Poverty < statastic.com

Your Children Should be Wearing Wooden Shoes

Wednesday, February 14th, 2007

BBC World news was aflutter today over the results of the The United Nations Children’s Fund (UNICEF) report entitled, “Overview of child well-being in rich countries.” The Brits, it seems have taken over a place normally reserved for the United States: coming in dead last in child welfare.

The report takes a more inclusive approach to the measurement, and data quality varies widely across the rich nations that it surveyed, but the UK is at the bottom in many categories. Rest assured, America is still #1 in several categories, including: relative child poverty, percentage of single parent families, and the lack of overall health and safety for children. Paradoxically, while our children report getting plenty of exercise, they are also the second fattest (it seems that those pesky Maltese children edged us out).

Another seeming paradox is that one of the most tolerant countries on earth, the Netherlands, has many fewer children engaging in risky behavior than the United States. Of course, any Dutch person you ask will insist that this isn’t a paradox at all. The point of lax drug laws is to help demystify marijuana and other drugs for teenagers. Perhaps they have a point, about 50% more American 11 to 15 year-olds have smoked pot in the last 12 months compared to their Dutch counterparts. It might be worth listening to the Dutch - they came in first in the survey of child welfare among rich nations.

Below are some of the more interesting results from the report.

Can Innovation Save the Bottom of the Pyramid?

Friday, August 25th, 2006

Yesterday I wrote about the shortcomings of Prahalad’s book, The Fortune at the Bottom of the Pyramid. We left with the question of whether there was even a market to discuss. Several factors make it difficult to estimate disposable income at the bottom of the pyramid (BOP). Even if it is not a fortune, there is likely much more than a nickel a day of disposable income amongst the world’s 4 billion poor.

Most people in extreme poverty live in rural areas and derive much of their diet from subsistence farming. This means that relatively little of their income is spent of food. In family or tribe-oriented societies, there is also an income smoothing effect. Kinship networks, for example, mean that if one person in a family has a high-paying position in the government, many in the family will benefit. In addition, income such as flows from non-governmental aid, international transfers from foreign nationals living abroad, and the grey economy may be under-reported in GNP figures.

In response to Karnani’s paper, the WRI’s NextBillion.net noted that:

BOP households collectively spend money, lots of it, on a wide variety of goods and services, and are clearly willing to pay for services such as connectivity, clean water, financial services, energy, health care, and education for their children, as well as food, housing, and consumer goods. The BOP is already an economic actor, not just a passive, dependent group, and its collective actions define a market.

So there let’s assume that there is indeed a market of billions at the bottom of the pyramid. Should companies try to reach it? Karnani cautions that viewing the BOP as a vast market of micro-consumers is “potentially a dangerous delusion.” Let’s look more closely at his argument.
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Distribution and Economies of Scale

Concerned about the apparent gullibility of multinational corporations (MNCs), Karnani warns that:

“Not only is the BOP market quite small, it is unlikely to be very profitable, especially for a large company. The costs of serving the markets at the bottom of the pyramid are very high…. This increases distribution and marketing costs and makes it difficult to exploit economies of scale. Weak infrastructure (transportation, communication, media, and legal) further increases cost of doing business.”

Two words: Coke and Guinness. Both have very deep penetration in West Africa. Granted these are not going to improve the health and well-being of the BOP (though Guinness bottles do read, “Guinness is Good for You“). Somehow these MNCs have overcome the challenge of distributing and marketing their products across a large geographic area.

Regardless of infrastructure and marketing costs, the market will help align buyers and sellers if the price is right for each.
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Reducing Prices at the Bottom of the Pyramid

Prahalad’s thesis hinges on the idea that attracting more competition to the BOP will drive down product prices, thus freeing up their disposable income for other purchases. This is basically how Wal-Mart has made low-income Americans feel richer even as real income has stagnated over the last decade. But Karnani takes issue with Prahalad’s assertion that the private sector can deliver high quality goods to the world’s desperately poor at competitive prices:

“There are only three ways to reduce prices: 1) reduce profits, 2) reduce costs without reducing quality, and 3) reduce costs by reducing quality…. the only realistic way to reduce price is to reduce cost. The BOP proposition is adamant that we should not reduce quality in this process.

