Buying Bygone Boogeymen (Wonky Charts)

My first lesson in Economic Theory came from my Grandfather who once told me that I didn’t have to pay a dollar for an empty cup of coffee. I took it both literally and figuratively. I didn’t have to pay for empty ideas. Enter the term “Inflationary Wages”.

Walmart is not unique as a low-wage employer. However in Walmart’s response (and refusal) to paying people a living wage, they remind me of when I was researching the great 1959 Steel Strike for a paper. I read a term then that led me to more research: Inflationary Wages. In 1959, it went something like this: If wages were raised while productivity did not increase, then it would cause “inflation” in the labor market. The boogeyman was that every steel worker in America would be able to command his/her own wages, while producing (essentially) nothing, which would cause prices to rise to pay for that unproductive labor. The steelworkers were demanding that their wages raise from $2 per hour to the (choking) $5 per hour. Minimum wage was $1 per hour at the time.

After the steel workers won and got their raise to $5 per hour, something strange happened: steel prices raised (very slightly) and then dropped big; and companies still made hefty profits, as indicated by the Consumer Price Index of the time, which reflects demand for stuff.

Chart1

Source: National Bureau of Economic Research

Chart2

Source: U.S. Bureau of Labor Statistics

In other words, more people were making more money, and as such, were buying more stuff, which made companies more profit. Inflationary wages never materialized. Steelworkers were not commanding their own wages, prices didn’t increase, and people bought more stuff.

Walmart is by no means claiming that low-wage workers will be able to command their own wages, while doing nothing if minimum wages rise. What they are claiming is that retail prices will increase to pay for that labor. Granted that market conditions are different, but something that shines light on this boogeyman is this: when minimum wages have increased, something else also did: demand. Increased demand equals increased sales, equals increased profits. Something else also happened: prices didn’t increase all that much.

This chart, which tracks CPI to minimum wages increases since 2007 when minimum wage was incrementally increased from $5,15 per hour to its current $7.25 per hour between 2007 and 2009:

Chart3

Source: U.S. Bureau of Labor Statistics

Again, we see that the more money people made, retail prices flat-lined. The increase in price in 2010 were the result of shrinking supply curves following the Great Recession. Of course many (perhaps rightly) argue that the Great Recession effected a lot of things. However, by 2010, demand had sunk, and continues to “stick” there. The only other reason prices would rise in the face of low demand is shrinking supply curves.

And Walmart, amongst others are doing just fine. The Service Economy of the 21st Century is trying to sell us an empty cup of coffee. It’s just a boogeyman under the bed.

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