Last week, at a hearing of the Health, Education, Labor and Pensions (HELP) Committee, Senator Elizabeth Warren (D-Mass.) said that if the minimum wage kept pace with productivity between 1960 and today, the minimum wage would be $22 an hour. You can watch the video here and look at a chart of the divergence here. It doesn't seem she was actually advocating the wage be that high, but examining the idea is illustrative of the problems with the discussion about the minimum wage.
Unfortunately for McDonald's employees everywhere, this idea doesn't make any sense. It's true that since 1973 average productivity increased 80%, and median compensation increased 10%. But it's a misleading, apples and oranges comparison: the productivity of minimum wage earners isn't the same as the productivity of the average worker.
Furthermore, as I'll demonstrate below, a $22 minimum wage would mean someone earning the minimum wage would earn about the same as the median worker does today. That gigantic increase would make American labor uncompetitive and many firms would go out of business.
The minimum wage has been a hot topic since President Obama proposed a $9 minimum wage in his State of the Union address. The Senate has taken up a proposal to raise it to just over $10 over two years.
In the HELP committee, Warren questioned Dr. Arindrajit Dube, a professor of Economics at University of Massachusetts Amherst. Dube said that previous minimum wage increases have not raised unemployment or inflation, and he doesn't believe this increase would either.
Before evaluating those claims, we need some background about the minimum wage.
The makeup of those earning the minimum wage is very different from the average worker: 49.5% of minimum wage earners are between 16 and 24, and 23.5% are teenagers. 62% of minimum wage earners under 25 are enrolled in school.
Incredibly, only 23% of minimum wage earners live in households below the poverty line. Even of those above 24, less than a quarter live in poverty.
In 2011, about 5.2% of American wage earners received the federal minimum wage of $7.25 an hour. Only 19.4% of workers who earned minimum wage or below (such as those who receive tips) worked more than 40 hours or more per week, compared with 60.6% of all wage earners. 20.1% of minimum wage earners work 20-24 hours per week. The average private employee worked 34.5 hours last year.
At the current minimum wage, 35 hours per week yields $13,195 per year, and 21.5 hours a week gets you $8,105. The 2013 poverty threshold for a one-person household in the mainland U.S. is $11,490. Working 35 hours per week, a worker earning $22 an hour would take home just over $40,000 for the year before taxes, but someone working 21.5 hours per week would earn just under $25,000 per year. The median wage in 2011 was just under $27,000.
Bringing the minimum wage up to the median wage would force employers to eliminate millions of jobs and tank the economy. Warren's questions make for good, theatrical politics, but they don't make any sense economically.
Now we are ready to tackle Dube's arguments. It's true that most economic studies have shown no relationship between increases in the minimum wage and decreases in employment. However, those studies are not necessarily applicable to this proposed wage increase.
The most cited study, representative of the field, is by Card and Krueger. They examined 410 fast-food restaurants in New Jersey and eastern Pennsylvania after New Jersey raised its minimum wage from $4.25 to $5.05. Even the proposed increase to $10 from $7.25, let alone $22, is a much bigger magnitude, absolutely and relatively, and it's on the federal level. This also means that the inflationary effects are hard to predict.
The consensus among economists may be that increases in the minimum wage don't affect unemployment, but the existence of the minimum wage itself surely does reduce employment, and employers can always reduce the number of hours employees can work. It's true the jobs eliminated by the minimum wage are so low paying the employees would probably need government benefits anyway, but the point to remember is that the minimum wage is not our only weapon against poverty.
A much more effective tool to reduce poverty than increasing the minimum wage would be to increase the Earned Income Tax Credit (EITC). While the wage increase would primarily benefit middle class young people, increasing the EITC benefits the working poor indiscriminately.
It's true that inequality is a growing problem. Most Americans would like income distribution to be more evenly divided than they think it is (and it's way more unequal than they think it is). However, rather than shocking the economy with a huge wage increase, we should simply tie the minimum wage to inflation. If we had done that in 1968, today the minimum wage would be about $10, just where the Senate is fighting to move it now.