“Unless all the current producers are grossly inefficient, the only way to reduce cost… without reducing quality will always require a significant improvement in technology. Good examples of this are found in the areas of computers, telecommunications and various electronic products. It is difficult to find examples of such dramatic cost reduction in other product categories. It is not surprising that the BOP proposition repeatedly uses these same examples. We should also note that the ultimate impact on the real income of the poor due to these major price reductions is quite low because the poor spend only a small part of their income on such electronic products. The poor spend over 80% of their income on food, clothing and fuel – products that have not benefited from such dramatic technological changes in a long time.”

Let’s evaluate that last statement and have a look at how technology might help deliver improved food, clothing, fuel, and public health.

Food: There are constant improvements in pest-resistant crops, hybrid seeds, or high volume animal husbandry. Many famers in Africa still till individual family farms by hand. Certainly technology could help them improve efficiency which would lead to lower prices.

And technology improvements in computers and telecommunications do not exist in a vacuum. There are numerous positive spillover effects that affect the BOP as producers. The Washington Post recently reported that cell phones in Congo have enabled farmers and fishermen to “…use text messaging to check market prices, eliminating middlemen and increasing profits — and preventing long trips to the market on days it is canceled.” So a technology unrelated to agriculture has helped farmers saved on input prices (transport to the market on days when it’s canceled) and output prices.

The Economist: Real Apparel Prices 1993-2002 Clothes: Apparel prices have tumbled over the past decade. Much of this is due to reduced quotas on Chinese apparel imports in the U.S. and Europe. Thus, the assertion that “the only way to reduce cost… without reducing quality will always require a significant improvement in technology” is inaccurate. Clothing prices have dropped as a result of trade policy, not an improvement in technology. This does have a trickle-down effect for the world’s poor.

Fuel: Fuel has indeed become more expensive. Women have to scavenge farther for firewood. Oil prices lead Nigerians into the deadly practice of siphoning off crude oil from pipelines running through their villages. But technology can improve access to energy sources. Military applications such as SkyBuilt mobile solar power could find a market at the BOP helping medical centers or providing a short term power source for harvesting and processing crops.

Public Health: As patents expire on novel drugs, cheaper generic drugs will enter these markets. Playpump is an innovative approach to water delivery. LifeStraw promises to exploit economies of scale in order to drive down prices for its personal water filtration device. Rwanda's Market at the BOP

Technology: Last week, the Wall Street Journal ran a front-page story about an American entrepreneur, Greg Wyler, who was building an Internet infrastructure in Rwanda. The focus of Terracom is to first focus on market access, then profits. Mr. Wyler might disagree with Karanani’s ideas about providing a quality product at reasonable prices for the poor. He is quoted as saying, “We’re on a mission here to see what happens when we drive prices down and quality up.”

And lest you think that Rwanda is an obvious market for an outside investor, have a look at the graph at the right.

As WRI writes in response to Karnani’s critique:

The pertinent development question is whether the BOP is well served by the present (often informal) markets, and whether there are unmet needs that could be better served by more competitive markets and broader participation by the legitimate private sector.

I believe that private sector innovation help can drive prices lower, maintain or increase quality, and help deliver goods that result in better livelihoods for those at the bottom of the pyramid. But what if multinationals start marketing products that the poor don’t need? Are BOP consumers rational economic actors? Or is Karnani correct when he says that, “The problem is that the poor often make choices that are not in their own self interest.”

Is There a Market at the Bottom of the Pyramid?

Thursday, August 24th, 2006

Wealth Growth map In 2004, C.K. Prahalad, a professor at University of Michigan’s Ross School of Business published the groundbreaking book “The Fortune at the Bottom of the Pyramid.” The basic thesis is that multinational corporations (MNCs) have concentrated their sales and marketing efforts on the richest citizens of the world while ignoring the 4 billion consumers who live on less than $2 per day at the Bottom of the Pyramid (BOP).

