Wednesday, June 17, 2015

The economics of democratic communism: wage distribution

So I did a back of the envelope calculation on a possible wage distribution under democratic communism.

  • US Population: 350 million
  • Working Age Population: 250 million
  • Non-Working Population: 100 million (thus 2.5 workers per non-worker)
  • Maximum 40 hours per person per week

We assume that everyone works at least 24 hours per week at a minimum wage of 1 Standard Value Unit* (SVU) per hour. We'll assume that an SVU has purchasing power equivalent to about \$30 (2015 dollars). This may seem high, but under democratic communism, everyone pays taxes. I annualize wages at 50 weeks per year. So at the minimum wage/minimum work-week, a person pays 12 SVU/week (\$18K/year) in taxes and has a disposable income of \$18K/year.

Between 24 and 40 SVU a week, there's a flat (regressive) tax: a worker keeps 100% of his income between 24 and 40 SVU per week. After 40 SVU/week, there's a 50% marginal tax rate; after 100 SVU/week, a 75% rate, after 300 SVU/week, an 85% rate, and after 400 SVU/week, a 95% rate. (I assume that the number of people making more than 400 SVU per week is negligible, given the confiscatory rate). Remember, these are all marginal rates: tax only on the amount above the bracket. The idea that a person can be even 10 times as productive as a commonly-skilled worker is dodgy; over that, a person is just collecting some kind of rent.

*The value of one hour of commonly-skilled labor under ordinary conditions. With apologies to Jack Vance

Weekly Wage (SVU) Annualized Disposable Income (US\$) Effective Tax Rate (%)
24 \$18K 50%
40 \$42K 30%
100 \$83K 44.5%
300 \$158K 64.8%
400 \$181K 69.9%

I assume that non-working people get a minimum of 12 SVU per year, or 75% of some measure of their lifetime earnings, whichever is greater.

I cobbled together a right-skewed wage/subsidy distribution. Because of artifacts of the cheesy way I modeled the distribution, I account for 91.72% of the population. I assume the working and non-working distribution are identical.

with the following statistics:
Stat Weekly (SVU) Weekly Disp. Inc. (SVU) Annual Disp. Inc. (US\$)
Mean 51.15 SVU 28.16 SVU \$42,237
Mode 36.50 24.50 \$36,750
1Q 31,89 19.90 \$29,850
Median (2Q) 36.80 24.8 \$37,200
3Q 60.10 38.10 \$57,150

This distribution makes anyone earning over 102.4 SVU/week an "outlier" (greater than 3Q+1.5(3Q-1Q)). It's a little complex to calculate (and interpret, because of the skewness) the standard deviations, so I'll leave those for later.

Total purchasing power in the model is equivalent to about \$13.75 trillion US\$, which is in line with the 2015 economy. Total actual labor hours worked is 8.1 billion hours (assuming everyone making over 40 SVU/week is working 40 hours per week), which is slightly less than my estimate of 8.3 billion in today's economy (given a generous 10% un-/under-employment rate). Although most people work fewer than 40 hours per week, the unemployment rate under this model is zero by definition, so more people work. Overall tax revenue is about 45% of total wages, again in line with most democratic socialist countries.

Because that total purchasing power and the total amount of labor is about the same as today, the overall price level should be similar, although there may be considerable adjustments to individual prices. Housing costs should be considerably lower (more on this later); food and basic "luxury" items may have higher prices.

Note that everyone works, and children are directly subsidized. Therefore, a two-parent household with two children where one parent works at the median wage and the other parent takes care of the children has a disposable income of 24.8 + 12 + 2*6 = 48.8 SVU/week = \$73.K/year.

All the numbers seem in line with a reasonable modern industrial economy. This kind of model does not seem, at least at first glance, completely crazy.

If you want to look at the spreadsheet, it's here: Excel Spreadsheet (let me know if this link doesn't work)

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