MEDIA MISINFORMATION: Yahoo News' announcement of the Social Security cost of living adjustment

A study of macroeconomics usually reveals that the best time to buy anything is last year. ~ Marty Allen

On Oct 13^th my home webpage displayed a headline, "Bad News for Social Security Recipients." Intrigued, I clicked on it to learn what terrible circumstances we Social Security recipients might be facing.

The story covered the impending announcement from the Dept of Labor – delayed by the Republican-inspired shutdown – of what the 2014 cost-of-living adjustment (COLA) will be for people receiving Social Security and disability benefits. A whole lot of people receive either Social Security benefits or disability benefits that use this COLA – 71 million citizens (a bit less than 1 person in 4 in the US), ranging from retirees, survivors and disabled veterans to poor people who get Supplemental Security Income.

The expected 2014 COLA will be around 1.5%, which for the average Social Security beneficiary amounts to $17 per month. This COLA will be the lowest in years; only 6 times since the COLA was implemented 38 years ago has it been below 2%.

Way long ago, I used to write story headlines at my college newspaper. To label this below-normal level of COLA as "bad news" deserves an "F."[1] Calling a low COLA "bad news" implies that a higher COLA would be good news for affected citizens. This is untrue. Higher COLAs come from higher inflation, which reduces people's real income. Perhaps the headline-writer would rather have an uncola, or be living in Argentina, where consumer prices have risen a whopping 7 times as much as the US this year – 10.55%. This imprudent headline adds a mistaken sense that not only is Social Security an entitlement, but somehow a high-COLA is as well. This is economic nonsense.

The Social Security COLA represents changes in national prices, not prices in a specific location for a particular person or family. This COLA tracks the yearly change of the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) during the months of July, August and September. If the COLA is low, it means consumer prices haven't increased much. This lack of inflation is good news for everyone who buys consumer goods and services.

Unfortunately, the headline-writer, like too many other people, does not understand what the COLA actually represents. This inability to distinguish between individual and national price changes is illustrated by the following comment to the Yahoo News article by someone called dvlsh11.

"I don't know how they can say 'prices haven't gone up,' gas is over 3 bucks per gallon, food prices seem to steadily rise, companies are saying things like laundry soap is 'concentrated so you use less' when you don't really use less they just give you less and charge the same amount as before. After rent/mortage most ppl's biggest bill are their utlity bills."  

Dear dvish11, get a grip: "they" haven't said prices haven't gone up. They have said prices have gone up a small amount – by about 1.5% – based on actual price changes. The COLA measures prices, not individual consumer behavior like over-using "concentrated" soap. National food prices have increased 1.6% in the past year; energy prices have declined 0.3% in the past year.

This low COLA means the Federal Reserve's monetary policy has successfully (and single-handedly) kept inflation in check (that's very good news) and offered a modicum of economic growth (OK news). Because of truculent Republicans, the US now conducts no appropriate fiscal policy whatsoever. So it is impossible to initiate a much-needed increase in government expenditures to remedy the lingering effects of the recession. Instead, government expenditures have decreased, further contributing to the economy's doldrums.

The Social Security COLA reasonably characterizes the average yearly change in national consumer prices. But there is a COLA war of sorts being waged among economists and affected parties. Some believe this COLA actually over-states the price changes that Social Security recipients face. In fact President Obama has mentioned he might be amenable to using a variation of the Social Security COLA based on "chained" prices, as a more accurate index [2], in return for more tax revenue. Unsurprisingly, groups like the AARP and labor unions are much opposed to chained price indices. I believe using a chained Social Security COLA could be one mechanism to accomplish a minor reduction in Social Security costs.

However, having a low Social Security COLA for 2014 – no matter what form – is good news for consumers of all ages.

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[1] The story itself doesn't make any misguided statements about the low COLA; it's quite factual. The headline-writer, however, should be sent to a remedial economics course.

