Beat the Press

Dean Baker's commentary on economic reporting

6/24/2006

The Minimum Wage and Doctors’ Pay

Since there have been some interesting comments on two separate posts from last week, I thought I would pull them together. To get up to speed, NPR ran a piece last week which decried (slight exaggeration) the low pay of doctors. I also commented on the failure of reporting on a minimum wage hike to note the extensive research showing that modest increases in the minimum wage (like the ones being debated) have no significant effect on employment.

The responses have raised issues about the appropriate wages for doctors and people who work at the type of jobs that get the minimum wage. The point that I wanted to make is that these two are linked. The wages of people working at low paying jobs are a cost to doctors, and doctors’ pay is a cost to those earning low wages.

The logic of this is simple. While some wage increases may be absorbed in lower profits, and may also be offset by higher productivity, at least some part of any wage increase will be reflected in the prices of the goods or services that worker produces. This means that, other things equal, if we want minimum wage earners to get more money, then we want doctors to get less. Alternatively, if we join NPR in the drive to raise doctors’ pay, then we want minimum wage workers to get less. This is basic economics/accounting; I doubt that any economist anywhere on the political spectrum would dispute this logic.

To me, the main economic story of the last 3 decades has been that those in high paying professions (e.g. doctors, lawyers, dentists, accountants, economists etc.) have managed to drive up their wages by sustaining and increasing barriers against competition (both foreign and domestic), while less-skilled workers, like autoworkers, textile workers, dishwashers, and custodians have been deliberately placed in direct competition with low-paid workers in the developing world.

The wages in these latter categories have generally been flat or declined over this period, while workers in most of the high-paid professions have seen substantial pay increases (e.g. the OECD reports that the real wages of doctors in the United States increased by 55 percent from 1964-1995 [sorry, it’s not free data, so I can’t link to it]). If this pattern is to be reversed, then the wage increases for workers at the middle and bottom will have to come at least partly at the expense of the real wages of high-end workers, just as the wage gains of high-end workers have come partly at the expense of those at the middle and bottom over the last three decades.

This is all accounting; one can debate the merits of specific policies to reverse the upward redistribution of income, but there really is not much room to debate the accounting. (My favored policy is free trade in professional services, so that doctors, lawyers, accountants and economists can enjoy international competition in the same way as autoworkers, textile workers and dishwashers, see chapter 1 of The Conservative Nanny State.)

29 Comments:

  • At 4:17 PM, Anonymous Half Sigma said…

    For that matter, higher wage but LESS PRESTIGOUS jobs, such as nurses and engineers and computer programmers, also see lower wages because if immigration.

    When nurses or computer programmers make too much money, this is seen as a "problem" that needs to be fixed with more immigration, but it's not a problem when lawyers and doctors make a lot of money (although most lawyers really don't make much).

     
  • At 6:08 PM, Anonymous Anonymous said…

    "The wages in these latter categories have generally been flat or declined over this period, while workers in most of the high-paid professions have seen substantial pay increases (e.g. the OECD reports that the real wages of doctors in the United States increased by 55 percent from 1964-1995."

    While there is no question that entry is restricted by a combination of the government and the profession itself, the 55% increase only appears to represent an annualized rate of less than 1.50% over an apparent CPI adjustment of over 5.0% per year. Given all the assumptions involved, this may not be very significantly different from noise.

    Regards, Don

     
  • At 6:31 PM, Anonymous Anonymous said…

    There's another possible result, IMHO, they could expect that both doctors and everyone else will make more money, but inflation will make it irrelevant.

     
  • At 7:38 PM, Anonymous Erik L. said…

    At last I understand you Dean. I think you may be slightly, well, not nuts, but sorta wrong, in your world-view.

    Your hand wavy dismissal of the possibility of both wages going up as being counter to accounting principles and being believed by any economist, I really have to doubt. Your model assumes the existence of only two types of people, unfairly minimizes the effect of increases in productivity, the fact that goods and services provided are not constant over time. You also conveniently start your comparison at a time when american industrial might was beginning to be challenged by foreign competition and Medicare was about to increase the income of doctors (what would the comparison from say, 1980 to present show?)

    You provide no numbers on what portion of medical costs are represented by doctors salaries and what proportion of the economy is represented by people earning "high salaries".

    Also have you ever thought to factor in what effect increasing levels of taxation have on the wages of low income workers? Why do you posit a zero sum game between low income workers and high income workers but not between low income workers and the government.

