Wage Labor and Inflation I

by Jehu

This post is based on a discussion I had on Reddit, r/antiwork. It is a work in progress.

I posted this item to Reddit and was not surprised by the reaction. In fact, I expected it:

If the minimum wage kept pace with depreciation of the dollar it would be $45 an hour today

In 1970, the minimum wage was about $1.25. Today it is about $7.25. If some on the Left had their way, the minimum wage would be $15.

To see how low the Left sets it sights, we need only realize that in 1970 an ounce of gold went for $35. Today that same ounce of gold fetches $1,250. Over the intervening 50 years gold hasn’t become more valuable, the dollar’s purchasing power has declined.

This means your real wage has collapsed without you even realizing. In truth, to have the same standard of living your parents had working a minimum wage job in 1970, you would have to be earning $45 an hour today.

You’re not even close. Wage slavery doesn’t work for wage slaves. That’s why they call it slavery.

The post garnered several negative comments, that took exception to my approach, which uses gold price as the metric for inflation. Most people preferred the Bureau of Labor Statistics Consumer Price Index (CPI) instead:

HannibalParka: “Why are you pegging the minimum wage to the price of gold? They’re not really related”

deck_hand: “I think I trust the CPI more than I do your insistence that gold alone is the best gauge [of inflation since 1970].”

Nefandi: “What actually (for real this time) makes sense when it comes to the minimum wage is to weigh it against the cost of living. So in the basket we have to put housing costs (ownership and rents), transportation, education, food, clothing, medical care, end of life care, etc. You know, real things that people need to use every day.”

ResourceOgre: “Using the ‘Gold Price Index’ you get silly numbers. Using the Consumer Price Index you get a number based on cost of living.”

I will admit that there is a huge discrepancy here between where I say the minimum wage should be and where the Bureau of Labor Statistics says it should be. I knew when I posted my statement that my figure drastically disagreed with the figure provided by the Bureau of Labor Statistics’ own Inflation Calculator. I have known this for almost a decade. I rarely reference my own estimated adjusted minimum wage figure because, in truth, it is so massively divergent from the current minimum wage that no one in their right mind would take it seriously.

My math is not wrong, however. In fact, owing to stupidly picking the wrong year in my original post, I actually understated the problem. In 1970, the minimum wage was actually $1.45, not $1.25. Which means today the minimum wage should be closer to $52, not $45. But you get my point. Accepting a minimum wage anywhere close to the purchasing power it had in 1970 requires such re-conceptualization of the minimum wage that it is probably easier to imagine just getting rid of wage slavery entirely, which is where I spend most of my effort.

But I raised the issue because it seems to me that I have been avoiding it too long out of some sense of wanting to avoid the controversy. This is dumb. Inflation is a real problem for which no one has offered a real explanation. No better way to kick off this discussion than to show graphically the extent to which inflation has destroyed the purchasing power of the minimum wage.

So here goes.

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According to my best calculation, the minimum wage should be set at approximately fifty-two dollars an hours in order to match the purchasing power it had in 1970. According to  the Bureau of Labor Statistics website inflation calculator — preferred by many of those who object to my results — the minimum wage should be set at a measly nine dollars and seventy-five cents. Nine-seventy-five is certainly higher than the national minimum wage we have now, which stands at seven dollars and twenty-five cents, but it is light years away from the fifty-two dollars an hour McDonald’s employees should be getting for flipping hamburgers.

So which is it?

$52.00 or $9.75?

Well, this requires some discussion.

To calculate its estimate of the minimum wages with a purchasing power equal to that of 1970, the Bureau of Labor Statistics (BLS) employs its Consumer Price Index. Perhaps we should begin with what the Consumer Price Index (CPI) can and cannot tell us about inflation.

To do this let’s begin with a well-known but little referenced admission by the BLS about the shortcomings of this severely defective index:

9. Is the CPI a cost-of-living index?

The CPI frequently is called a cost-of-living index, but it differs in important ways from a complete cost-of-living measure. We use a cost-of-living framework in making practical decisions about questions that arise in constructing the CPI. A cost-of-living index is a conceptual measurement goal, however, and not a straightforward alternative to the CPI. A cost-of-living index would measure changes over time in the amount that consumers need to spend to reach a certain utility level or standard of living. Both the CPI and a cost-of-living index would reflect changes in the prices of goods and services, such as food and clothing that are directly purchased in the marketplace; but a complete cost-of-living index would go beyond this role to also take into account changes in other governmental or environmental factors that affect consumers’ well-being. It is very difficult to determine the proper treatment of public goods, such as safety and education, and other broad concerns, such as health, water quality, and crime, that would constitute a complete cost-of-living framework. Since the CPI does not attempt to quantify all the factors that affect the cost-of-living, it is sometimes termed a conditional cost-of-living index.

The BLS statement continues:

10. What goods and services does the CPI cover?

The CPI represents all goods and services purchased for consumption by the reference population (U or W). BLS has classified all expenditure items into more than 200 categories, arranged into eight major groups (food and beverages, housing, apparel, transportation, medical care, recreation, education and communication, and other goods and services). Included within these major groups are various government-charged user fees, such as water and sewerage charges, auto registration fees, and vehicle tolls.