[2] A chained price index more quickly adjusts prices to reflect consumer behavior when people substitute purchases of a cheaper good for another due to price increases of a substitute. A chained index thus could reduce the expenses connected with future Social Security COLAs.

FUTURE BURGER-FLIPPERS – A SMILING FACE OF FLESH OR PLASTIC?

"Raising the minimum wage tends to be more popular with the general public than economists." – Christina Romer

It's rarely a good time to be a low-skilled worker. Right now, here in the land of the evaporating American Dream, it's a downright terrible time.

Low-wage, low-skill workers are at the bottom of the proverbial 99% heap of us. Who are low-wage workers? The roughly 21 million workers who earn between the minimum wage and $10 an hour are largely young, lesser educated and without children. Low-wage workers represent 13.5% of the US laborforce.

In September, the Census Bureau reported that real (inflation-adjusted) median household income in 2012 was $51,017. Unlike previous years, this income level didn't fall from 2011 (a small help), but it's no higher than it was 30 years ago and 9% lower that it was in 1999 (a larger problem). The bleakest part of this Census report was that since the economy began recovering from the Great Recession in 2009, 95% of the economic gains have gone to the richest 1% of people. The bottom 75% of income-earners (roughly, families who earn less than $89,000/yr) are making considerably less than they had been, due to higher unemployment and stagnated wages.

In other words, economic inequality is still very much alive and growing in the US and making low-wage workers' lives that much more challenging. The US Gini Index[1] in 2010 was 46.9%. In 1990, it was 42.8%. Most recently, the US Gini Index was ranked 89 nations below (meaning more unequal than) Sweden's which was 23.0% and the world's lowest.  

What can be done about this? Economists are of several minds with regard to possible solutions^[2].

President Obama proposed in February that the Federal minimum wage be increased to $9/hr (by the end of 2015) and tying it to the cost-of-living. For liberal economists the minimum wage should have been raised some time ago, but better late than never. The current Federal minimum wage is $7.25/hr and has been unchanged since 2009. Consumer prices have increased 8.4% since 2009.

A higher minimum wage level would increase the income of low-skilled, entry-level workers who hold minimum-wage jobs. The current Federal minimum wage's annualized income is $15,080. The 2013 federal poverty level for a single person is $11,490/yr for a family of 2 people, it is $15,510.

The chart below characterizes these workers by age, education and employment. As you can see, 57% of low-wage workers have a high-school degree or less; just 3 types of employers account for two-thirds of all low-wage workers in the US.

In July and August, the Service Employees International Union (SEIU) organized a series of one-day "strikes" in numerous cities at hundreds of fast-food restaurants (there are no unionized fast-food restaurants) to call attention to the plight of low-wage workers, especially burger-flippers and service staff at fast-food emporiums. Many fast-food employees work part-time. An example includes Terrance, a man who earns $9.30/hr after working for eight years at a Burger King, plus $7.40/hr at his second part-time job at Pizza Hut. The SEIU action sought a new minimum wage for fast-food workers of $15/hr, which would be a 107% increase above the Federal minimum wage. The SEIU estimates there are 200,000 fast-food restaurants in the US. The current median pay for fast-food workers is $8.94/hr, according to the National Employment Law Project.

OK, with this discussion about burgers and fast-food, it's time for a one-question quiz: which city in our great nation has the highest concentration of fast-food restaurants? See this footnote for the answer.[3]

Would raising the minimum wage be an effective remedy for the real dilemma facing low-skill workers, including burger-flippers? It's possible, but unlikely to have much effect for 3 reasons.

First, the federal minimum wage isn't going to change. Unsurprisingly, the Congress hasn't considered or acted on the President's proposal. It has much bigger burgers to fry. Republicans, perhaps following their affiliated economists, traditionally have serious problems with any increase in minimum wage. Conservative, "market-driven" economists state that a higher minimum wage will result in workers either losing their jobs or, as businesses adjust, hiring fewer, higher-cost, low-skill workers.

