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The only way AFL-CIO can report 400-to-1 ‘CEO-to-worker pay’ ratio is to ignore CEOs of medium, small companies
View related content: Carpe Diem
As I reported recently on CD, there are a number of statistical problems with the methodology used by the AFL-CIO to calculate its annual “CEO-to-worker pay” ratio, which was 373-to-1 in 2014, up from 331-to-1 in 2013. Obviously, as a federation of 56 trade unions representing 12.5 million active and retired union workers, the AFL-CIO has an incentive to report the highest possible “CEO-to-worker pay” ratio. How to do that? Very easy: a) report the very highest possible estimate of CEO pay available and b) report the very lowest possible estimate of worker pay.
1. Lowest Worker Pay. Even though the AFL-CIO represents union members, it uses average worker pay for all workers, not just union members. For example, to get a 331-to-1 CEO-to-worker pay ratio in 2013, it compared the total compensation of 350 of the highest paid CEOs in the S&P 500 ($11.7 million) to average annual worker pay of $35,239. To calculate that average worker pay, the AFL-CIO used the average hourly wage of $20.14 in 2013 for production and nonsupervisory workers and the average workweek of 33.7 hours for those workers: $20.14 per hour x 33.7 hours per week x 52 weeks = $35,239 annual worker pay. And as I reported here, the AFL-CIO is actually reporting the annual cash wages for part-time workers, not full-time workers (less than 35 hours per week is part-time according to the BLS).
If the AFL-CIO had used the average annual pay for all full-time private workers of $44,617 in 2013, the CEO-to-worker pay ratio would have decreased by about 21% from 331-to-1 to 262-to-1, and if it had used the average annual union pay of $49,400, the ratio would have fallen further to 237-to-1, a decrease of 28.4%.
2. Highest CEO Pay. As I also pointed out in my previous post, the AFL-CIO compares total CEO compensation (base pay plus bonuses, profit-sharing, stock or option awards, etc.) to the average cash wages of workers, and not total worker compensation (including fringe benefits, profit-sharing, retirement/pension, etc.). That comparison of CEO compensation to worker cash pay is another method used by the AFL-CIO to report the highest possible CEO-to-worker pay ratio. Another tactic used by the AFL-CIO is to use only a very small sub-set of only the very highest paid CEOs.
For example, in 2013 the AFL-CIO included only 350 of the highest paid CEOs among the S&P 500 companies, and it reported the average CEO compensation, not the median CEO compensation – another tactic used to report the highest possible CEO pay number. As the chart above shows, the median CEO compensation for all S&P 500 companies in 2013 was $10.1 million (according to Equilar’s “2014 CEO Pay Strategies Report“), which was $1.6 million (and 13.7%) lower than the AFL-CIO’s reported $11.7 million CEO average compensation. Using the median compensation for all S&P 500 CEOs reduces the AFL-CIO’s ratio by more than 13% from 331-to-1 to 287-to-1.
Further, to report the highest possible CEO pay, the AFL-CIO considers only the CEOs of large-cap S&P 500 companies, which are America’s 500 largest, well-established companies with market capitalizations above $5.3 billion. Ignored by the AFL-CIO are the CEOs of America’s S&P 400 Mid-Cap companies (market capitalization of $1.5 billion to $5.9 billion) and 600 S&P Small-Cap companies (market capitalization of $400 million to $1.8 billion). The chart above shows the median CEO salaries and the CEO-to-worker pay ratios for those two groups: $4.9 million median salary and CEO-to-worker pay ratio of 139.5-to-1 (99.4-to-1 for union workers) for the S&P MidCap 400 companies and $2.7 million median salary and ratio of 76.7-to-1 for the S&P SmallCap 600 companies (54.7-to-1 for union workers).
For all 1,500 companies in the S&P 1500 (includes the S&P 500, S&P MidCap 400 and S&P 600 Small Cap indexes) the median CEO salary in 2013 was $4.96 million, and the CEO-to-worker pay ratio was 140-to-1, less than half of the AFL-CIO’s reported ratio of 331-to-1. For the AFL-CIO’s membership, the CEO-to-union worker pay ratio for the S&P 1500 would be only about 100-to-1.
Bottom Line: As the chart above shows, the CEOs of America’s largest companies in the S&P 500 get paid about twice as much on average ($10.1 million) as the CEOs of mid-size companies ($4.91 million), the CEOs of mid-size companies get paid about twice as much as CEOs of small-cap companies ($2.7 million). By only considering a sample of large-cap S&P 500 companies (and not all 500 companies), while ignoring the CEOs of mid-size and small-cap companies, the AFL-CIO can greatly exaggerate its annual CEO-to-worker pay ratio. As I’ve reported previously, if the AFL-CIO considered the average pay of all 21,550 chief executives running companies in America ($216,100 in 2014), the CEO-to-worker pay ratio in 2014 would be 6-to-1 (and 4.3-to-1 for union workers). The only way the AFL-CIO can get an inflated CEO-to-worker pay ratio of almost 400-to-1 (for 2014) is to engage in questionable methodology that compares the average (not the median) total compensation of a tiny group of the country’s very highest-paid CEOs who head America’s largest companies to the cash wages of about 100 million mostly part-time workers. While that shady methodology does generate a lot of sensationalized media attention, it also creates a pretty high “statistical misrepresentation-to-truth ratio.“
Lots of problems with AFL-CIO’s ‘CEO-to-worker pay’ analysis including small sample size and using part-time worker pay
View related content: Carpe Diem
The AFL-CIO has come out with its annual exaggerated and distorted CEO-to-worker pay comparison, which this year is a whopping 373-to-1 using some questionable statistical methods. As I reported recently on CD here, a comparison of all US “chief executives” to all US workers produces a CEO-to-worker pay gap of less than 4 (only 3.83 in 2014). Below is a review of that particular issue, along with some other statistical problems with the AFL-CIO’s comparison of CEO-to-worker pay.
