Part 17 - Hyperwage Theory

Hyperwage Theory Part 17

Hyperwage Theory Part 17

Hyperwage Theory Part 17

Hyperwage Theory deserves a Nobel Prize because of its single-variable yet pandemic solution to Third World poverty, corruption, low productivity, inefficiency, tax evasion, thin tax base, thin middle class, weak domestic market, unequal wealth distribution, brain drain and many more economic and non-economic issues. Can you imagine that? All we need to do is change one single solitary variable and our non-economic and economic problems will be greatly diminished.

Yes, the Hyperwage Theory deserves a Nobel Prize but, no, it will never earn it. The members of the Nobel Prize Committee are the very same people that the Street Strategist accuses as lacking in original thought. The judges and the nominators are the brilliant economists whose economic theories, in my opinion, are the culprit of the perpetuation of Third World poverty. We have granted them a hundred years of leeway, how much longer should we give to their theories? Another hundred?

Nobel Prize or not, there is no denying that this series has raised the consciousness of the students of economics and social issues to a level of critical thinking. Now, they know what questions to ask, and what interpretations of economics are subject to reevaluation.

All told, Hyperwage maybe branded a folly but makes for a great tutorial in economics.

Defense vs. merits
So far, I would like to point out that all our discussions have been about defending Hyperwage from critics and detractors. And I hope you realize we have done pretty well in defending it. So far, we have not made any conclusion that violates any economic principle. In fact, we have shown the opposite. We have shown that modern economics is actually full of fallacies. Their theories lead us to believe we are a low-cost country when in fact we have to work almost 10 times harder to buy the same basic commodity compared to our First World counterparts.

Yes, so far we have been in a defense mode. Yet, Hyperwage Theory has its own independent virtues in addition to its self-defense virtues.

Don’t worry, after defending Hyperwage from all these attacks, we will then settle on the discussion of its own independent merits. For the moment, just bear in mind we are still in the defense mode.

Controversy in New Jersey
The idea of Hyperwage came to me sometime in 1995 when I asked myself: “Why am I here? Why is a foreign jurisdiction enjoying the benefits of my labor? Why do I have a British guy coming to my cubicle and polishing my Bally shoes while I am creating an origination pitch book for a prospective Korean banking client? Why can’t this be a scenario in my home country?”

Unknown to me, about that time, there was a raging controversy in New Jersey. I learned of this controversy only in 2003, or several years after the idea of Hyperwage came to me.

But before we proceed, I would like to warn you that the New Jersey controversy does not directly support Hyperwage, rather, its virtue is that it does not exclude or preclude Hyperwage Theory. Later on,
I will elucidate on the difference between the New Jersey controversy and Hyperwage.

On April 1, 1992, the state of New Jersey increased its minimum wage from $4.25 (P233.75 at US$1=P55) to $5.05 (P277.75) per hour while the minimum wage in Pennsylvania remained at $4.25. This was an 18.8% increase in a single step.

Remember this was in 1992 or more than a dozen years ago. Do you agree that the US has always been a hyperwage country?

Almost 20%
Anyway, what was expected to happen? A single step increase of 18.8% in minimum wage should drown out small businesses, resulting in more unemployment, and a depression of the economy of New Jersey.
In 1994, a stunning study conducted by David Card of University of California in Berkeley and Alan Krueger of Princeton University (CK).

This was “Minimum Wages and Employment: A Case Study of the Fast Food Industry in New Jersey and Pennsylvania,” American Economic Review, September 1994. Let’s call this “CK 1994.”
Then another study attempted to discredit the Card-Krueger study. This was “The New Jersey-Pennsylavania Minimum Wage Experiment: A Re-evaluation Using Payroll Records,” by David Neumark and William Wascher, (NW), Mimeo, Michigan State University, March 1995, August 1995, March 1997, August 1998. Let’s call this “NW 1995.”

Richard Berman came out with “The Crippling Flaws in the New Jersey Fastfood Study,” mimeo, Employment Policies Institute, Washington DC, March 1995. Let’s call this “Berman 1995.”
Then Card and Krueger answered the accusations of NW with a paper called “A Re-analysis of the Effect of the New Jersey Minimum Wage Increase on the Fast-Food Industry with Representative Payroll Data,” National Bureau of Economic Research Working Paper No. 6386, January 1998. They updated this paper in January 1999. Let’s call this “CK 1999.”

Battle of econometrics
I’ll summarize the controversy. In CK 1994, the original study on the New Jersey minimum wage increase, the authors revealed a very startling conclusion that is contrary to conventional wisdom.
In CK 1994, there was a slight or slightly faster increase in employment growth in New Jersey than in eastern Pennsylvania after the rise in minimum wage in New Jersey.
Berman 1994, NW 1995 attempted to question the data of CK 1994.

In CK 1999, Card and Krueger provided an even better data using confidential data from the US Bureau of Labor Statistics. I think they actually went through the raw data reported by the companies to the government.

What is even amazing is that in 1996, there was an increase in the Federal minimum wage, which raised the minimum wage in Pennsylvania but did not affect the minimum wage in New Jersey.

What happened in 1996? Did Pennsylvania suffer increases in unemployment figures? CK 1999 did not find any relative employment losses.

Thus, on two occasions, in 1992 and in 1996, the Card-Krueger studies confirmed that the increase in minimum wages did not result in huge unemployment, instead it resulted in slightly faster increases in employment.

