Wages & Raises - Another Economic Riddle – Test #2

To: Cardiff Garcia – Co-host: The Indicator, Planet Money - NPR Stacey Vanek Smith – Co-Host: The Indicator, Planet Money – NPR

I hope you enjoyed my previous test on US Jobs / Unemployment. In that vein, when I heard you comment on wages growing. It just seemed another opportune topic to craft a riddle about. So here it is: When are higher raises for the lower income workers relative to higher income worker not in the best interests of the lower income workers?

Before you jump to some conclusion that I don’t think a raise isn’t better than no raise, that’s not the question nor relevant to the riddle. So, to help you and any readers out, I want you to think in larger terms. I am not asking this in the context of an individual but rather in the context of the population of workers. Obviously, every individual is a member of the population of workers but by looking at that close up view you may get caught in the weeds. Now if you know the answer already, then the following questions should be a proforma exercise.

Question 1: If you get a 5% raise, are you better off than an average wage earner that only received a 3% raise?

Question 2: Since wages and raises affect the population in toto, would everyone getting a 5% raise mean that nothing has actually changed?

Question 3: In a prosperous economy what should the progression of incomes across its population be?

[Hint: You can think in terms of population groups, or even statistical characteristics; but at the end of the day, what would one expect from a ‘Wealth of Nations’ perspective?]

Question 4: Let’s do a topical question. Assume two co-workers have same position and work responsibility. One is paid $50K annually and the other $45K; one is female, the other male. If the $50K earner receives a $2K raise. What raise would be appropriate to provide the $45K earner with an equal treatment?

Question 5: What is one of the capitalistic benefits from wages raising?

I suspect you want to know the answers. That would seem only fair I suppose.

Answer 1: No. It is not a given that you are better off.

Answer 2: No. The new distribution would have different implications on the economy.

Answer 3: To help you get to the answer, the key is to know why you need growing income for the bulk of the population.

Answer 4: It’s simple math, once you define what being ‘fair’ would mean. Personally, I would consider any level below 5.6% to be inadequate and 6% is a minimum given the facts given.

Answer 5: It’s necessary for the economy to improve beyond any level it has previously achieved.

So, now for the Riddle: What grows as you lose ground?

The answer to this riddle requires you to be see what the five questions presented. One could ask the riddle differently; say: Is US Wage-growth appropriately for the state of the US’s Economy? Or, one could ponder the question of whether most Americans are better off with their wages today than at any time in the past?

Would this not have to be true if the US Economy is better than it has ever been before?

I’m sure there will be opportunities for future tests.

I hope this one was entertaining.

Regards,