1. Extremely Small Sample Size. The AFL-CIO compares a small number of the highest-paid CEOs who head some of the world’s largest multi-national corporations that are among companies in the S&P 500. This year, it’s not even clear how many CEOs are part of the AFL-CIO’s analysis, notice the ambiguity here (emphasis added):
In 2014, CEOs of the S&P 500 Index companies received, on average, $13.5 million in total compensation—an increase of 15.6% from the previous year—according to the AFL-CIO’s analysis of available data.
Last year, the AFL-CIO reported an average CEO pay (total compensation) of $11.7 million for 2013 based on “available data from 350 companies.” This year, the AFL-CIO fails to mention the exact number of companies it is using to determine that average CEO compensation in 2014 was $13.5 million.
And as I have reported before, BLS data show that there are actually 246,240 “chief executives” in the US, who earned an average annual salary of $180,700 in 2014. Using the BLS’s more narrow job classification “chief executives of companies and enterprises,” the 21,550 CEOs in that group earned $216,100 in 2014, an annual increase of only 1.3% from 2013 and far below the 15.6% increase in “CEO pay” reported by the AFL-CIO for 2014.
Using the BLS average of $216,100 for all American CEOs of “companies and enterprises” in 2014 (less by the way than the base salary of $272,00 salary for AFL-CIO chief executive Richard Trumka), and the AFL-CIO’s estimate of worker pay ($36,134 in 2014) would produce a “CEO-to-worker pay” ratio of only 6-to-1, far, far below the AFL-CIO’s 373-to-1 biased ratio using only the top 1-2% of the highest paid CEOs in the US.
2. AFL-CIO Compares Total CEO Compensation to Workers’ Cash Wages. The AFL-CIO compares average total CEO compensation ($13.5 million in 2014) for a very small sample of the highest paid chief executives to the base cash wages of the average worker ($36,134 in 2014), not the total compensation for the average worker. That is, the AFL-CIO reports a “CEO-to-worker pay” ratio, which is actually a “CEO total compensation to worker base pay” ratio and not a “CEO cash pay to worker cash pay” or a “CEO total compensation to total worker compensation.”
The AFL-CIO’s measure of total CEO compensation includes base salary, plus any payments for bonuses and profit-sharing, the value of any deferred compensation in the form of stock or option awards, retirement or pension benefits, and other non-cash benefits like health care, personal use of company cars and airplanes, country club memberships, etc. On the other hand, the AFL-CIO only considers monetary wages for workers, and ignores the value of their fringe benefits (health care, employer contributions to 401(k) programs and other pension/retirement benefits, etc.) and the value of any profit-sharing or bonus payments. How significant are those non-wage benefits?
Consider that hourly autoworkers at Ford will receive $6,900 this year in profit-sharing payments, following even larger payments of $8,800 last year and $8,300 in 2013. GM workers could receive up to $9,000 in profit-sharing payments this year, following payments of $7,500 in 2014 and $6,800 in 2013. Autoworkers also receive generous fringe benefits that include education tuition assistance (up to $5,000 per year), book reimbursement, personal development assistance, retirement benefits, and health care benefits (including prescription drug coverage, $20 co-pay office visits, wig benefits, hearing aid coverage, dental care coverage, retiree health coverage, mental health care and substance use disorder treatment coverage, disability coverage, medical leave coverage, etc.). While UAW worker fringe benefits may be more generous than those received by the average US worker, it still illustrates the point that the AFL-CIO is making an “apples vs. oranges” comparison by considering total compensation for CEOs including every possible fringe benefit to only the cash wages of workers, while completely ignoring any worker fringe benefits.
3. AFL-CIO “Worker Pay” is for Part-Time Workers. To calculate the average annual cash-only payments of $36,134 for the “average rank-and-file worker,” the AFL-CIO use the average hourly pay of $20.60 in 2014 for Production and Nonsupervisory Employees and the average number of weekly work hours of 33.7 for those workers in 2014 ($20.60 per hour X 33.7 hours per week X 52 weeks = $36,100 per year). Note that the BLS considers weekly work hours below 35 as part-time status, and therefore the AFL-CIO is comparing the total compensation of CEOs working full-time to the cash wages of part-time workers!