He asserts that introducing market choice to the poor will free villagers from local monopolists, creating a virtuous cycle of consumer access and improved product quality. MNCs that sell products in this enormous, underserved market stand to make hefty profit. And, as more and more companies turn their attention to the BOP, competition will drive private sector innovations that address the needs of the poor. By giving MNCs an economic stake in this market, they in turn will draw the attention to problems of governance.

Although the work is primarily empirical and draws too heavily from examples in India, the BOP argument is an intriguing one. It eschews the notion that concentrating on the poor should be relegated to a secondary “corporate social responsibility” initiative and takes an integrative approach to the private sector achieving what non-governmental institutions and multi-lateral lenders such as the World Bank have not: pulling billions out of poverty.

We should applaud the BOP adherents for their novel approach, an approach that too closely resembles the idealism typical of a first-year Peace Corps volunteer. It is only after the corruption, complacency, intestinal ailments, and constant economic opacity have wrung out the initial naiveté that the discussion becomes interesting.

And a dose of cynicism is exactly what Professor Aneel Karnani - also of the Michigan School of Business - introduces in a recently-released working paper, “Fortune at the Bottom of the Pyramid: A Mirage.” He asserts that:

“Rather than focusing on the poor as consumers, we need to view the poor as producers. The only way to alleviate poverty is to raise the real income of the poor.”

Professor Karnani’s basic thesis is that BOP de-emphasizes the role of government in providing basic services and that we must focus on building the capacity of the world’s poor by focusing on government failures in education, health, and infrastructure.

Unfortunately, non-governmental organizations have been focusing on failures of government for decades. Billions of dollars have been spent flying experts around the world to bolster child immunization rates, build water delivery systems, and advise on bankruptcy reform. As you can see from the map above, the last 27 years have been lean ones for many in the bottom of the pyramid. This is not to diminish individuals’ efforts or passion. It is only to acknowledge that it is a very difficult goal and multi-lateral institutions do not have a recipe, much less a consensus, of how to foster economic growth.

One of the positive side effects of the BOP argument is that it makes MNCs stakeholders in a new and underserved market. To be sure, there are fatal flaws in the logic and research initiated by Prahalad. But MBAs are new to development and we should embrace that wide-eyed optimism even as we critique shakey methodology.

Is there a Market at the Bottom of the Pyramid?

Karnani points out one inexcusable fallacy in Prahalad’s work: market definition.

Prahalad used the World Bank’s estimates for the number of people living on an income of $2 a day or less (poverty), and $1 a day or less (extreme poverty). Both poverty measures are at purchasing power parity (PPP).

Why is PPP important? Because no matter where in the world you spend $1 PPP it buys the exact same goods, regardless of local price. So that $1 PPP that the extreme poor earn in a day will buy you one loaf of bread in the U.S. Actual prices are much lower in developing countries, so that same loaf of bread might only cost $.10. The market at the bottom of the pyramid will not pay MNCs in PPP dollars; it will pay them in local currency, as Karnani explains:

“[Prahalad] claims that the BOP potential market is $13 trillion at PPP. This grossly over-estimates the BOP market size. The average consumption of poor people is $1.25 per day and assuming there are 2.7 billion poor people, which implies a BOP market size of $1.2 trillion, at PPP in 2002.

“From the perspective of a multi-national company from a rich country, profits will be repatriated at the financial exchange rates, not at PPP rates. In that case, the global BOP market is less than $0.3 trillion, compared to $11 trillion economy in the US alone – making the BOP a difficult place to look or a fortune.”

Another problem is that the poor spend about 80% of their income on food, clothing and fuel. Suddenly the $300 billion market at the bottom of the pyramid shrinks to $60 billion of disposable income at current exchange rates. Spread amongst 2.7 billion people, that’s about a nickel a day for disposable income.

Karnani also takes issue with the number of poor:

“Prahalad states that there are more than 4 billion people with per capita income below $2 per day at purchasing power parity (PPP) rates…. Most researchers argue that the World Bank already over-estimates the number of poor people, with some researchers estimating the poor at 600 million (The Economist, 2004).”