    After reading your blog for about a month I am increasingly of the opinion that you do what you chastise others for doing- selectively present numbers that support only your desired political conclusion.

    I apologize for the brusk tone of this post...

     
  • At 10:00 PM, Anonymous donna said…

    I'm waiting for the outsourcing of CEO jobs. I'm really sick of these assholes making so much money for so little work. I think pretty much anyone with an MBA and a couple years training could make a fine CEO, so why do they make so much? It's rather ridiculous.

     
  • At 12:17 AM, Blogger Dean Baker said…

    Anonymous,

    I am discussing the last three decades during which most people have not fared well, but doctors have. Nothing changes if you pick a slightly different end or start point. Do you think that we shouldn't discuss the period that has dominated most of our lives?

    You will note that I used the expression "other things equal" [standard economist lingo] in my post. This is for 2 reasons. First, I wanted to focus on the immediate issue -- higher wages for doctors means lower wages for everyone else (if you know any economist who wants to say that productivity will rise to fully offset any increase in wages, please let me know).

    Second, the other things that may not be equal don't change the story. For example, the total tax share of GDP was 25.7 percent in 1966. It was 27.6 percent in 2003. This rise in tax shares (all of which occurred in the sixties) cannot explain the stagnation in the typical workers' wage over the last three decades.

    In terms of the share of income that goes to high wage earners, there is a very good paper from Robert Gordon on this topic. Here is his breakdown of the share of total personal income that consisted of wage income for each income grouping (in other words, the table shows wage income for each group as a share of both wage and non-wage income for the population as a whole).

    percentiles share of total income

    0-20 1.6%
    20-50 8.9%
    50-80 22.3%
    80-90 13.6%
    90-95 9.4%
    95-99 11.0%
    99.0-99.9% 5.5%
    99.9-100 2.9%


    These data show that 28.8 percent of total personal income goes as wage income to the richest 10 percent of households. This is more than two and a half times as much as the wage income received by the bottom half of the population.

    Put another way, if the richest 10 percent of the population had their wages cut by 10 percent, this would be enough money to allow a wage increase of 27.5 percent to entire bottom half of the income distribution.

    I am afraid that there is no way to cut the numbers that doesn't show that the wealthy have gotten a hugely disproportionately share of the income growth of the last 3 decades, and that much of this has been through their wages. I don't think that anyone has any data that show a very different story.

     
  • At 11:31 AM, Anonymous Anonymous said…

    The doctor I work for delivers babies and works 24/7 all by herself and pays $100K in malpractice premiums. You can't debate her salary without taking into account the amount of money the CEOs of the insurance firms make. I'm glad for $70 oil and here's why. First you cover your mortgage, food, health care, auto expense and your kids tuition. Everything else is entertainment and while I understand the entertainment industry (CD, DVD etc) has been an engine of innovation for the past 20 years or so, think about what you've spent your money on for the past 10 years - cameras, tv's, computers, cell phones etc. So to hear you grip about health care tells me maybe your priorities are skewed. If health care is over priced tell me what else is overpriced - the guys that run your 401(k) - you don't even know what they're doing. What other business do you know that has to deliver free services because the customer can't afford to pay anything but has a i-pod and a cellphone that takes photos. Work in a doctors office for a couple of weeks and then tell me they are overpaid.

     
  • At 11:35 AM, Anonymous Erik L. said…

    The reason I suggested a different time frame was pretty clear from my post and I will take the fact that you dimiss it to mean that you realize it will make most of your point disappear.

    I also wonder, in your numbers if you are taking account of the value of benefits or only salary. If not this is also somewhat misleading.

    Also, do the numbers you give for doctors take into account the expenses that higher paid docs often must take on. My brother, for example pays for his own health insurance and many of the highest paid specialties also have extremely high malpractice costs.

    Finally, these numbers take no account of the number of hours worked. Many of those highly paid specialists work extremely long hours.

    Also, your "all other things being equal" is not sufficient. The nation is not comprised of doctors and janitors. The overwhelming majority of people in that top income category you show, are not doctors.

     
  • At 1:20 PM, Blogger Dean Baker said…

    This is getting fun.

    I'm glad to see that people think so highly of the doctors that they know. There are also plenty of wonderful people trying to raise families on $14k a year working as dishwashers and custodians.

    To Erik, my choice of years is due to the fact that the OECD (my data source here) only provides data for a limited number of years, you're welcome to ask them why. I have no idea what you think is at issue. Of course Medicare helped boost the pay of doctors. Does this mean that their pay should therefore not be an issue of concern.