4. AFL-CIO Doesn’t Compare CEO Compensation to Worker Pay at the Same Company. The AFL-CIO compares the average compensation of a few hundred CEOs to the average pay of about 100,000 “part-time” production and non-supervisory employees, while perhaps thousands of those workers don’t even work for a company headed by one of the few hundred CEOs in the AFL-CIO’s sample. Why not compare CEO compensation to the typical pay of employees who actually work at the CEO’s company? That comparison of “CEO-to-worker pay” is actually calculated by Pay Scale for the 100 largest publicly-traded US companies, as Jim Pethokoukis reported on the AEIdeas blog yesterday. The Pay Scale analysis also corrects for the flaw discussed above in Item #2 by comparing the “Total Cash Compensation” for CEOs to the “typical median worker pay” at the same corporation.
According to Pay Scale:
Data on CEO Salary was obtained from Equilar’s “100 CEO Pay Study,” an annual study of CEOs at the 100 largest U.S. publicly-traded companies. We summed Salary, Bonus, and Other compensation to get non-stock compensation. This measure is most similar to employee data from the PayScale website. We provide the overall typical median pay for workers at 100 companies, as well as the ratio of CEO-to-worker pay.
Based on the Pay Scale analysis for 2013 for the 100 largest US companies by revenue, the average CEO “total cash compensation” was about $5.5 million, the average pay for employees at those companies was $70,700, and therefore the average CEO-to-Worker Pay ratio according to Pay Scale’s analysis was only 84-to-1. The historgram above shows the distribution of CEO-to-Worker pay ratios for those 100 companies, which range from as low as 6-to-1 for Hewlett-Packard to a high of 422-to-1 for CVS. Part of that difference is explained by the fact that the typical worker at HP makes $84,500 while the average CVS worker makes only $28,700. As Jim pointed out, only five companies had ratios over 200-to-1 in 2013, and there were only two companies over 300-to-1 (Goodyear and CVS). The historgram also shows the average of 84-to-1 is influenced by a few outliers on the high end, which is corrected by calculating the median CEO-to-worker pay ratio of only 70.2-to-1 (half of the companies are above the median, and half below) for the companies in the Pay Scale database for 2013.
Bottom Line: To summarize the problems with the AFL-CIO’s “CEO-to-worker pay” ratio:
a. It is based on a small sample of companies that represent only 1-2% of all companies with CEOs.
b. It includes bonuses and all forms of non-cash compensation and fringe benefits for CEOs, while ignoring those forms of compensation for employees.
c. It compares CEOs working full-time to part-time “rank-and-file” workers (33.7 average weekly work hours).
d. It doesn’t compare CEO compensation with employee pay for workers at the same company.
Given all of these statistical flaws (the biggest I think being that the AFL-CIO’s average worker pay is actually for part-time workers), it’s somewhat troubling that the media seems to mostly blindly accept and report the AFL-CIO’s annual distorted and exaggerated “CEO-to-worker pay” ratio without ever questioning the analysis. One exception I could find is this WSJ article “Top CEOs Make 373 Times the Average U.S. Worker” that points out Item #2 above about comparing CEO total compensation to cash wages for employees. And as I have pointed out many times, a comparison of the average pay of ALL CEOs to the average pay for ALL full-time workers is less than 4-to-1, nowhere close to the nearly 400-to-1 figure used by the AFL-CIO (and the media). Call it a “statistical falsehood-to-truth ratio” of almost 100 times for the AFL-CIO’s CEO-to-worker pay ratio!
View related content: Carpe Diem
Here’s an example of “Perry’s Law,” which says that “competition breeds competence” and thereby forces producers to offer consumers better service, higher quality and/or lower prices. The LA Times is reporting that “Long Beach’s answer to Uber and Lyft is Cheaper taxi fares,” here’s an excerpt:
Long Beach officials loosened restrictions on local taxi fares Tuesday, a move aimed at keeping cabs competitive with the flexible pricing models of ride-hailing services like Uber and Lyft.
At its meeting in downtown Long Beach on Tuesday evening, the City Council voted, 9-0, to allow Long Beach Yellow Cab, which holds the city’s exclusive franchise agreement, to charge passengers less than the metered fare. The company will now be able to offer discounted rates and free rides.
The vote makes Long Beach the first major U.S. city to eliminate the price floor that prevents taxi drivers from providing free or discounted rides. The maximum price remains unchanged. Yellow Cab officials said the shift would help its drivers better compete against Uber and Lyft.
Both services set fares based on supply and demand. During periods of high demand, called “prime time” or “surge pricing,” the companies raise prices to coax more of their drivers onto the roads. Discount codes are also common. As in most cities, taxi fees in Long Beach are set by city regulators, and do not fluctuate. Cabs charge a base fare of $2.85, plus $2.70 per mile. The policies were put in place to protect customers years ago, officials say — before Uber and Lyft existed.
“Taxicabs have had no opportunity to experiment and fail, or experiment and succeed,” said William Rouse, the general manager of Long Beach Yellow Cab Cooperative Inc. “Most people know it’s illegal for drivers to charge more than the meter, but it’s just as illegal to charge less than the meter. For a long, long time, we’ve known there’s been a need to address this imbalance.”
