Minimum Wage Hysteria from Progressives

I was going to let the latest minimum wage issue pass and defer to last year’s NCPA publication on the topic. But every now and then, patent silliness from other sources deserves a response. A report from the Soros-funded Center for Economic and Policy Research (which was released a year ago, but has suddenly become a hot topic) has found that the minimum wage has not kept pace with the growth in labor productivity.

According to CEPR’s analysis based on data from the Bureau of Labor Statistics, the value of the minimum wage peaked in 1968, and would be $10.52 an hour in 2012 if indexed for inflation. CEPR also notes that in 1968, the minimum wage was about half (53 percent)of production worker wages at the time. If the minimum wage represented half of today’s production worker wages it would

be $10.01 per hour. Nothing particularly shocking here, but CEPR then goes on to analyze labor productivity (output per hour).  If the minimum wage grew at the rate of labor productivity, it would now be $21.72 an hour! Bottom line – it’s time to go above and beyond President Obama’s state of the union minimum wage of $9.00 an hour and push for that $20 minimum wage…do I hear a yea?

But there is a problem with slapping BLS data into a graph and calling it

a day. First, workers are part of what is known as the labor market. With the exception of artificial wage floors imposed by the government and labor unions, it operates much like any other market. Like any other good or service, there is a supply of and demand for workers. Like it or not, this is a factor in determining wages. There is no point paying a worker $10.00 an hour when there are three workers behind her willing to do the job for $7.25 an hour. But even if their productivity levels are different (assuming equal experience and education), that would be recognized after a probationary employment and not necessarily during the initial hiring process.

Furthermore, there are other problems with the “wage growth should strictly follow productivity growth over 40-plus years” view. The labor market has changed dramatically. In 1968, there was far less polarization between low-skilled and higher-skilled workers. But with the advent of computer technology, the gains in productivity have not accrued equally over various sectors. Thus, to apply a minimum wage based on “average” productivity would create even more unemployment, as employers who had below-average productivity workers would simply replace them with capital. Amazingly, as much as CPER supports such a thing, they would probably quickly discard the idea if we applied this system to taxes. (How about it — should a wealthy person’s “average” tax rate of 24 percent be applied to a minimum wage earner as well?)

Finally, the growth in jobs of different skill levels is not uniform. In fact, a  study  by economists David Autor and David Dorn found that from 1980 to 2005 employment changes across skill percentiles were U-shaped. Low-skilled workers experienced modest gains while high-skilled workers experienced large gains, with the smallest job gains occurring at the middle-skilled percentiles. Autor and Dorn also noted that in the lower-skilled percentile, service occupations have grown 30 percent since 1980. These include child care workers, hairdressers, janitors, home health aides and food service workers. These jobs rely heavily on human intervention and cannot easily become more productive with the use of machines.

So before we decide to further exacerbate unemployment by tripling the minimum wage, let’s give a little careful thought to the numbers


Comments (4)

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  1. Joe Barnett says:

    Good post. Workers’ contributions to output or productivity increases are not equal — that’s why people are paid different wage rates.

  2. Kyle says:

    He must have an inside line on productivity growth that the rest of us must be missing. Or his piece is just a bid to get Soros to pay him more.

  3. Andrew O says:

    I agree that wage growth following productivity is problematic since it cannot control the altering variables in skill-set that occur with time due to technological innovation. I think that minimum wage is thought by some as a humanistic approach to provide decent working conditions, instead of the economic considerations at hand. I wonder if there would be three people vying for the same job and they are willing to get paid less than $10/hr, wouldn’t a plausible reason be because they are below the poverty line and are desperate to get some form of income? Theoretically, if we ought to base wages based on supply and demand and skill-set, then theoretically a company could pay close to nothing for a job that may not be high in supply but high in demand. If the issue is the polarization of skills, then education comes to mind as a consideration to providing better equilibrium in the job market. However, I still can’t seem but to be uncomfortable with the theoretical possibilities of companies potentially abusing a system of supply and demand as they could get work for little to no cost if the supply of low-skilled workers is pervasive. I may need some enlightenment/education on this front, but it’s something I can’t quite be comfortable with if my logic is at all reasonable.

  4. Gabriel Odom says:

    I think that the only reason the labour market for lower skilled workers hasn’t completely collapsed is because these gains in productivity have finally pushed the equilibrium wage beyond the minimum wage floor.

    Let’s not forget that the average productivity means that roughly 50% OF WORKERS ARE WORTH LESS THAN THAT. Setting the minimum wage to the average marginal productivity of unskilled labour means that about half of the workers will be less productive than what firms are forced to pay them. Let’s hear it for 50% unemployment!