There’s no shortage of poor, I’m afraid. Sanjay Reddy and Thomas Pogge of Columbia University have written a persuasive paper that critiques World Bank calculation of the number of poor in the world. While they give no new estimate, it’s likely that the world’s poor have been undercounted:

“There is some reason to think that the distortion is in the direction of understating the extent of income poverty.”

So the bottom of the pyramid is left with billions of poor who have no money. Does this invalidate Prahalad’s entire thesis? More on that tomorrow.

It’s a Duck: The Iraq Civil War

Monday, August 21st, 2006

It looks like a duck, it walks like a duck, and it really sounds like a duck.

Yesterday’s Washington Post editorial, “What Next?” gave a grim assessment of how a civil war in Iraq could explode into a regional conflict in the Middle East. Iraq has all of the necessary ingredients of a civil war: a growing tendency to identify with religious and ethnic groups rather than the Iraqi nation-state, valuable resources spread unevenly throughout the country, a growing perception that democracy does not reflect regional interests, and daily news of increasing civilian casualties.

A broader civil war would likely produce Iraqi refugees who could export the Iraqi conflict to neighboring countries. As we have seen in the recent Lebanon-Israel conflict, these neighboring states are willing to fund proxies such as Hezbollah, if not to intervene directly. The authors note that the foundation for a regional war could already be in place:

U.S. military and Iraqi sources think there are several thousand Iranian agents of all kinds already in Iraq…. Iran has set up an extensive network of safe houses, arms caches, communications channels and proxy fighters, and will be well-positioned to pursue its interests in a full-blown civil war.

Although Bush administration officials acknowledge privately that things are not going according to plan, Bush said publicly today that Americans “have to understand the consequences of leaving Iraq before the job is done.”

We’ve done a heck of a job so far. Insecurity has left the Iraqi economy in shambles making it easier for insurgents to find new recruits. One-fifth of the population is in poverty. Oil production is still 11% below pre-war production levels. Unemployment is as high as 40% in some regions, and inflation is rampant.

Iraq also has a serious brain drain that leaves little human capital with which to rebuild. According to a report by the Brookings Institution, 2,000 doctors have been murdered, and another 12,000 have fled the country. Internal displacement is also a growing problem: 200,000 Sunni Arabs have been displaced from western Iraq and up to 100,000 Shiites have fled cities to take refuge in the south.

Civilian deaths increased by nine percent from June to July, and have almost doubled since January, 2006. One of the more disturbing trends is that as violence has increased in Iraq, it has also become increasingly brutal.

When do we recognize this as a civil war? In the editorial “What Next?” Laura Stanton of the Washington Post produced a graphic that applied the percentage of deaths and displaced persons from recent civil wars to the current population of Iraq. Statastic used this data to gain further insight into the average number of deaths per month during these civil wars.

So how severe are the 3,438 civilian deaths reported in July, 2006? On a per capita basis, this is nearly 50% more deaths per month than averaged during the Croatian civil war. If violence in Iraq were to increase at the same rate that it increased between January and July of 2006, there would be more than 450 deaths per day in Iraq by July, 2007. This is about the same rate as the Kosovo war, but with one critical difference: Iraq’s population is 14 times larger. We would need as much as four times the current financial and military resources to quell a civil war, requiring as many as 450,000 soldiers. And that says nothing of how we would stop a regional conflict.

If a civil war does erupt into a regional war, Daniel L. Byman and Kenneth M. Pollack note that history is not on our side:

No country in recent history has successfully managed the spillovers from a full-blown civil war; in fact, most attempts have failed miserably.

Much as Americans may want to believe that the United States can just walk away from Iraq should it slide into all-out civil war, the threat of spillover from such a conflict throughout the Middle East means it can’t.

It’s time to acknowledge the Iraqi insurgency for what it is: a civil war. Quack.

Average Monthly Deaths in Recent Civil wars

Sources: Washington Post (primary sources cited include Amnesty International, Center for Study of Civil War, CIA World Factbook, Richard Holbrooke’s “To End a War”, World Bank); PBS Frontline map.