L.A.’s nine licensed cab companies reported a 21% drop in trips in the first half of 2014 compared with the same period the previous year, the steepest decline on record.
This example helps to illustrate Perry’s Law, and provides an example of how direct, ruthless, even cutthroat competition is often the most effective form of regulation, and provides the intense discipline that forces firms to maximize their responsiveness to consumers. To maximize the competence of producers and suppliers, we have to maximize competition, and to maximize competition we usually need to reduce the government barriers to market competition artificially restricting the number of taxis that are allowed to operate in a city and forcing them to charge fixed, government-mandated prices. In other words, we need to move away from the ubiquitous crony capitalism that protects well-organized, well-funded, concentrated groups of producers like taxi cartels from market competition. Government regulation typically reduces competition, which then reduces the competence of producers, and reduces their willingness to serve consumers and the public interest, which make us worse off. I say the more market competition the better, for consumers and for the human race. As Bastiat pointed out in 1850:
Treat all economic questions from the viewpoint of the consumer, for the interests of the consumer are the interests of the human race.
Competition from Uber and Lyft have forced the traditional taxi cartels to lower prices and offer better service and become more competent, which has generated tremendous benefits for consumers, just as Perry’s Law predicts.
HT: Morgan Frank
View related content: Carpe Diem
1. Chart of the Day I. Based on yesterday’s Census Bureau report on April retail sales, consumer spending at “Food Services and Drinking Places” (restaurants and bars, see red line) was greater than grocery store sales (blue line) in April for the third straight month, reversing a longstanding pattern of food spending and establishing a new US consumer milestone (the “great convergence“). As the chart above shows, the spending habits of Americans over the last three months represent the first time in US history that spending on food at restaurants by Americans has exceeded spending on food at traditional grocery stores and supermarkets. In April, US consumers spent $51.25 billion on food and beverages at restaurants, which was almost $1.5 billion (and about 3%) more than $49.77 billion in grocery store sales for the month. Over the last three months, spending at “Food Services and Drinking Places” was $152.6 billion compared to $149.8 billion spent on food at grocery stores from February to April.
2. Chart of the Day II. The chart below provides another graphic illustration of the “great convergence” in the food spending habits of Americans over a much longer period of time, this one using annual USDA data from 1869 to 2013 (Table 1 here). As a share of total food expenditures, spending on food at home has gradually decreased from almost 95% in 1869 to 50.4% in 2013.
Note: There has been some criticism of the two charts above that were posted on Twitter today (and previous versions that were posted here on CD and on Twitter) because of the claim that retail grocery sales don’t include sales from Walmart and Target. While that is a valid criticism of the Census Bureau grocery store sales data, it’s not true of the USDA grocery sales data, see explanation here:
Adjusted sales from Target and Wal-Mart Stores, Inc. are added to grocery sales from the Census Bureau because these stores are not classified as supermarkets by the North American Industry Classification System (NAICS). Therefore, grocery sales reported by the Census Bureau are smaller than total sales [from the USDA].
It’s also true that the “food away from home” sales data reported by the USDA is a broader category and is therefore greater than retail sales reported by Census for spending at “food services and drinking places.” According to the USDA:
Food-away-from-home spending is mainly for food purchased at eating and drinking places, but it is also for food purchased at such outlets as hotels and motels, recreational places, vending machines, and schools and colleges.
For recent years, the differences were as follows:
1. The USDA reported annual spending of $694.5 billion in 2013 on “food at home” and spending of $653 billion on “food away from home.” With some other adjustments for home food production and food donations, spending on food at home in 2013 was 50.4% of total food expenditures, see bottom chart above.
2. The Census Bureau reported annual spending of $576 billion in 2013 on food purchased at grocery stores and spending of $542 billion on food at restaurants, which would mean that 51.5% of food expenditures (for those two categories) in 2013 were spent at grocery stores. In 2014, 50.7% of total food spending was for food at grocery stores ($591.9 billion) and 49.3% was for spending at restaurants and bars (food sales data from the USDA are not yet available for 2014).
Bottom Line: The Census Bureau’s retail sales figures don’t count grocery store sales at Walmart and Target, but they also don’t count food purchased away from home at hotels, recreational places, vending machines and schools and colleges. With broader coverage for food spending, the USDA does count both grocery store sales at Walmart and also spending on food away from home that isn’t included by the Census category “food services and drinking places.”
Here’s what’s important: By either organization’s slightly different calculation of food spending, it’s clear that the US has experienced a “great convergence” over the last 150 years in food spending, as Americans now spend less than ever before on food at home/food at grocery stores (50.4% of total food spending according to the USDA in 2013, 50.7% according to Census in 2014), and more on food away from home/food at restaurants than ever before (49.6% of food spending in 2013 says USDA, 49.3% in 2014 says Census).
View related content: Carpe Diem
Especially in the evenings after rush hour, I frequently see very large city buses in DC that probably have a seating capacity of 50 passengers or more traveling around with only one or two passengers, which always strikes me as an extremely inefficient use of resources. This may not be the complete answer to that glaring transportation inefficiency, but I think the services offered by Bridj are a pretty promising transportation alternative. The Boston-based startup combines “the convenience of the ride-sharing app Uber with the efficiencies of public transportation” as this article in Autoblog describes it.