Before I leave this topic, I would like to warn you. There are so many think-tanks all over the world that try to debunk the CK study. Since a very long time has elapsed since the 1992 New Jersey wage law, some of the dust has settled and it is better to read the later versions of studies rather than quote information from the older ones. Thus, I suggest a reading of CK 1999 before you attempt to read the previous ones.

Virtues of CK
The CK 1994 study, which was revisited in 1999, is very significant for me because when I belatedly read it in 2003, for the first time since the idea of Hyperwage hit me in 1995, there is a study I can lean on, an empirical basis of sorts.

Again, I must remind you that the CK study alone does not espouse hyperwage but at least it does not preclude it.

But hey, don’t forget, that in the first place, the US is already a hyperwage country. Remember that I have always emphasized that Hyperwage Theory, being purchasing power-centric, is applicable to Third World countries.

What is amazing in the New Jersey 1992 wage law is that it was a hyperwage jump (almost 20%) in a country that is already at hyperwage levels, and yet there was even a slightly faster increase in employment contrary to conventional wisdom.

My question: Is a country like the Philippines capable of a single step increase (real, not nominal) of 20% a year for 5 years?
Whatever the answer, New Jersey’s experience should give us some kind of confidence. What I’m saying, as I have said all along, is that there is room for hyperwage under the rudimentary principles of economics.

Minimum wage controversy
While we are at this topic, there are so many First World economists who maintain that having minimum wage laws is anti-economics. Singapore does not have a minimum wage law but then since its entire population is only around 3 million, there is always a shortage of labor and the law of supply and demand can be trusted to work.

In many European countries, there are no minimum wages but their industrial collective bargaining units are so strong that the workers are protected.

Hong Kong does not have a minimum wage law yet domestic helpers have must be paid a minimum wage.

In effect, it has a minimum wage law, and that is the wages of the helpers.

I believe in laissez faire but in the case of minimum wage, the government must intervene in the law of supply and demand. Why? With oversupply of labor, a capitalist has the weapon to hire labor for a song.
At any rate, under Hyperwage Theory, this is the only variable that needs to be controlled.
I have met many foreigners running businesses in this country who agree with the Hyperwage Theory. In fact, they pity their workers who earn enough only to pay for their daily transportation and food expenses. But they lament this situation by saying it’s not their fault because if they raise their wages, they will not be competitive in the local market.

But they agree that if all companies are subjected to the same increase in accordance with a mandated minimum wage law they are willing to follow it.

Look at our hotels. The most profitable hotels of the international chains are those in this country and other Third World countries. Why? Because they charge almost the same room rates worldwide yet their labor cost here are very cheap. Is it the fault of the hotel chains? I tell you, Shangri-la or Hilton will still be in the country even if our wages are high. After all, they have hotels in Canada and France. Are these hotels willing to pay P50,000 per month for a front desk clerk? Definitely, that’s the rate of their counterparts in Hong Kong.

Hyperwage vs. CK
What is the difference between Hyperwage and the CK study? The CK study is an 18.8% increase, which is a large single-step increase. On a daily basis that is a rise from P1,870 daily wage to P2,222 per day, and this was in 1992, remember.

Hyperwage calls for an increase from P2,000 to P20,000 per month, or about ten-fold. This 10x increase is not possible under an already hyperwage country such as the US. The absolute amount of P20,000 is still lower than the US.

I must make this distinction: A slight increase in wages (18.8 % in the case of New Jersey) will lead to a slight increase in employment as found by the CK 1994 study. However, a huge increase in minimum wages such as 10x will result in the destruction of the economy. This is ordinary economics.
In contrast, under Hyperwage, we must enforce a 10x increase in minimum wages. This alone will crack the minds of the PhDs in economics. This is why Hyperwage will never sit well with World Bank economists.

Open minds
The promise of Hyperwage requires an open mind as a prerequisite. To reap the fruits of the promise, we must abandon our current education. But then, our economist have been hopelessly brainwashed.
Since I am not an economist, I was not aware of existing economic literature. I simply used my personal experiences and the experiences of those who have actually lived in both First and Third Worlds. Had I known about the CK study ten years ago, my development of Hyperwage would have been hyper-accelerated. Before, that I have only used logic and reasoning to convince people that Hyperwage is the way to go.

In fact, in this series, this is the first time that I have used actual economic research to back up the possibility of Hyperwage. When I read CK for the first time, my mind leaped and jumped with joy. Here was an actual study of an actual wage increase that resulted in an increase in employment. At that moment, I knew I was in the right direction. But then again, I was bereft of any economic education enough to be credible to economists.

Anyway, I have to go now. When you read the first few parts of this series I knew you were skeptical. And you never even expected me to use any economic principle or study to support my theory. You thought I was merely babbling and rambling my thoughts. I did it intentionally. I also deliberately placed these empirical and theoretical back ups near the end because I wanted to tell you that logic and reasoning alone should convince any person that Hyperwage is possible.

Now, given these studies and principles which I am going to discuss later on, I hope that Hyperwage is not a mere scatterbrain’s convolutions but is actually a serious theoretical challenge to existing economics.

After all, Hyperwage Theory is invented by the same person who invented the world’s fastest, most effective, most efficient, and most accurate way to learn debit and credit.
(Thads Bentulan, Aug 25, 2005)
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