Martin GUZI Masaryk University martin.guzi@econ.muni.cz Wages around the globe What is wage? • •Wage is monetary compensation paid by an employer to an employee in exchange for work done. • As of August 2022, 30 states had a minimum wage higher than the federal minimum. Minimum wage in US makes people poor in 2023 •Individuals earning below $14,580 per year are considered poor •Poverty threshold is $30,000 per year for family 2+2. •Federal minimum wage of $7.25 per hour provides a full-time worker with $15,000 annual income (working 40 hours per week for 52 weeks). •Family depending on minimum income (determined by government) is therefore considered poor by the same government. http://livingwage.mit.edu/metros/42660 https://www.thebalance.com/federal-poverty-level-definition-guidelines-chart-3305843 https://www.healthcare.gov/glossary/federal-poverty-level-fpl/ The living wage shown is the hourly rate that an individual in a household must earn to support his or herself and their family. The assumption is the sole provider is working full-time (2080 hours per year). The tool provides information for individuals, and households with one or two working adults and zero to three children. In the case of households with two working adults, all values are per working adult, single or in a family unless otherwise noted. The state minimum wage is the same for all individuals, regardless of how many dependents they may have. Data are updated annually, in the first quarter of the new year. State minimum wages are determined based on the posted value of the minimum wage as of January one of the coming year (National Conference of State Legislatures, 2019). The poverty rate reflects a person's gross annual income. We have converted it to an hourly wage for the sake of comparison. Federal taxes are taken from the Urban-Brookings Tax Policy Center Microsimulation Model (version 0217-1) 24 and include: individual income taxes (after tax credits including the refundable portion of earned income and child tax credits), payroll taxes (including both the employee and employer portion of social security and medicare taxes), corporate income tax, estate tax, and excise tax. The federal tax rate for the middle quintile was 14.0% in 2017. File:MW map EUR January 2013.png • Minimum wages in Europe •Source: Eurostat, 2011 •Note: Monthly minimum wage as a proportion of average monthly earnings in industry and services. • File:MW as % of mean January 2013.png Monthly minimum wage as a proportion of average monthly earnings (%) Collectively agreed minimum wages for low-paid jobs • These 10 low-paid jobs are: £domestic cleaners £cleaners and helpers in offices £shop sales assistants £waiters and bartenders £cooks £home-based personal care workers £childcare workers £agricultural, forestry and fishery labourers £couriers and newspaper or parcel deliverers • Proportion of EU employees earning close to the minimum wage (%), by sociodemographic and employment characteristics, EU, 2018 How do we compare economies? –comparison of one country vs. another –comparison of same country at different time – nWe look at: ¨GDP ¨Inflation ¨Unemployment ¨Wage rates 1.When looking at countries with different stages of economic development. 2.Trying to evaluate the success of economic reforms, as countries move towards market economy International comparison of hourly direct pay for time worked in manufacturing, 2010 (US$) •Source: Adapted from ILO Global Wage Report 2012/13 Differences in wage levels across countries and regions remain considerable Adapted from ILO Global Wage Report 2012/13 Source: US Department of Labor, Bureau of Labor Statistics, 2011. Prof. Orley Ashenfelter (Princeton University) •Orley pioneered empirical testing of economic hypotheses and creative data collection. He used data on wage rates of workers at McDonald’s restaurants around the world, for a simple convincing measure of comparable wage rates. •He also works on non-labor topics - the study of wine prices and quality determinants or an analysis of the famous ‘Judgement of Paris.’ "The best indicator of country development is the wage rate of ordinary people" Ashenfelter’s study •Measurements of wages for: – Identical jobs – Producing identical products – Firms with identical technology nUnits of Measurements: ¨ The price of BigMac ¨ Wage rate in the basic entry-level job at McDonald's restaurants ¨ McWage expressed in Big Macs per Hour ¨ hero_big-mac McWage rates are used to have a common currency for comparison of the cost of labor. The Big Mac is a standardized hamburger that is produced by all McDonald’s restaurants. Various studies in economics have gathered and compiled the prices of Big Macs across the globe (McDonald’s exist in over 140 countries) as a measure of Purchasing Power Parity. The hourly wages are measured in local currency, then converted to USD given exchange rates, and then in units of Big Macs. The measurement of McWages in Big Macs provide a measurement of worker’s welfare adjusted for PPP. McDonald’s Restaurants •Reasons for selection – Standardized protocol for employee work – Little/no variation in food ingredients – Little/no variation in food preparation – Same technology – Standard work operations manual – U.S.