in escaping from the old ones, which ramify, for those brought up as most of us have been, into every corner of our minds.’
You are stuck in a ski lift for twenty four hours - you can have one person (living or dead) with you who will it be?
My late mother. Sorry – not interesting, but true. If forced to pick someone else, it would be John Maynard Keynes. Predictable perhaps, but it would. (1) Mum (2) JMK. Perhaps I could have them both there. We’d have a great time of it.
Name the book that changed you….
On Being a Christian, by Hans Kung.
This is the book which finally convinced me I was (and am) an atheist.
What would you do differently if you were to start all over again?
Move to Adelaide sooner. I left London in the year 2000. Wish I’d come here in about 1990.
Give our readers, members and subscribers a piece of advice that has served you well… Anything you would like to plug? Now is your chance.
The best piece of advice I have ever received is to have limited expectations about changing the world for the better, but to keep trying anyway. I have never voted for the winning side in a general election in the UK or Australia. It would be easy to be discouraged. But it is important to me to retain a sense of purpose, and even if making genuine progress is a very long game, to at least do my best to be helpful, and to not be remembered as a flat-earther (which is how many of today’s most prominent orthodox economists will be remembered in the decades to come).
I encourage everyone to take an interest in modern monetary theory. An easy way of doing this is to watch the many presentations by and interviews given by Bill Mitchell, Stephanie Kelton, Warren Mosler and Randall Wray.