Mises Wire

Chris Matthews: Wages

Chris Matthews: Wages

David Brat, the economist at Randolph -Macon college who defeated Eric Cantor in that GOP primary in Virginia, said recently that wage increases are only appropriate when a worker’s productivity increases. This is pretty standard economist stuff that any economics undergraduate learns. That is, a worker’s employment can only be sustained in the long run if his productivity is equal to or greater than the wage he receives. In the case of the minimum, wage, this makes it impossible to hire a person whose productivity is below the legal wage. Only journalists and politicos find this difficult to understand. Chris Matthews, for example. The effects of minimum wage on workers whose productivity amounts to something less than the minimum wage are explained, here , here, here, and here.   

Matthews, however, has delivered the death blow to this reasoning, he thinks. He produced this graph:

GRAPH EPI2584720.psd

Since the source of the graph is not provided, all I know from Matthews about it is the name of the organization from which the graph comes, and we know that the chairman of the organization that produced the graph was  ”elected President of the AFL-CIO in September 2009.”  So, we have an idea about the impartiality of the graph.

But I did manage to find the graph here, and you can see the incredibly ornate method through which the graph’s data was compiled. The report’s simplified explanation of the graph is this:

Figure A sets the scene for the rest of the section, showing the growing gap between economy-wide productivity (a measure of how much economic output is produced on average in each hour of work) versus real hourly compensation (wages and benefits, adjusted for inflation) for production and nonsupervisory workers (a group that constitutes roughly 80 percent of the private-sector workforce).

It would seem that much of what you need to know about this graph is that the wage data is adjusted for inflation while the output data is not. Indeed. if we look at the wage data for “production and nonsupervisory workers “ as the EPI graph does, we find it looks pretty much like the productivity curve:


But wait a second, why does the disparity between wages and productivity begin there in the early 1970s? Could it be that this is when inflation began to increase following the final death blow to the gold standard in 1971? Gee, if we look at the CPI numbers we see that the CPI took off in the early 1970s, at the same time the two curves diverge in the top graph. In other words, the disparity is a function of inflation:




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