-style work practices (franchise) –The Big Mac is a standardized hamburger sandwich McDonalds-French-Fries-262x300 220px-Mcdonalds-90s-logo To avoid many of these interpretation problems … Food ingredients are delivered to the restaurants and stored in coolers and freezers. These ingredients are handled using a highly mechanized food preparation system with equipment that differs very little from place to place. Although the skills necessary to handle contracts with suppliers or to manage and select employees may differ among restaurants, the basic food preparation work in each restaurant is highly standardized. Operations are monitored using the 600-page Operations and Training Manual, which covers every aspect of food preparation and includes precise time tables as well as color photographs. Another important consideration for working with McDonald’s data is the impact of European labor regulations, such as Labor Unions. The authors present the data that McDonald’s was able to use legal independence of its franchise restaurants to implement US-style work practices. (Except Sweden)> Result of Study •Extraordinary differences in wage rates of •workers doing the same job in countries at •different level of economic development. Western Europe, US, Japan rates are ¨3 – 5 times higher than Eastern Europe, Korea, Brazil ¨More than 5x higher than China, India, Colombia The results of our analysis indicate that there are extraordinarily large differences in the wage rates of workers doing identical jobs in countries at differentl evels of economic development. McDonald's Prices and Wages Slope relation is below unity: 0.17 (price on wage) Empirical Findings •Great variance in overall wage rates – From $0.29 in India to $7.73 in Japan •Relative equality within developed countries – Western Europe (e.g. Italy $6.00, Sweden $7.07), –USA $6.50, Japan $7.73 •Prices of Big Mac vary less than wages –From $1.07 in Russia to $3.19 in Venezuela • http://darussophile.com/wp-content/uploads/2012/06/bmph-2000-2011-a.png http://darussophile.com/2012/06/russian-wages-are-fast-converging-to-western-levels/ Limitation of study •The reported wages are “gross wages” without tax adjustments (while personal income taxes are different across countries, the adjusted data will have the same order of ranking). •The impact of minimum wage legislation, affect reporting of the wage data. •The BigMac price is affected by local prices (e.g. rental prices, energy prices) • Do pay levels of low-skilled respond to minimum wage legislation? •Entry-level wages of crew from 10 thousand McDonald’s restaurants in the US (2016-2020) •Variation in min. wages across US counties •Possible effects of minimum wage increase –Product price increase –Technology introduction –Employment effects • The effects of min. wage increase •Restaurants preserve pay ‘premium’ above the (increasing) minimum wage level •Touch-screen ordering kiosks were not introduced in response to min. wage increase. •Very little effect on prices of Big Mac sandwich •Literature documents no/small min. wage employment effects in the fast food industry • What is wage? • •Wage is monetary compensation paid by an employer to an employee in exchange for work done. What determines wages? •Country and region •Productivity (education, experience) •Gender •Firm characteristics •Job characteristics •Public/private sector •Institutions (e.g. minimum wage, unions) •Other: appearance, ethnicity, agility, motivation, persistence, creativity, ingenuity, ect. • • The Earnings Function •Main tool for looking at wage inequality is the earnings function (first used by Mincer 1958) – a regression of log hourly wages on some characteristics: • •Earnings functions contain information about both absolute and relative wages but we will focus on latter •Think of the equation as an estimate of the expectation of log wages conditional on x • Results of wage equation for Czechia (1) (2) (1) (2) Female -0.24 -0.26 Industry relat. to Agriculture Educ. Relat. to Primary Mining 0.26 0.32 Apprenticeship 0.08 0.07 Manufacturing 0.21 0.21 Secondary w/ GCE 0.34 0.32 Utilities 0.39 0.36 College and University 0.82 0.82 Construction 0.22 0.21 Post-graduate 1.04 1.04 Retail 0.10 0.08 Age 0.04 0.04 Hotels 0.07 0.15 Age squared -0.04 -0.04 Transport 0.25 0.25 Part-time -0.05 -0.05 Banks 0.54 0.63 Firm size (employment) 0.06 0.07 RealEstate+R&D. -0.02 -0.03 Firm size squared -0.02 0.04 Other Services 0.12 0.11 _const 3.49 3.48 Trade unions 0.004 N 1m 0.5m Stylized facts to be deduced from this earnings function •women earn less than men •ethnic minorities earn less than whites •education is associated with higher