    As far as my reference to doctors and janitors, I was being slightly metaphorical. Just in case this was a common source of confusion -- if doctors pay goes up, then someone elses pay has to decline. If it just gets passed on in health care prices, then everyone's wages decline because they don't go as far as they used to. If we can find some particular group, who we can either tax or cut their wages/profits and then use this money to pay doctors more, then the cost of higher wages for doctors does not have to borne by everyone. The line "other things equal" meant that doctors wages goes up without any offsetting policy

     
  • At 1:44 PM, Blogger Dean Baker said…

    sorry, I forgot to answer the question about the income measure in these surveys. It is supposed to be income net of business expenses, which would mean after subtracting off the cost of malpractice insurance.

     
  • At 4:09 PM, Anonymous dale said…

    I've always thought the major fault line in our economy was between the super rich- the elites of wealth and power- and everyone else. Not so much between the working class and the professional class.

    I take your point that raises of income for professionals come at the expense of those who must pay for- or do without- their services.
    But in a way- that's all tension between those who work for a living- as opposed to the tension between all those who work for a living, on the one hand- and those who invest for a living.

    Earned vrs unearned income, etc.

     
  • At 5:32 PM, Anonymous Denis Drew said…

    If the minimum wage is raised 75% to $9.00/hr, the price of a $5.00 meal would have to jump 25% to $6.25 (fastfood has the highest labor costs: 1/3).

    A fastfood worker making $5.15/hr today must work one hour to pay for a $5.00 meal -- and doesn't have money to spare for fastfood. A fastfood worker earning $9.00/hr would need to work only 40 minutes to pay for the same $6.25 meal -- and would have a lot more income to spend on optional purchases like fast food.

    That is how McDonalds stayed in business when the minimum wage peaked in 1968 (at half today's average income, yet).
    **********************
    A minimum wage of $12.50/hr should cause about 4% inflation directly. Indirectly, for the sake of argument, lets say it would add 7% or 8% by pushing up wages for altogether two-thirds of the workforce (just to have something to work with).

    This inflation would redistribute income from folks whose pay fell (far) behind both inflation and growth from folks whose incomes have kept up with inflation but not with a fair measure of growth.

    The only way to redistribute the money back from CEOs, etc., who in today's labor market make 25 times as much as they did 25 years ago will for their corporations tell them the same story they have been telling unorganized labor for three decades: "Sorry, but we cannot stay in business if we pay you $200 million -- given the amount of money that now universally organized American labor squeezes out of us -- $2 million wil have to do (open for negotiation :-]).

    In Germany (home of sector wide labor agreements) they welcome WalMart with open arms while WalMarts knees shake, wondering how to handle an economy owned by labor.

    I cannot believe Edward's think tank in North Carolina projects an end poverty in 30 years. They must mean going back 30 years in a time machine. Nor that all my Democratic Party promotes is a minimum wage lower than Ike's 1956 minimum, 250% more per capita output later.

     
  • At 7:54 PM, Blogger Robert Vienneau said…

    Greg Mankiw assures us that "most economists who study the topic attribute the trend primarily to changes in technology that reward skilled relative to unskilled workers". He insults our intelligence

     
  • At 1:27 AM, Blogger James M. Jensen II said…

    Dr. Baker,

    I'm thinking that most models of minimum wage effects are assuming rational, competitive behavior on the part of workers. If this is not the case, then there may be a situation in which businesses are leeching welfare from their employees. This would explain any gap between high paid "power-suit" employees for whom the overhead of competing for wages is accepted and low-paid employees for whom it seems futile.

    Raising minimum wage, then, would first serve to mandate a redistribution of welfare from businesses to employees. Businesses will then continue to retain and even expand their employees rather than face a loss of production overall.

    Only after some level would minimum wage be an actual deterrent to employement.

    Does this look correct?

     
  • At 10:05 AM, Blogger __Fair Left__ said…

    I love your post because it exposes the no-free lunch, morality-wise, for those of us with upper-middle class wages. On the other hand, I continue to be shocked by your endorsement of the following:

    My favored policy is free trade in professional services, so that doctors, lawyers, accountants and economists can enjoy international competition in the same way as autoworkers, textile workers and dishwashers

    As a joke this is good, and for a long time I thought that was what you were making. Seriously, a rational government policy is to _manage_ competition so that a roughly ideal level of wages occurs in all professions and job categories. More bluntly, free trade has screwed over dishwashers: the solution is not to screw over all workers in the same way.