Notes: *The estimate for July, 2007 applies the rate of doubling in civilian deaths that occurred during the 6 months between January and July, 2006.

The average monthly deaths were calculated by applying the death rate per capita in each country’s civil war to the population of Iraq. This was then divided by the length of the each civil war. The monthly average was calculated using whole years for these conflicts. In other words if a civil was started in December of 2000 and ended in January 2001, its duration would counted as two years, not two months.

Why the lack of precision? Because using the monthly average of deaths during a civil war is an imperfect measure to begin with. Civil conflicts often hinge on a single event that may not have many civilian deaths (such as the February 22, 2006 bombing of a sacred Shiite shrine in Samarra), or a monthly average may understate the brutality of a shorter campaign (such as the 800,000 who were murdered in Rwanda over the course of 100 days).

This measure is only meant to lend an international comparison to the debate about what constitutes a civil war.

Rich Countries, Corruption and Aid to the World’s Poor

Tuesday, August 15th, 2006

Yesterday Foreign Policy and the Center for Global Development released their 4th annual Commitment to Development Index (CDI). This index attempts to quantify how well rich countries “help poor countries build prosperity, good government, and security.” The index measures seven policy areas: aid (per capita and quality), trade, investment, migration, environment, security, and technology.

Many countries’ own policies stand in direct contradiction to one another showing, perhaps, that internal politics are primary, and policies affecting the poorest countries on earth are secondary. Andrew Natsios, the former head of the U.S. Agency for International Development (USAID), pointed out some of these contradictions before resigning in January, 2006. As Foreign Policy notes:

“Natsios criticized a law that requires the U.S. government to buy food from U.S. farmers, ship it on American boats, and deliver it to famine-stricken regions via U.S.-based organizations. The U.S. government must deliver food aid this way even when it depresses local food prices, pushing more farmers into poverty, and even when it could buy food from farmers just outside a famine zone for much less. Some nongovernmental organizations that get a large fraction of their funding from the program defended the status quo, arguing that dropping the ‘made in America’ requirement would undermine the program’s support among American farmers and shippers. Congress quickly axed Natsios’s proposal for reform. That the U.S. government must pay off American interests to feed the starving is a sad commentary on how low the commitment to development may still be.”

In an unrelated but equally interesting measure, Transparency International has for several years been publishing the Corruption Perceptions Index (CPI) in order to draw attention to the role of corruption in stifling economic development. When we look at corruption in rich countries, there appears to be a parallel between increased corruption and decreased effectiveness at helping poor countries. To be fair, the 21 rich countries ranked in the Corruptions Perceptions Index are squeaky-clean relative to the countries they are trying to help (with the exceptions of Italy and Greece).

Is there a link? Perhaps pandering at home - the constant political pressure from competing interests - creates economic inefficiencies that hurt poor countries. These policies could come in the form of unfair trade policies (e.g. Switzerland’s $987.58 per-cow subsidy) or environmental indifference (the United States’ ultra-low gas taxes).

Then again, it’s also easy to be small. The 5 countries “most committed to development” have an average population of 7.9 million whereas the bottom five have an average population 53.7 million. Similar ratios hold for corruption: the most transparent rich countries have smaller average populations.

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Transparency & Commitment to International Development Sources: Statastic research; Foreign Policy; Center for Global Development; Wikipedia

How Playground Equipment and Sippy Straws Could Save Millions of Lives

Wednesday, July 19th, 2006

Access to potable water remains one of the most enduring problems around the world. Today more than 1 billion people do not have access to improved drinking water sources. This leads to 1.6 million deaths from diarrhea each year, the vast majority occurring in children younger than 5.

Multilateral development agencies have been working for decades to improve this situation. Early water projects were well-intentioned engineering gifts. The SCANWATER project, for example, simply installed gas-powered water towers on the highest hills around Cameroon. Because these projects didn’t develop local capacity to train technicians or to collect money for expensive maintenance, most of these water towers rapidly fell into disrepair.