According to Autoblog, this is how Bridj works;
Users request a pickup point, destination, and when they want to leave on the company’s iOS or Android app. Bridj operates a fleet consisting mostly of 14-person Mercedes-Benz Sprinters, and it adjusts pick-up and drop-off times based on demand.
Here’s a link to the Bridj website (“your everyday transportation system that adapts in real time to where you live work and play”) and here’s a video below that shows how it works.
Bridj currently operates only in Boston (see service areas here), and now in DC in the service area below, with plans to expand to other DC areas soon, and to other cities in the future as well. According to its website, “Each Bridj trip costs slightly more than public transit, but significantly less than taking a taxi.”
If the popularity and success of Uber is any indication, Bridj could have a very bright future.
HT: Hit Squad
View related content: Carpe Diem
The great French free-market economist Frederic Bastiat (pictured above) was considered by many to be the master of the reductio ad absurdum approach that he used quite effectively to expose the logical fallacies of his opponents’ positions by taking unsound arguments to their extreme and often ridiculous conclusions. Here are a few examples:
1. To make the case against trade protectionism, Bastiat wrote a petition to the French parliament in 1845 on behalf of French candlemakers, who he said suffered from the unfair competition of a foreign rival flooding the French market with light at such an incredibly low price that domestic candlemakers couldn’t compete. That rival was the sun, and Bastiat proposed laws requiring “the closing of all windows, dormers, skylights, inside and outside shutters, curtains, casements, bull’s-eyes, deadlights and blinds,” as an absurd form of protectionism for the French candlemakers.
2. When a new railroad was proposed from France to Spain, the French town of Bordeaux wanted a break in the tracks so that “all goods and passengers are forced to stop at that city,” which would therefore be “profitable for boatmen, porters, owners of hotels, etc.” Using reductio ad absurdum, Bastiat proposed that if a break in the tracks provided economic benefits and jobs for one town and served the general interest, then it would be good for breaks in the tracks at dozens and dozens of other French towns, to the absurd point that there would be a railroad composed of a whole series of breaks in the tracks, so that it would actually become a “negative railway.”
(Note: The section above has been corrected to clarify that Bastiat was talking about adding “breaks in the tracks” and not adding train depots as I wrote before.)
More recently, the reductio ad absurdum approach has been used frequently to argue against raising the minimum wage. For example, here’s former Dallas Fed president Robert McTeer in Forbes first citing Bastiat and then arguing that:
If legislating a higher minimum wage, or dictating one by administrative fiat, could create prosperity, why stop with two or three dollars per hour? Just go ahead and raise it to $50 an hour and get a really good bang for your bucks. (Actually, there is no logical reason to stop at $50.)
While some might argue that reductio ad absurdum isn’t the best approach to use when pointing out the flaws and fallacies of the minimum wage law, I’ll follow Bob McTeer’s approach with another reductio ad absurdum argument against the minimum wage. Here it is:
There are thousands of different wages in the economy, here’s a list of hourly and annual wages from the BLS for more than 800 different occupations. If minimum wage proponents have faith that politicians and the government know the “best” or “optimal” minimum wage for unskilled workers, then shouldn’t that faith extend to politicians and the government determining minimum wages and perhaps maximum wages for all occupations in all industries. Note that the BLS wages are nationwide averages, and would vary around the country based on regional differences in the cost of living, so minimum wage proponents would further grant the government the power to regulate wages around the entire country.
But then wages are just one price – the price of labor – and there are thousands, if not millions, of other prices throughout the economy. If it’s best to let politicians and the government decide on wages (minimums and maximums), then shouldn’t the enlightened policymakers also be trusted to set all prices in the economy – consumer prices, commodity prices, home prices, etc.? After setting all wages and prices, shouldn’t politicians and the government also determine the price of credit by setting minimums and maximums for all interest rates in the economy?
Bottom Line: Just like Bastiat argued that if a break in the tracks served the public interest, then an infinite number of breaks could also be justified, I would argue using reductio ad absurdum that if minimum wage proponents want to give the government the power to set minimum wages for unskilled workers, then they should likewise grant government the absurd power to set all wages, all prices, and all interest rates in the economy. On the other hand, if you think it’s absurd that the government should set an infinite number of prices, wages, and interest rates in the economy, then it seems inconsistent and illogical that you think the government should set the minimum wage for unskilled workers.
View related content: Carpe Diem
1. Chart of the Day (above). See the trend in college grade inflation over time in the chart above, via the GradeInflation.com website, maintained by retired Duke University professor Stuart Rojstaczer. Note the reversal:
1950s: Cs > Bs > As
1960s: Bs > Cs > As
1980s: Bs > As > Cs
2000s: As > Bs > Cs
2. Venn Diagram of the Day (above). Results trump intentions.
4. Socialism Kills. Motorcycles are very popular in Venezuela and shortages of spare parts in the recession-plagued country are so acute that bike riders are being killed for their motorcycles.