     
  • At 4:44 PM, Anonymous Anonymous said…

    Global competition for some surgical procedures is just in it's infancy. It's cheaper to travel to India and have certain surgical procedures done that it is to stay in the states.

     
  • At 4:55 PM, Anonymous Art Perlo said…

    From 1964 to 1995, real percapita GDP roughly doubled. So a real pay increase of 55% for one group does not seem excessive. The problem is that the rest of us have not done even that well.

    I agree with other posters that the real contradiction is between all of us who live primarily from wages and salaries (which includes many doctors), and the top management and outright owners of big corporations. "High-paid" steelworkers, airline workers, and now auto-workers, have taken big pay cuts. The resultant weakening of labor's bargaining power far overshadows any trivial gains the rest of us realize from lower prices.

    A solution to the health care crisis in the US might very well include reducing pay for doctors, especially at the high end. It could also include public financing of medical schools, so doctors don't graduate with $300,000 debt, as well as greatly increasing opportunities for medical education, especially in under-served communities. But by itself, I don't see lower doctors' incomes as contributing to improved medical access or higher wages for minimum wage workers or anyone else.

     
  • At 9:27 PM, Blogger Dean Baker said…

    One can argue about who should get cuts in pay and income, different people will of course see this question differently. I will make two points here.

    First, the beneficiaries of the upward redistribution in the last 30 yeears were not just richest 0.1 percent or the the richest 1.0 percent. The next richest 4 percent also did quite well, a group that includes most of the doctors, lawyers, etc.

    I'll reproduce a slightly altered table from Gordon's paper, showing income shares in 1972 and 2001.

    percentiles inc sh 72 inc sh 01

    0-20 2.6% 2.0%
    20-50 16.0% 11.7%
    50-80 33.7% 27.2%
    80-90 17.0% 16.1%
    90-95 10.8% 11.3%
    95-99.0 12.2% 14.8%
    99.0-99.9 5.7% 9.6%
    99.9 -100 1.9% 7.3%

    While the very richest did the best over this period, there was also a substantial upward redistribution to those in the 95-99 percentiles. (The year 2001 was a bad one for reasons that I will not get into here, but that was Gordon's choice, not mine.) This means that reversing the upward redistribution over this period would require a reduction in the relative income of many high-paid professionals.

    The second point is that the upward redistribution was largely the result of deliberate government policy. As I have pointed out, we designed our trade policy to place manufcaturing workers in direct competition with low-wage workers in the developing world. This has a negative effect on the wages of manufacturing workers and workers without high school degrees more generally. We could have designed our trade policiy to put highly paid professionals in competition with their counterparts in the developing world.

    The fact that we wrote policy to subject autoworkers to international competition, but not doctors or lawyers, was a conscious political decision. Trade agreements could have been designed toward subjecting the highest educated workers to international competition, instead of less-skilled workers in manufacturing.

    As one pundit put it, autoworkers want protection, but lack the political clout to get it. Economists are too dumb to know that they need protection, but have enough political power to get it anyhow.

     
  • At 5:54 PM, Blogger JEthan said…

    Legal research and brief writing is already subject to international competition. There are several companies which will take your legal question and (usually overnight in the US) research it via Lexus/Nexus or WestLaw by Indian lawyers or legal researchers.

    Similarly, one investment analysis firm where I know a partner is opening a research office in India where they can hire a MBA for 20% what it costs in the US. This is obviously good for the short term, but one wonders who is training the younger US analysts who should some day take over as the US partners retire. Will they invite the maturing Indian analysts to move to the US? Or will the firm simply move to India as the US partners retire, leaving only a sales office in the US?

     
  • At 5:57 PM, Anonymous Anonymous said…

    Legal research and brief writing is already subject to international competition. There are several companies which will take your legal question and (usually overnight in the US) research it via Lexus/Nexus or WestLaw in India by less expensive Indian lawyers or legal researchers.

    Similarly, one investment analysis firm where I know a partner is opening a research office in India where they can hire a MBA for 20% what it costs in the US. This is obviously good for the short term, but one wonders who is training the younger US analysts who should some day take over as the US partners retire. Will they invite the maturing Indian analysts to move to the US? Or will the firm simply move to India as the US partners retire, leaving only a sales office in the US?

     
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  • At 12:58 AM, Anonymous Bill Cover Insurance said…

    In such a shaky economy, it is almost like a privilege to have a minimum wage earning jobs.

     
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