Wednesday, March 30, 2016

Economic Issues Part 1: Minimum Wage and Disability

Economic issues are often difficult to understand, especially in an election season where everyone seems to be... well.. lying or at least misleading us about what numbers mean.  There have been a few times recently that someone has said something blatantly false... that I should have known was false... but still had to google and run the numbers to verify.

This is post is the first is in the vein of my prior post on tax policy, and throws out a couple of economic misconceptions with some real data.

SOCIAL SECURITY DISABILITY

I am usually the first person to say that the world is a complex place, drawing linear causal lines is difficult, and you can't assume that relationships are perfect and deterministic.  That's why I should have realized that Social Security Disability Applications are not a deterministic process.

The process/system seems simple enough:

  • an event occurs (let's say you're paralyzed)
  • you apply for benefits
  • you wait on the government to decide if you're eligible
  • you get/don't get benefits.

Simple as it seems, and in a box, one would assume that the driving factor would be the prevalence of initial "events."  Because the process of people becoming disabled seems fairly stochastic, one would assume that it would occur at a fairly steady rate over time.

Except that people respond rationally to external incentives.

For another project I was looking at disability applications by year and noticed a spike around the time of the last recession.  Realizing and hypothesizing at once, I charted the data back to the 1960's and found that the annual change in disability applications correlate fairly well with the change in the annual unemployment rate (r = 0.47).  Here's what that looks like:


I looked at the literature on this subject (there isn't a ton) and there are two general theories (respond to this post if you have other additional theories):

  • People have greater incentives to apply for benefits if external job prospects are poor, and some borderline cases apply in these time periods.
  • More people fraudulently apply and are turned down during recession years out of economic desperation.

The second point is interesting, as the approval rate also tends to decline during recessions, however it does not account for all the variance, and more people are in-net approved for disability during difficult economic times.  Here's granted applications change correlated to change in unemployment rate (r = 0.5).


These numbers shouldn't be surprising: people respond to rational incentives.  However it does point to something else sounding somewhat sinister: a good number of the people receiving social security disability benefits may be able to work and would, under different economic situations.


MINIMUM WAGE

A major misconception I have seen in recent days goes along this line:

If the minimum wage kept pace with inflation from the beginning, it would already be over ___ (e.g. $15, $22). 

This has been disproven a few times, and I can verify it here again with a simple chart placing the historic minimum wage into 2015 dollars.


The high point is in the 1960's when minimum wage was an adjusted $10.90 for a single year. The original program was only $4.20 in today's inflation adjustment.  The average inflation adjusted minimum wage from program inception until 2000 was only $7.65, actually fairly close to today's $7.25.  The argument doesn't seem to hold up.

But why do so many people have this misconception?  It's because of a different talking point for some economists and politicians: that the minimum wage hasn't kept up to worker productivity since about 1973.  If we pegged minimum wage to a common measure of worker productivity it would be something like $22 an hour.

But economists disagree on whether bench-marking to productivity is the correct thing to do. In short part of the argument is that minimum wage is just a bind at the low-end, whereas much of the productivity gains have been seen in or as a result of high-tech, developing firms with already high wages.  Thus manipulating the minimum wage is likely not the best way to target rewarding increased worker productivity.

CONCLUSION


It's clear that many of our common economic understandings are false.  The problem becomes larger in election years when people are openly arguing with misleading and false notions.  It's clear from the above data though:

  • Disability claims are not a stochastic process, and seem to be incented by the external economy.
  • The minimum wage would not be $15 today if tied to inflation.  If tied to productivity, minimum wage would be $22, but that's a disputable benchmark.

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