5. Chart of the Day II (above). The Conference Board released its monthly Employment Trends Index (ETI) today for April, and it reached the highest level last month since March 2007, slightly more than 8 years ago. The ETI is an aggregated composite labor market index based on eight individual labor-market indicators, and April’s increase in the ETI was driven by positive contributions from seven of the eight components.
6. More Job Market Good News. The class of 2015 will enter what economists say is the best job market for new college graduates in nearly a decade, as the improving US economy and accelerating retirements of baby boomers create job openings across many fields.
7. How much oil does the Bakken Formation have? The most recent estimate of proved reserves is just under 6 billion barrels for the entire Williston Basin, which includes the Bakken, and another 3.5 billion to 4.1 billion barrels of “undiscovered and technically recoverable” oil. At the current rate of about 1 million barrels per day, that would mean that drilling will go on for another 16 years or so.
8. Chart of the Day III (above). Note the downward trend in US real GDP per capita over the last 60 years. Is that because economic growth is slowing down/stagnating or because: a) GDP doesn’t accurately capture quality improvements over time and b) more economic value is being created today that isn’t captured by GDP accounting (more non-market production of services that don’t involve direct payments via a market-based exchange)?
9. Vanguard Updates: a) May 1 marked the 40th anniversary of the day in 1975 when Vanguard launched what is now the world’s largest mutual fund company. But there was no party, no cake, no fanfare. At Vanguard, they’re too cheap to spend dollars on a frivolous celebration, and that’s just one example of how it keeps its expense ratios so low (0.18% vs. industry average of 1.02%), b) Here are “6 ways Vanguard has changed the way people invest,” and c) Mutual fund and E.T.F. fees have dropped by 27% over the last 10 years, but not because Wall Street fund managers have been reducing fees. It’s because investors have been voting with their feet, moving money from expensive funds into cheaper ones, like [Vanguard] index funds and that drives down the average fees for mutual funds.
Economic Lesson: Low-cost industry leaders like Vanguard and Walmart generate benefits not just for Vanguard investors or Walmart shoppers, but they also generate benefits across the board by imposing discipline on their competitors. Vanguard’s low fees force other mutual fund companies like Fidelity to lower their fees, and Walmart’s low prices force other retailers like Target to lower their prices. We’re all better off today because of Vanguard and Walmart, even if we invest and shop elsewhere – thanks to the power of “everyday low fees” and “everyday low prices.”
10. Video of the Day (below). Charles Murray and Jonah Goldberg on civil disobedience in America.
The ‘miracle of the marketplace’ brings tropical fruit from thousands of miles away to your local grocery store
View related content: Carpe Diem
Shopping at a Harris Teeter grocery store yesterday in DC, I bought four large bananas for only 81 cents, a mango from Guatemala for $1 and an avocado from Mexico for $2. As I left the store marveling at what a bargain those exotic fruits are at those prices, I was reminded of this CD post from a few years ago that was inspired when I had a similar experience purchasing bananas as a local Safeway.
As I commented in 2013, What a bargain! Based on the fruit’s label, those four bananas had traveled from somewhere near the equator in Colombia to the nearby Harris Teeter store in DC, and even after traveling more than 2,300 miles from another continent, were available to me for only 20 cents a piece!
The realization that I can walk to a local grocery store and pay 20 cents for an exotic, tropical fruit that was delivered to me from South America seems like such a miracle that I started to wonder: How do today’s banana prices compare to prices in the past? Well, here’s a little banana history: Bananas were first available commercially to American consumers in 1876, when they were introduced at the Philadelphia Centennial Exposition to celebrate the hundredth anniversary of the signing of the Declaration of Independence, and sold for ten cents. In today’s dollars, that would be the equivalent of about $3.00 per banana, or 15 times more expensive in real cost than the 20 cents I paid at my local grocery store! Stated differently, the price consumers pay today for bananas is 93% lower (adjusted for inflation) than the original price paid by Americans in 1876 when they were first introduced.
Over a more recent time period, the chart above displays inflation-adjusted retail banana prices from 1980 to 2015, based on BLS data, and shows that banana prices have been declining steadily over the last thirty years. Banana prices today ($0.59 per pound), after adjusting for inflation, are almost 40% lower than in 1980 ($0.98 per pound), see blue line in chart. It’s likely that nothing has changed as far as the physical product is concerned, but greater efficiencies in production, distribution, and transportation of bananas have resulted in a price reduction of 39.4% over the last 35 years.
I’ve also calculated he “time cost” of bananas measured in the number of minutes it would take a worker earning the average hourly wage to earn enough income to purchase a pound of bananas at the retail price in each year (see red line in chart). By that measure, the “time cost” of bananas has fallen from 3 minutes in 1980 to only 1.7 minutes this year, which is a reduction in cost of 43.3%. At the current average hourly wage today of $20.90 the “time cost” of one 20-cent banana would be less than 35 seconds of work – almost free!