Unless you're Rip Van Winkle, you're all too aware the Republicans control the House of Representatives, so any House bill to raise the minimum wage is dead before arrival. And from their decidedly other-worldly perspective, the extreme Republicans (ExReps) who now seem to rule the House despite their small numbers (talk about minority rule), are more focused on drastically cutting funding for food stamps, defunding the entire Federal government (by not passing a "clean" authorization bill by October 1^st) and not raising the public debt limit.

Because the ExReps will do nothing to change the Federal minimum wage, state and local authorities are acting. Eighteen states and the District of Columbia have higher minimum wages than $7.25/hr. California Governor Jerry Brown just signed a bill to raise the CA minimum wage to $10/hr by 2016; that would be the highest State minimum wage in the nation. In June, the City of Berkeley began considering the establishment of a city "living wage" modeled on San Francisco's living wage that is now $10.55/hr, the highest in the US. Being Berkeley, it's not if the City Council passes such a rule, but when.

States have revised their minimum wage laws, but it's a piecemeal action that can only help low-wage workers living in those jurisdictions. Localities, like Berkeley, can do the same thing on a more micro scale. A potential consequence is that if the minimum wage increase is large enough (California's change represents a 25% increase over several years), firms in those areas may decide to lay off now-higher cost workers or not hire as many in the future. Or firms can hire workers in other locations not subject to the new wage. Some businesses have long complained that doing business in California is more expensive than other states. A new, higher CA minimum wage will exacerbate this. Employers like hotels, restaurants and retail sales – who employ a disproportionate number of low-wage workers – may be more incented to hire in areas that aren't subject to the higher wage requirements.

Second, unemployment still remains a significant concern for workers, especially young, low-skilled workers. Teenage unemployment is now 22.7%, more than 3 times as high as current overall unemployment of 7.3%. Youth unemployment (16-24 year olds) is 16.3%; unemployment for 25-35 year olds is 25.8%. These unemployment rates have been lowered marginally over the past year, not because more young people have found jobs, but rather because people have dropped out of the labor market and are no longer actively looking for work. This withdrawal from the labor market is reflected in the labor force participation rate (LPR). For youth, the LPR is now a depressing 60.5%; the LPR for all workers over 16 is a grim 63.2%, the lowest rate since 1978.

From a market perspective, this combination of historically above-normal unemployment rates and historically below-normal labor force participation rates means there are many low-skill workers who are potentially available now for employment who aren't working at all (or as much as they want). Unlike more competitive labor markets for skilled- and highly-skilled-employees, low-skilled labor is not in short supply. The world's supply of low-skilled workers is rapidly growing, even in the US.

 Although burger-flippers need to know how to operate several restaurant appliances, and service employees need to know how to operate a cash register and interact properly with customers, these skills are not rocket science. Restaurants' training efforts easily cover these job requirements. Low-skill labor's wages are dwindling in large part because low-skill labor is widely available and quite substitutable with other, unemployed workers. It's a buyer's market.

Beyond burger-flippers and in this age of globalization, low-skill wages for manufacturing ultimately aren't set in Oakland any more than in Milwaukee or Little Rock, they're influenced by international forces. [See my "Maddie and the Machine" blog.] There are a lot of Bangladeshis who are willing to work for a lot less than $7.25/hr. [The current minimum wage in Bangladesh is $38 a month, which is $0.24/hr.]

Thus, there isn't any strong market force pushing US low-skill wages upward. These current labor market conditions make it unlikely that the SEIU's goal of having burger-flippers receive $15/hr will be met. But what if burger-flippers were to earn$10 or even $15/hr; what might happen?