In addition, the CPI includes taxes (such as sales and excise taxes) that are directly associated with the prices of specific goods and services. However, the CPI excludes taxes (such as income and Social Security taxes) not directly associated with the purchase of consumer goods and services. The CPI also does not include investment items, such as stocks, bonds, real estate, and life insurance because these items relate to savings, and not to day-to-day consumption expenses.

So let’s parse these statements.

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The first thing to notice is that the CPI is a measure of the changes over time of the nominal prices of a specific, but unnamed, use-value. Which use-value, you might ask? The CPI is concerned with one use-value and one use-value only, labor power. It tracks the nominal prices of the goods and service that go into labor-power. In labor theory, we call these goods and services wage-goods. The BLS, however, calls the wage workers, “urban consumers” and the wage-goods they purchase are called, “consumer goods”. Thus, the CPI is almost exclusively a measure of the average change over a period of time in the nominal prices paid by urban workers for a market basket of wage goods.

The second thing to notice, is that changes in the cost of living of wage workers are considered only insofar as they occur in the form of commodities purchased directly in the marketplace. This means, the CPI does not include changes in the government or the economy as a whole that affect the wage worker but which are not directly reflected in their marketplace transactions. Examples of these sorts of changes might include, for instance, changes in a worker’s income such as taxes deducted directly from her nominal wages prior to receipt of her paycheck. Costs borne by the worker such as Income and Social Security taxes, Medicare taxes, and military expenditures spending financed by borrowing are excluded from the index.

The third thing to notice is that, in addition to income and Social Security taxes, the CPI does not include financial assets, like stocks, bonds, real estate, and life insurance. These sorts of marketplace transaction are said to fall under the heading of savings, rather than consumption. The Consumer Price Index, as its name implies, is only concerned with consumption, not savings. The problem with this is that, once you have limited your definition of inflation to the nominal prices of wage-goods and excluded both government and the financial sector from your analysis, haven’t you basically defined as inflation-prone only the higher nominal prices of wage-goods?

Hopefully, to make my point clearer are there any reputable Marxist scholars out there who agree with the Bureau of Labor Statistics that higher nominal wages are implicated in inflation? If not, why do Marxist scholars employ the CPI in their work? And why do folks on the Left in general think the CPI, with its emphasis on the prices of wage-goods, is an accurate index of inflation?

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Allow me to offer an alternative view of the problem of inflation.

First, let’s dispatch the myth that the CPI can measure inflation under any circumstances.

According to Wikipedia,

“[Inflation] is a sustained increase in the general price level of goods and services in an economy over a period of time.”

As can be seen from the passages above from the BLS website, the CPI doesn’t track the general price level of goods and services; it only tracks changes in the prices of urban consumer goods and services, and these only insofar as they are purchased in the marketplace.

What’s missing from this index are income taxes, and social security taxes, which as is well known unfairly target working class wages. Social security taxes, in fact, are entirely regressive. Yet this burden on this living standard of the working class is never calculated for purposes of inflation. Also missing are certain marketplace transactions, like stocks and other securities. This exclusion is predicated on the assumption that such transactions fall under the heading of savings, rather than consumption. In fact, there is no reason for this sort of exclusion when it comes to calculating inflation. The exception is entirely fraudulent. We are concerned about the general price level and this would seem to include the prices of securities and other financial assets.

Let me give an example that might illustrate why I think this matters:

Suppose the average price of a loaf of bread were to double from $1.50 per loaf to $3.00 per loaf over a year’s period of time. This might be the result of inflation or it might not. We would not know unless we investigated to find out why the price change occurred. But it would certainly send up a flag to us that it should be investigated as a potential expression of inflation, right?

However, suppose the market value of the outstanding stock of the bakery that produces that loaf of bread were to double in price from $1.5 billion to $3 billion over a year’s period of time. Would this send up an inflationary flag? Not likely. The prices of securities are not tracked by the Bureau of Labor Statistics and the appreciation would never be investigated by anyone except financial reporters and others who concern themselves with such things.

But why is the first event considered potentially inflationary, and not the second?

It is true that, as a general rule, I mostly buy bread, while Bill Gates mostly buys the stocks of bread companies. And it is true that inflation, although expressed both in rising bread prices and rising stock prices, has a different economic impact on the two of us — the rising price of bread makes me feel poorer, while the rising price of the bread-maker’s stock makes Bill Gates feel richer — the measurement of inflation in the economy as such is not directly concerned with how either of us might experience its effects on our particular circumstances.

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My first conclusion is as follows:

If inflation is defined as a sustained change in the general price level over some period of time, whether this change actually occurred, and the extent to which it occurred, has to be empirically established prior to assessing its impact on the various classes in society.

For our purposes, then, we cannot decide first that the appreciation of stocks and other securities are to be handled differently than bread and shoes and then calculate only the changes in the prices of bread and shoes. Rather, we have to calculate the changes in the market prices for transactions of all objects, taken together. Then — and only then — we might propose to classify them according to their types: securities versus consumer goods.