So the key to sustainability is access, simplicity, good design and minimal maintenance. Two promising products are the Playpump and LifeStraw. As you can probably guess from the compound names, these products combine simple existing concepts with water sanitation development goals.

PlayPump is a water pump powered by children who play on a merry-go-round. The pumps are often located near
primary schools to take advantage of abundant free “labor.” Many primary schools in Sub-Saharan Africa have more than 100 students per class, so classes are taught in shifts. During this downtime, children can play on the merry go round ensuring a regular supply of water.

PlayPump in action

The PlayPump also takes advantage of the demographics that characterize developing nations, where half the population is under the age of fifteen.

In villages where girls are most often assigned the chore of fetching water, the PlayPump has the potential to reduce the distances walked for clean water, increasing the likelihood that girls can go to school.

Playpumps cost about $5000 each and can produce up to 1400 liters (370 gallons) per hour, enough water for 2,500 people. The water towers also can accomodate up to four billboard advertisements, two of which are normally reserved for public health messages, and two for revenue generation that provides for maintenance expenses. Currently a South African company is installing them with some help from the World Bank.

LifeStraw in action The second product is LifeStraw, which is produced by the Danish company Vestergaard-Frandsen. The LifeStraw is basically a lightweight handheld filtration device that can be worn around the neck. Any time someone need a sip of water, they can use this device to automatically filter out contaminants. The LifeStraw doesn’t require any spare parts, and it lasts for about one year or 700 liters. They retail in the developing world for $6, or about 1.6 cents per day. The company that produces LifeStraw has ambitious sales goals. The creator, Torben Vestergaard-Frandsen, said that, “We will be disappointed, if we do not sell at least 10 million LifeStraw a year.”

At less than a cent per liter of water filtered, LifeStraw is competitive with other water filtration systems in the developing world. That cost should come down as they ramp up production and realize economies of scale.

And lest you get the idea of ordering a LifeStraw for your homeland security kit or for camping, it’s still being reviewed by the EPA, so it’s not yet available in the U.S. One other caveat: it does not protect against Giardia, a nasty little parasite that Statastico really recommends avoiding.

What other ideas are waiting to be combined into a life-saving innovation? How about an electrical generator powered by soccer players? A playground slide that doubles as solar power? With more than 1 billion people around the world without access to clean water, invention is indeed the mother of necessity.

1 Billion without Access to Clean Drinking Water

Sources: Statastic research, WHO, United Nations

The Cost of Public Access to the Internet & Usage Rates in the Developing World

Thursday, July 6th, 2006

The Internet has been available in the developing world almost as long as it’s been here in the U.S. Internet cafes were popping up in Cameroon in the mid 1990s before the local Peace Corps volunteers even knew how to use them. Penetration rates, however, lag predictably behind the richer countries in the north. But the lack of telecommunications infrastructure is something of a blessing in disguise: developing nations have the potential to leapfrog technologies. Cell phones and VOIP prove easier than installing costly land lines, and there’s no need for telephone poles and copper cable if governments can create WiFi and WiMAX zones around burgeoning urban areas.

Wired Magazine recently featured a map with average prices for one hour of online access in Internet cafes around the world. Statastic used the average hourly price as a percentage of daily wages to provide a glimpse into the state of Internet access in a selection of low to middle income countries.

The chart below begs several questions. Could lowering the cost of public Internet access lead to higher usage rates? What is the demographic profile of the average Internet user in the developing world? Should multi-lateral donors subsidize the cost of public Internet access?

Among this small sample, D.R. Congo, Nigeria and Kenya are the three most expensive places for locals to access the Internet, relative to income. They also have some of the lowest usage rates. But these countries have several other characteristics in common: low literacy, high rates of corruption, and a high level of inequality. These countries may simply have a limited number of Internet cafes that cater to tourists, corrupt officials and the wealthy locals who are lucky enough to have an education and a job.