To express my appreciation of the “miracle of the marketplace” that allows me to walk to my local grocery store and buy exotic tropical fruit grown 2,300 miles away in Colombia for only 20 cents, I’ve modified part of Leonard Read’s famous “I, Pencil” essay below (with a little help from Jeff Jacoby):
I, Banana, am a complex combination of miracles: First, I’m a plant that is a miracle of nature — I’m botanically a berry but am also the world’s largest herbaceous flowering plant. And then I’m part of a human miracle – the kaleidoscopic energy and productivity of the free market. That human miracle is the complex, coordinated efforts of thousands of people involved who cooperate to bring millions of bananas from places like the Andes Mountains in Colombia to local grocery stores all over America and Europe – areas with climates that are completely hostile to growing the world’s most popular fruit. That human miracle is the configuration of the creative energies of thousands of people who speak different languages and have diverse ancestries — but collaborate spontaneously on my behalf to deliver fresh, tropical fruits like bananas (and also mangoes, avocados and pineapples) to my local grocery store, which happens miraculously in the absence of any human master-minding or any banana or fruit czar! Man can no more direct these millions of know-hows to bring bananas to the local grocery stores in America and Europe than he can put molecules together to create a banana plant.
Bottom Line: Let me express my appreciation to the “invisible hand” and the “miracle of the marketplace” that allows me to purchase tropical fruit from a faraway place at my local grocery for a price (20 cents) that is almost free. At the average hourly wage today of $20.90, the average American earns enough income in about 35 seconds to purchase a banana that has traveled more than 2,000 miles to his or her local grocery store! That’s a miracle!
View related content: Carpe Diem
A few days ago on CD, I featured Robert Reich’s recent video on doubling the federal minimum wage to $15 per hour that I described as a display of disappointing “economic malpractice.” In a series of posts, George Mason economist Don Boudreaux has done a great public service by conducting a systematic, step-by-step takedown of Reich’s economic asininity, because in Don’s words, “Nearly every sentence out of Reich’s mouth in the video is flawed.” Demonstrating his total “economic bad-assery” in regard to regularly dismantling every aspect of economic nitwitery about the minimum wage, here’s a summary of Don’s takedowns of Reich’s “manifestly idiotic” video:
1. In a post at the Cato at Liberty Blog (while his Cafe Hayek blog was temporarily unavailable) titled “Reich Is Wrong on the Minimum Wage,” Don described Reich’s video “painful” and commented further that “it hurts to encounter such rapid-fire economic ignorance, even if the barrage lasts for only two minutes. Reich’s video is infected, from start to finish, with too many other errors to count.” Here’s a slice of Don’s first response to Reich (emphasis mine):
Perhaps the most remarkable flaw in this video is Reich’s manner of addressing the bedrock economic objection to the minimum wage – namely, that minimum wage prices some low-skilled workers out of jobs. Ignoring supply-and-demand analysis (which depicts the correct common-sense understanding that the higher the minimum wage, the lower is the quantity of unskilled workers that firms can profitably employ), Reich asserts that a higher minimum wage enables workers to spend more money on consumer goods which, in turn, prompts employers to hire more workers. Reich apparently believes that his ability to describe and draw such a “virtuous circle” of increased spending and hiring is reason enough to dismiss the concerns of “scare-mongers” (his term) who worry that raising the price of unskilled labor makes such labor less attractive to employers.
Ignore (as Reich does) that any additional amounts paid in total to workers mean lower profits for firms or higher prices paid by consumers – and, thus, less spending elsewhere in the economy by people other than the higher-paid workers.
Ignore (as Reich does) the extraordinarily low probability that workers who are paid a higher minimum wage will spend all of their additional earnings on goods and services produced by minimum-wage workers.
Ignore (as Reich does) the impossibility of making people richer simply by having them circulate amongst themselves a larger quantity of money. If Reich is correct that raising the minimum wage by $7.75 per hour will do nothing but enrich all low-wage workers to the tune of $7.75 per hour because workers will spend all of their additional earnings in ways that make it profitable for their employers to pay them an additional $7.75 per hour, then it can legitimately be asked: Why not raise the minimum wage to $150 per hour? If higher minimum wages are fully returned to employers in the form of higher spending by workers as Reich theorizes, then there is no obvious limit to the amount by which government can hike the minimum wage before risking an increase in unemployment.
2. Once the Cafe’ Hayek blog was back up, Don posted “On Robert Reich on the Minimum Wage,” here’s a key excerpt:
Former U.S. Secretary of Labor Robert Reich recently did a short video in which he endorses a policy of raising the national minimum wage in the U.S. to $15 per hour. That’s a 107% (!) increase over its current level of $7.25. Amazingly, Reich seems seriously to believe that it is mere ‘scare-mongering’ to suggest that more than doubling the minimum wage will destroy jobs for any, much less many, low-skilled workers.
Nearly every sentence out of Reich’s mouth in this video is flawed. No matter what you might think of the rather esoteric exceptions to the economic case against the minimum wage – such as ‘labor markets are filled with monopsony power’ – the reality is that foolishness such as that peddled here by Reich is the kind and quality of argument that drives the minimum-wage debate in the popular press and in popular culture (and, hence, in politics). The fact that such manifest idiocy as is on display in this video is taken seriously by so many people speaks to the vital need for more widespread, basic economic education.
