Is the Correct Minimum Wage to Follow Productivity?

Is the Correct Minimum Wage to Follow Productivity?

The Claim

Finding the “correct” minimum wage seems more of a subjective goal rather than an objective one. But the fight to increase the federal minimum wage has been present for as long as I can remember.

The claim is that the minimum wage would be $23/hr if wages kept up with productivity. This is according to Senior Economist Dean Baker in his article:

CORRECTION: The $23 an Hour Minimum Wage

To understand what it means for wages to keep up with productivity we first need to understand what it is. Productivity = GDP / hours worked. So productivity will increase with an increase in GDP. Or will increase if hours worked decrease. Productivity has increased in the past fifty years but the minimum wage hasn’t followed.

Separation of Wages and Productivity

Wages and productivity started to separate around 1970. According to the EPI, the reason for the separation was because of many things including:

Excess unemployment was accepted to maintain inflation
Raises in the federal minimum wage were infrequent and minimal
Labor laws couldn’t keep up with the attack on labor union

These are all very plausible reasons for the dispersion of wages and productivity. But I believe that the EPI missed a very crucial point for the separation.

Why

Could the fact that investment in productive capital is really what attributed to the increase in productivity? The extra profit, or increase in productivity, is due to capital (like computers) rather than labor.

In the 1970s and 1980s computers became mainstream in the workplace. It made creating, editing, and saving documents extremely easy. This would easily increase productivity with very little actual work from the worker.

By the 90s the internet allowed companies to easily share all their documents through email. This saves time and allows for business to be done from long distances. Plus with websites businesses could now share and advertise their products and services to people they couldn’t reach before, increasing their profits.

Finally, by the 2000s, businesses started putting all their data and documents on the cloud. Thus introducing remote work. Now you can simply do your job in the office, at home, or anywhere in the world. Removing their need for large office buildings.

The growth of technology since the 70s, in general, and specifically in the workplace, has been unprecedented. For the EPI to not mention this to be a reason for the separation is quite misleading.

An increase in productivity in the workforce since the 1970s is not because the workers are working significantly harder than before, but because of the amount of capital businesses put into the technology. Businesses made labor easier and more efficient. So why should the employee receive an increase in wages if the reason for the increase in productivity was because of technology and not the workers?

What Ought To Be

Wages and Productivity Match

The minimum wage shouldn’t match productivity. It should match workers’ value. If you do less work because the computer can do the same job but is more efficient and productive, why do you deserve the money? The increase in profit/productivity should be reinvested back into the cause of the increase, technology.

Because of the efficiency of work, due to technology, how often at your job do you just sit around looking at your phone? I have seen a lot more free time than in the past while at work. Specifically in those minimum wage jobs.

I am not saying that this is a bad thing. Downtime at work is very important and can increase your happiness at work. Also, I understand this is a bit of anecdotal evidence. But it has been an observation of mine that people who work minimum wage jobs want to be paid more, yet are on their phones as often as they can be.

Following the Path of Social Security

So now what? Keep the minimum wage at $7.25/hr and as inflation increases the minimum wage workers never catch a break? Wages should follow inflation the same way social security follows it. Using the Cost-of-Living Adjustment (COLA).

Social Security payments increase each year based on the average 3rd quarter CPI change (only if it is positive). In other words, social security increases the same amount as the average inflation rate of July, August, and September year over year.

Last year, the average inflation rate in July, August, and September was 5.9%. Thus social security payments in January of 2022 increased by 5.9%. This is to help people who are retired adjust to the increased cost of living. Now it does lag behind a year, so the current inflation rate of June 2022 is 9.1%, and the social security payments from this year are only 5.9%, but it is still better than nothing.

Data collected from FRED St. Louis Fed and Social Security Administration

If we had minimum wage follow the same path where there is COLA, we would see the minimum wage at $11.12 as of January 2022. This is if we started COLA for minimum wages at the same time we did the recurring COLA for social security in 1975. At that time minimum wage was $2.00 and was increased to $2.10. Working 40 hours a week, 50 weeks out of the year, at a wage of $11.12 is $22,240 a year, which is about $10,000 more than the poverty level for one person.

It is easy to make these claims though since hindsight is 20/20. This model also ignores the fact that if you increase the minimum wage then if businesses want to keep the same amount of profits (or more) from last year, they must increase the price of their goods/services. Thus increasing inflation… which increases the minimum wage for next year. The same thing that Dean Baker said about his article, this is just a thought experiment. There is no way to tell if this is an effective way to increase the minimum wage.

In fact, ways to improve this system would have the COLA be for each individual state, so California’s minimum wage would increase faster than let’s say Mississippi’s would because they have greater inflation. Or you could get even more in-depth, and separate it by state and by industry, so there is a different minimum wage depending on the inflation of the industry that you are in.

Effective or not, a positive of this system is that because it lags behind inflation by a year this gives business owners, specifically small business owners, a chance to prepare for the increase in the minimum wage. Because drastic changes to the minimum wage will have serious disruptions to the economy.

As explained it is difficult to find the correct minimum wage. There is one thing that is true about your wages that will never change. The more you increase the value of your work the more your wages will increase.