Brazil’s usage rates are surprisingly high. Perhaps Brazil’s high inequality can help explain how 14% of Brazilians have regular access to the Internet despite the fact that one hour in an Internet café costs nearly one sixth of average daily wages. Just who are those fortunate 14%?
Cost of 1 Hour of Public Internet Access vs. Internet Penetration in Developing Nations

Sources:
http://internetworldstats.com
WIRED Magazine, May 2006

The World Cup and Inequality

Saturday, July 1st, 2006

Six teams remain in the World Cup, but one stands head and shoulder above the rest: Brazil. Unfortunately, Brazil’s beautiful game is not what deserves our attention. Brazil is among the most unequal nations on earth. The wealth concentrated in the richest 10% of the population is 68 times greater than in the poorest 10%. Income distribution in the two nations favored to take home the World Cup couldn’t be more different: Brazil’s wealth is ten times more concentrated than Germany’s. The World Cup and Inequality

Source: United Nation’s Development Programme Report

Minimum Wage and Poverty

Wednesday, June 28th, 2006

“Republicans Cut Minimum Wage by 21%” – or – “Do-Nothing Congress is Something of a Misnomer”

This week, Democrats are threatening to block a bill that would give members of Congress a raise until the minimum wage is increased. While I applaud the Democrats in Congress for re-opening this issue, minimum wage should not be subject to political winds. Since 1938, the annual minimum wage (based on working 40 hours per week, 50 weeks per year) has ranged from $6,807 to $18,621 in 2006 dollars. During that time minimum wage has ebbed and flowed, creating instability and unpredictable incomes for the poorest American workers.

Much of this instability is masked by inflation. Inflation silently eats away at minimum wage when Congress is in a do-nothing sort of mood. In 1981, the Democratic Congress raised the minimum wage from $3.10 to $3.35 where it remained for 8 years. Unfortunately, that same $3.35 in 1981 was only worth $2.46 by 1989. Effectively, inaction on minimum wage cut worker pay by 27% between 1981 and 1989.

Not to be outdone, the Republicans increased minimum wage from $4.75 to $5.15 in 1997, where it has remained ever since. Unfortunately, that same $5.15 in 1997 only buys $4.08 of goods in 2006, a reduction of 21% due to inflation.

The Democrats have proposed raising minimum wage by $.70 per year until 2009 when it would top out at $7.25/hour. This would raise minimum wage by about 15% annually. While this proposal does rescue minimum wage – and Congress – from the ignominy of falling below the poverty level for the first time since 1949, it is a sudden increase for those who employ minimum wage workers.

Inaction (or sudden action) on minimum wage creates wage cost volatility for employers. Jarring increases in the wage costs make it more difficult for businesses to plan. These infrequent and unpredictable increases in minimum wage can also create a political backlash from small business owners.

The solution is to create an automatic, annual increase of the minimum wage based on either the federal consumer price index, or some fixed percentage over the federally-determined threshold for poverty. Make minimum wage more transparent to employers and the working poor, and let do-nothing Congresses get back to their flag burning amendments.

Historical Minimum Wage vs. Poverty threshold

*Historical Minimum Wage assumes working 40 hours/week, 50 weeks/year and is adjusted by the CPI.

^#U.S. Census Bureau 2005 Poverty Threshold for single person under 65, adjusted upwards by 3% for 2006 estimated inflation.

^6.27.06 - Reuters reported a Democratic proposal in Congress to raise minimum wage by $.70 per year until 2009 when it would top out at $7.25/hour.

Your Children Should be Wearing Wooden Shoes

Wednesday, February 14th, 2007

Can Innovation Save the Bottom of the Pyramid?

Friday, August 25th, 2006

Is There a Market at the Bottom of the Pyramid?

Thursday, August 24th, 2006

It’s a Duck: The Iraq Civil War

Monday, August 21st, 2006

Rich Countries, Corruption and Aid to the World’s Poor

Tuesday, August 15th, 2006

How Playground Equipment and Sippy Straws Could Save Millions of Lives

Wednesday, July 19th, 2006

The Cost of Public Access to the Internet & Usage Rates in the Developing World

Thursday, July 6th, 2006

The World Cup and Inequality

Saturday, July 1st, 2006

Minimum Wage and Poverty

Wednesday, June 28th, 2006

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