earnings •wages are a concave function of experience, first increasing and then decreasing slightly •wages are a concave function of job tenure •wages are related to ‘family’ characteristics •wages are related to employer characteristics e.g. industry, firm size, private/public •union workers tend to earn more The variables included here are common but there are many others factors affecting wage •Labour market conditions – e.g. unemployment rate, ‘cohort’ size •Other employer characteristics e.g. profitability •Computer use- e.g. Krueger, QJE 1993 •Beauty – Hamermesh and Biddle, AER 1994 •Height – Persico, Postlewaite, Silverman, JPE 2004 •Sexual orientation – Arabshebaini et al., 2005 •R2 in wage equation is not very high – rarely above 0.5 and often about 0.3. So, there is a lot of unexplained wage variation • Problems with Interpreting Earnings Functions •Earnings functions are regressions so potentially have all usual problems: –endogeneity e.g. correlation between job tenure and wages –omitted variable e.g. ‘ability’ –selection – not everyone works e.g. the earnings of women with very young children •Tell us about correlation but we are interested in causal effects and ‘correlation is not causation’ • Learn More, Earn More •Having a tertiary degree is linked to higher pay •Diploma as a signal of high-ability or more human capital (quality of education) •Education is access to better occupations •Less education often means fewer choices •With more graduates returns to education decline • • • How do returns to education differ with the country development? • Returns to education measure the wage premium on higher educational attainment for workers of the same sex with the same age and work experience. In all regions, more schooling is associated with higher labor earnings, but the gain is not linear. The labor earnings of workers with tertiary education are double or more than those of workers with sec ondary education only. However, workers with only a secondary education earn little more than those with elementary education. The education premium is generally higher the lower the income Level of the country Work experience •How do earnings vary with work experience? •When do young people earn more than old? •Workers and firms engage in long-term relationships in which the worker is initially underpaid – the wage is lower than the value of the marginal product – but later on in life the worker is overpaid. • Older workers may have a wage that is higher than their productivity. • Raw hourly earnings (log) by age Source: Eurostat, SES, 2010 The role of the private sector •The private sector is the main engine of job creation and the source of almost 9 of every 10 jobs in the world. •Programs targeted to small business owners with entrepreneurial potential are vital and likely to improve living standards and productivity. •Firms are vulnerable to economic downturns. •Most people prefer job security to higher earnings. • Firm characteristics •Do foreign or domestic company pay more? •Do multinationals pay more? •Is there link between the size of firm and earnings? •Firm size is positively linked with some dimension of worker quality (e.g. productivity, motivation, prestige) • While large firms are more productive, they were not all born large. In industrial countries, some of the more resounding successes, from Honda to Microsoft, started in garages. Hourly earnings (log) higher in larger firms Source: Eurostat, SES, 2010 • http://siteresources.worldbank.org/EXTNWDR2013/Resources/8258024-1320950747192/8260293-134876122810 3/fig_8_large.gif Large firms are both more innovative and more productive. They invest more in machinery. They are much more likely than small firms to develop new product lines, to introduce new technology, to open and close plants, to outsource, and to engage in joint ventures with foreign partners. These firms produce more with a given amount of labor, and export more as well. They also pay substantively higher wages than micro- and small enterprises. In developing countries, however, many people work in very small and not necessarily very dynamic economic units. Protecting workers or protecting jobs? •Institutional indicators include union density, minimum wage legislation, unemployment benefits, coverage, severance pay, or employment protection legislation. •Unions help workers’ to negotiate a larger share of the pie for labour compensation. •Unemployment benefit can have an impact on workers’ reservation wages •Protecting jobs in times of crises • Protecting jobs may be warranted in times of systemic crises or major economic restructuring. But job protection policies can create permanent inefficiency, especially in countries with weak institutions, making it indispensable to establish and enforce trigger rules and sunset clauses that define the extent and size of the protection. •Check your wage before accepting a job offer •www.WageIndicator.org WageIndicator.org