This question leads to the last reason for questioning how much effect a higher minimum wage might now have for low-wage workers. This reason is more strategic and involves technological substitution of capital (in the form of new machines) for labor. It is a centuries-old, continuing process that made an indelible, irreversible mark during the Industrial Revolution.[4]

For much of our history, the US was labor-poor. That is, although the nation enjoyed impressive natural resources, labor was relatively scarce. One can easily argue that seminal technological inventions like the cotton gin (1793) and mechanical reaper (1834) were introduced to improve labor productivity, given that workers were relatively scarce. New technologies like these and many others eventually reduced the need for many low-skilled laborers in many industries. Over time manufacturing, agriculture and other business activities became less labor-intensive and more capital-intensive. Fortunately, technological change, combined with robust economic growth, also created other opportunities for displaced workers. That's not today's situation; GDP grew less than 2% this year.

During the past 20 years, textile and apparel manufacturers in the US have suffered enormously as markets were lost to lower-cost foreign producers – due in part to far cheaper foreign labor costs, those Bangladeshis, for example. Since 1990, US apparel manufacturers have lost 81% of their capacity and 85% of their jobs. However, a few US textile-apparel manufacturers now have made a come-back – by employing far more technology (e.g., capital and machines) and far fewer workers. Like other industries, modern manufacturing has become much more capital-intensive, thereby requiring higher-skilled workers.

If the recent labor actions at fast-food establishments were to surprisingly succeed in significantly raising wages, I wonder that after a few years, well-capitalized employers (in 2012, MacDonald's Corp had $27.5 billion revenues; Burger King had $1.97 billion in revenues) would start using robots instead of higher-cost human beings in their restaurants. Big Macs and Whoppers could be made and served by ever-smiling McDrobots that don't need to get paid.

Do fast-food consumers want low prices or are they willing to pay more to keep receiving their orders from real humans whose wages may be increased by government fiat? In the realm of 99 cent meals, price probably dominates. It wouldn't surprise me if fast-food firms have explored automated possibilities. Such capital-based automation would echo similar strategies that have already been implemented by many firms like automobile, mobile phone, computer and steel manufacturers to name just a few.

So what are low-skilled workers to do? These workers' living needs are increasingly unattainable with their minimum-wage earnings. Raising the minimum wage by statute at a time of elevated unemployment seems warranted but may not be effective. Should federal and state governments improve and broaden their worker training programs to better prepare these low-skill people for productive, remunerative jobs? Yes. Training/re-training programs could help, but don't always have strong performance records. Should more money be spent on vocationally-oriented education? Yes. However, more federally-funded programs for training and education is going to happen no sooner than when the federal minimum wage is raised. That is to say, not until the House gets a Democratic majority. Don't hold your breath.

I believe the most fruitful way to help low-skill workers is to get the US economy growing again emphasizing labor-intensive infrastructure investment and more equitably sharing the benefits of such increased investment. The ExReps are unlikely to buy into the equitable sharing part of this. But if they somehow step out of their twilight-zone reverie for a moment – admittedly a very long shot – perhaps when Ted's not Cruzing on Green Eggs and Ham, they might belatedly see the wisdom of enacting much-needed fiscal stimulus aimed at middle-class, low-skill workers that would benefit their constituents and the rest of us. Otherwise, we may be buying our future burgers from a smiley-faced McDrobot automaton.

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[1] The Gini Index measures income distribution inequality, where a higher percentage represents more inequality. A completely unequal income distribution would be represented as a Gini Index of 100% (all income would be earned by 1 individual). Thus, a lower Gini Index is considered generally better because it indicates less income inequality.

[2] Being of "several minds" isn't an uncommon condition for economists and prompted George Bernard Shaw to note, “If all economists were laid end to end, they would not reach a conclusion."

[3] And the envelope please: it's Las Vegas. Five points if you guessed correctly.

[4] There was no definitive start date for the Industrial Revolution; many historians suggest it began in the late-18^th Century. A Farewell to Alms by Gregory Clark offers a fascinating, insightful assessment of this revolution's economic and social causes and effects.