Blog Post

AEIdeas

To demonstrate how free market capitalism and “the miracle of the marketplace” generate increased prosperity over time for average (and especially low-income) Americans, economist W. Michael Cox (currently the Director of the O’Neil Center for Global Markets and Freedom at Southern Methodist University’s Cox School of Business) has compared the purchases at different points in time from the income earned by college-bound teenagers working at a full-time, minimum-wage for 12 weeks during the summer (ignoring taxes).

Here’s a summary of his article “Capitalism’s Many Benefits Create ‘Luckiest Generation,’” which appeared in Investor’s Business Daily in October 2000. On several occasions over the years, I’ve presented updated comparisons of the purchases using the earnings of summer minimum-wage jobs in different years on CD, see my last post in 2013 here.

Here’s a new update, which compares a group of electronic and household items that could have been purchased by college-bound students in 1973 from the income generated working full-time at a summer job earning the minimum wage then, to a group of items that a teenager could purchase this year from 12 weeks of full-time summer work at today’s minimum wage.

In 1973, the federal minimum wage was $1.60 per hour (equivalent to $8.60 in today’s dollars), and a full-time summer job at 40 hours per week for 12 weeks would have generated $768 in total summer earnings for a college-bound teenager (ignoring taxes). Using retail prices from a 1973 Sears Spring and Summer Catalog, I found that a college-bound student in that year would have only been able to purchase the following five items for his or her college dormitory room using their entire pre-tax summer earnings of $768 from a minimum wage job:

Items Purchased in 1973 with Summer Earnings Working @ the $1.60/Hour Minimum Wage = $768 Power Return Electric Typewriter $193 Pocket-Size Electronic Calculator $99 12-Inch Portable Color TV $190 Stereo FM/AM Radio-Tape Player $188 5.4-cubic foot Compact Refrigerator $100 TOTAL $770

Now compare that pretty pathetic group of five items in 1973 to the cornucopia of 18 electronic and household items in the table below that could be purchased by a teenager or college-bound student heading off to a dormitory this fall with summer earnings of $3,480 (ignoring taxes) from working full-time at the current minimum wage of $7.25 per hour for 12 weeks, based on prices mostly from the Best Buy website.

Items Purchased in 2015 with Summer Earnings Working at the $7.25/Hour Min. Wage = $3,480 Dell Inspiron Laptop Computer $450 Apple iPod Touch $200 Apple iPhone 6 $200 Apple iPad Air $400 Bose Mini Bluetooth Speaker $200 Canon 18 Megapixel Digital Camera $500 HP Envy Wireless All-in-One Printer $100 Insignia 40 inch LCD TV (HDTV) $250 Sony Smart Blu-Ray Player $100 Microwave Oven $100 Compact Refrigerator $100 Sony PlayStation 3 $250 Kindle $200 One-year Netflix Subscription $100 Keurig Mini Plus Single-Serve Coffee Brewer $100 Samsung 1000W 5.1-Ch. Blu-ray Home Theater System $200 Tivo DVR $200 Philips Sonicare Rechargeable Toothbrush $75 Total $3,450

Pretty amazing contrast, isn’t it? And keep in mind that today’s minimum wage of $7.25 an hour is actually 13% below the inflation-adjusted minimum wage of $8.60 an hour (in 2015 dollars) in 1973, so today’s teenagers would actually have more than $4,100 to spend on today’s electronic gadgets if the minimum wage was adjusted to $8.60 per hour to make it equal to the 1973 minimum wage on an inflation-adjusted basis. Further, according to BLS data, 85% of workers ages 16-19 years old earned more than the federal minimum wage last year of $7.25 per hour, so a large majority of teenagers working full-time over the summer would have actually earned more than the $3,480 amount used in the analysis above.

According to Cox, the summer-job at the minimum wage comparison above tells us that “When it comes to their economic prospects, today’s young Americans are the ‘luckiest generation’ in history—at least until their children grow up and forge an even luckier one. And even if real wages are flat, the explosion of new products over time at lower and lower prices translates into a rising standard of living for all income groups, even minimum wage workers.”

MP: Cox makes a key point that even when real wages or real household incomes are stagnant over time, we are still most often experiencing increases in our real standard of living, due to the explosion of new consumer products that become available at ever-cheaper real prices. Even teenagers today can afford a cornucopia of low-cost electronic products today like laptop computers, smartphones, Kindles, digital cameras, and iPods that even a billionaire couldn’t have purchased 20 years ago, because those products weren’t yet available. The 1973 vs. 2015 summer-job at the minimum wage comparison above illustrates that we’ve made a lot of economic progress over the last 42 years that has increased our national prosperity – and that march of progress has happened in spite of six recessions during that period, the stagflation of the 1970s with 18.5% mortgage rates and a 20% prime rate, the savings and loan crisis with almost 3,000 bank failures in the 1980s and 1990s, several major stock market corrections, and the Great Recession.

Today, even though the US economy is still struggling to fully recover from the Great Recession, and we’ve had sub-par economic growth and sluggish job creation in the post-recession period, our economic progress and a rising standard of living will continue unabated. The economic challenges facing past generations didn’t stop innovation and prosperity in the long run, and neither will the current challenges stop prosperity from rising over time. Just like today’s teenagers are exponentially more prosperous than their counterparts in 1973 and can afford items not available to billionaires of past eras, the teenagers 42 years from now in 2057 will likely be exponentially more prosperous than today’s teens and will be able to afford products that today’s teenagers (and billionaires) can’t even imagine, much less afford.

Human ingenuity, technological improvements, and the entrepreneurial spirit will continue the relentless trend that provides us with an increasing selection of better and cheaper products, and a continually rising standard of living for Americans. Matt Ridley pointed out several years ago in the Wall Street Journal that even the Great Depression didn’t slow technological progress because of an “inevitable, inexorable and incremental march of technological improvement” that continues steadily even during recessions and depressions. We should eagerly await the days ahead as the ongoing technological advances make our lives better, and I look forward to blog posts 10-20-30 years from now that demonstrate how teenagers of the future working at the minimum wage are exponentially better off than their counterparts today. And just as we look back today with amusement at the five items purchased in 1973 from working a summer job at the minimum wage, I predict that future generations will likewise look back with amusement at the 18 items purchased by today’s young Americans, when those future teenagers become the next luckiest generation and have access to more, better and cheaper products than are available today.

Here’s a single photo that helps put this analysis into perspective:

And I would add: What now fits in your pocket is much, much cheaper, and much, much better.