3. Don next asked “How Scientifically Objective Is Robert Reich?“:
Judge for yourself if Robert Reich, in this video promoting a 107% increase in the national minimum wage in the U.S., presents an unbiased interpretation of the data. About 45 seconds into this video Reich begins his comparison of the real value of today’s minimum hourly wage ($7.25) to the inflation-adjusted value of the minimum wage in 1968. In 1968 the minimum wage was $1.60; according to Reich’s inflation adjustment, this nominal value in 1968 is the equivalent of $10.52 today. Because $10.52 is significantly higher than today’s minimum wage of $7.25, we’re supposed to conclude that some great injustice is being visited upon today’s minimum-wage workers.
But as the graph above reveals, Reich’s selection of 1968 as the year to use for a comparison of the real value of today’s minimum with that of some presumed past golden era is almost certainly not random.
Indeed, the chart above shows that, save for the years of the recent Great Recession (hardly a time when one would wish for especially high minimum wages!), one has to go back to the early 1980s before encountering a time when the real value of the minimum wage was as high as is the real value of today’s minimum wage. While it’s true that for most (although not all) of the 15-or-so-year period between the mid 1960s and the early 1980s the real value of the national minimum wage was generally higher than is the real value of today’s minimum wage, this value was seldom anywhere near the high magnitude that Reich’s comparison of today’s real-minimum-wage value with that of the real value of 1968 would lead you to believe.
And consistently from the early 1960s back to 1938 – the year of the national minimum-wage’s unfortunate (and decidedly non-immaculate) conception – the real values of minimum wages were quite below that of the real value of today’s minimum wage. Even during the 1950s – a decade celebrated nostalgically by many as a glorious one, economically, for ordinary Americans – the real value of the minimum wage was well below that of the real value of the minimum wage today. Go figure.
4. Don’s latest post “Reich Is Repeatedly Wrong” is a letter to former Labor Secretary Reich, reproduced below in its entirety:
In one of your recent videos endorsing a 100-plus percent (!) hike in the national minimum wage, you repeat the popular-in-Progressive-circles assertion that (quoting you) “we subsidize low wage employers” through government welfare programs such as food stamps, Medicaid, and housing assistance.
Basic economic reasoning reveals your argument to be backwards. Welfare payments of the sort that you mention make work a relatively less attractive option for welfare recipients and, thus, reduce the labor supply. One consequence is that wages paid by employers to their low-skilled workers are raised (and not, contrary to your mistaken suggestion, lowered). Thus, far from being subsidized by most government welfare programs, Wal-Mart, McDonald’s, and other employers of many low-wage workers are harmed by them.
Don’t believe me? Here’s Arindrajit Dube, one of the most prominent economists today who favors raising the minimum wage: “[M]eans tested public assistance programs are not tied to work, and we should not expect them to lower wages. Let’s take food stamps, which are available to eligible families whether or not a family member works or not. Indeed, when people are not working, they are more likely to be eligible for food stamps since their family incomes will be lower. Therefore, SNAP is likely to raise, and not lower a worker’s reservation wages – the fallback position if she loses her job. This will tend to contract labor supply (or improve a worker’s bargaining position), putting an upward pressure on the wage.”
Your failure to grasp even the most fundamental of economic principles makes your arguments for a higher minimum wage especially dubious.
Bottom Line: In recognition of Don’s total “economic bad-assery” on the minimum wage (although certainly not limited to that one topic), I wrote in January on CD that:
No one has more steadfastly, consistently and vigorously brought economy sanity, logic and reason to the issue of the
minimum wage law government-mandated wage floor that guarantees reduced employment opportunities for America’s teenagers and low-skilled workers (especially minorities) than George Mason University economics professor Don Boudreaux. On his Café Hayek blog, Don has for many years regularly covered the minimum wage issue with his wisdom, wit, and keen economic thinking, and I applaud his ongoing efforts to educate his readers, students and (hopefully, some day maybe) policymakers [and former Labor Secretaries] about an important economic issue. I once again say “kudos” to Don Boudreaux for his ongoing and tireless efforts to regularly expose the numerous flaws of the minimum wage law government-mandated wage floor that guarantees reduced employment opportunities for America’s teenagers and low-skilled workers.
View related content: Carpe Diem
It’s already time for my third spelling/punctuation/grammar rant of the year (see my last two here and here) on what I think is the most common spelling/punctuation/grammar/orthographic mistake in the English language — the misuse of it’s (or its’) for its — illustrated by the examples below collected from CD comments and other sources on the Web:
1. Germany just put it’s first minimum wage into place last summer.
2. Here is the transcript in it’s entirety.
3. DDT is known to be safe and effective and it’s ban has since caused the deaths of more than 50 million people due to malaria, and sickness in many more.
4. I’ll let you know as soon as it’s on it’s way.
5. Clearly Company X has not handled this contract or it’s clients well.
6. Company X needs to reconfigure or fix it’s firewall.
Here’s an example of why punctuation is important!