Elizabeth Warren recently created a stir by suggesting that the federal minimum wage rate would have been at $22 per hour today if it had kept pace with increases in worker productivity since 1960. This number seems to be arbitrarily higher than what President Obama advocated in his State of the Union Address to the Congress. Warren’s exact words at a Senate Health, Education, Labor, and Pensions Committee hearing were as follows:
“If we started in 1960 and we said that as productivity goes up, that is as workers are producing more, then the minimum wage is going to go up the same. And if that were the case then the minimum wage today would be about $22 an hour. So my question is Mr. Dube, with a minimum wage of $7.25 an hour, what happened to the other $14.75? It sure didn’t go to the worker.”
Warren seemed to refer to the work of Dr. Arindrajit Dube, Assistant Professor of Economics at the University of Massachusetts, Amherst. In his testimony before the Senate Health, Education, Labor, and Pensions Committee on the same day, Dube argued that the minimum wage has failed to keep pace with productivity, while corporate profits have increased rapidly:
“It is quite remarkable that had the minimum wage kept up with overall productivity, it would have been $22 per hour in 2011. Had it kept up with the growth in income going to the top 1 percent, it would have been even higher, at $24 per hour; and the wage would have exceeded $33/hour at its peak in 2007.”
This counterfactual is certainly one way of looking at the data. But Dube offers it with a number of qualifications, which Warren conveniently ignores.
It does not suggest that the minimum wage should be increased to $22. The minimum wage rate is not pegged to the average worker productivity. If anything, the minimum wage is supposed to reflect the value of the work performed by workers with relatively poor skills, far below those of the average worker. Therefore, it is said to be the lowest wage at which any worker may sell his labor. Indeed, a number of factors can be held responsible for the fact that increases in minimum wages have lagged behind worker productivity: technological change, deregulation, a decrease in the influence of unions and greater trade.
But an increase in the minimum wage rate is itself not expected to bridge this gap. Instead of the dollar amount of the statutory minimum wage, of which Warren seems to be quite fond, it is the real minimum wage rate that matters. Real wages measure the actual value of goods and services that workers can purchase from their incomes and hence, can be seen as a proper determinant of welfare. But Warren does not understand this distinction.
By speculating on the whereabouts of the remaining $14.75, Warren also hinted that workers have somehow been denied their fair share and that the minimum wage rate should indeed be raised to a higher figure. This is not only pure speculation; it also betrays a deep ignorance of basic economics. The simplest answer is that this amount went nowhere because it was not present in the first place. The fact that there are thousands of workers willing to sell their labor at a rate below $22 per hour is enough to show that a mandate to increase the wage rate to that level would have the obvious consequence of increasing inflation. If the minimum wage rate were to rise by more than 140%, then it would be naïve to expect the prices of other commodities, including better skilled labor, to remain stable.
But worse still, Warren’s rhetorical question is an overstatement of the implications of the scholarly literature on the subject. In his research, Dube claims that there is no conclusive evidence to show that a small (usually around $1) increase in the minimum wage rate leads to a fall in the employment level. This result holds true during economic downturns (Allegretto Dube Reich 2011). But even then, he makes two critical admissions that Warren overlooks:
- The economic consequences of a large increase in the minimum wage remain unpredictable.
- There are disagreements among economists over the extent of the effect of minimum wage increases on job losses for highly impacted groups.
A survey conducted by the Bureau of Labor Statistics on the mean wage rate for different occupations in May 2011 gives us some perspective on this. From the data, we can observe that a Chief Executive earned around $51.64 per hour on average in 2011. Now, if Warren’s “fair” minimum wage rate were to be stipulated at $22, almost half of what a CEO earns, what would happen to the general price level in the economy? To suggest that this inflationary pressure would somehow make the low-skilled worker better off is absurd.
It is quite clear that Senator Warren is a victim of the fallacy of hoping to create worker prosperity by government fiat. But as Milton Friedman once pointed out, it is the poorest worker who is most hurt by minimum wage laws, because if he is not skilled enough for a $22 job, he is prevented from working at a lower wage. As James A. Dorn puts it: “The United States needs to abolish the minimum wage, not increase it.”
