Economics, U.S. Economy

The New York Times’ illogic on the minimum wage

Image Credit: shutterstock

Image Credit: shutterstock

Mark Perry points out the New York Times’ evolving views on the minimum wage: in 1987 the editors declared the appropriate minimum wage to be “zero,” arguing that the minimum wage prices low-skilled workers out of the market. Today, they argue that “American workers have achieved productivity gains that can easily support a $15-an-hour minimum wage.” Clearly the Times has changed its mind – which it has the right to do. What’s more important is the illogic of the Times’ current position.

Rising average productivity justifies rising average wages, or more accurately, rising total compensation including benefits. Wage growth hasn’t matched productivity growth, largely because health care costs are taking a bigger slice of the total compensation pie. But average compensation has more or less tracked productivity.

But the Times’ logic applies only to averages. There’s no reason to assume that the wage paid to the youngest, lowest-skilled workers in the labor force should necessarily rise with average productivity. The best guess is that it would rise with the productivity of the youngest, lowest-skilled workers in the labor force.

For instance, look at the fast food industry, which employs a lot of lower-skilled, lower-paid employees. Since 1987, output per hour in all non-farm businesses has risen by around 71%, according to the Bureau of Labor Statistics, an annual rate of 2.19%. The Times’ logic says wages in the fast food industry should have risen by a like amount. But BLS data show that productivity at self-serve restaurants has risen only by 0.45% annually since 1987, for total growth of 12%.

The simple fact is that if fast food restaurants increased wages by 71% over a period in which their own labor productivity rose by only 12%, they’d be out of business. Ask yourself: do shuttered businesses pay higher wages than firms that remain in business? If not, you might want to think twice about that $15 minimum wage.

Now, we might think that, as human beings, low-skilled workers are worth more than their skills garner in the marketplace. Similarly, we might think that as average productivity grows, some of those gains out to be shared with lower-skilled workers who haven’t done as well. Fine. But that’s an argument for supplementing workers’ wages, such as through the Earned Income Tax Credit. That’s not an argument that these workers are in any way being cheated by their employers or that their employers should bear the burden of raising their wages to whatever level society deems appropriate.

Megan McArdle has a very nice post on how popular and policy discussion of many economic issues – be it Keynesian stimulus, supply side tax policy or the efficient market hypothesis – is literally decades out of date with current economic thinking and would be unpublishable in any academic journal. You can add the New York Times’ treatment of the minimum wage to that list.

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4 thoughts on “The New York Times’ illogic on the minimum wage

  1. All good, and underappreciated points. I’d also add Scott Winship’s “wage correction” argument to this list. Even if average wage productivity did increase faster than average total compensation, this could be seen as a correction to the heavily-unionized period when wage growth outpaced productivity.

  2. There is really no good economic argument for the minimum wage or any other price floor. It is merely a political one. If Democrats and Unions opposed minimum wages, the NY Times would turn on a dime.
    The effect of the minimum wage on an individual depends on what his labor value is. If you are someone whose labor value is greater than the $10/hour, then a boost in the MW from $7 to $10 may actually help you because it eliminates competition from those whose value might be only $8.
    On the other hand, if your labor value is only $8, the rise in the MW will price you out of the market.
    The great hypocrisy is that the Times and other MW supporters purport to favor MWs in order to help the least skilled — i.e. those who are priced out of a job.

  3. The problem it appears is tying wages to productivity. Wages are simply determined by supply and demand. There’s no steadfast rule that says highly-skilled work pays more than low-skilled work but it usually does because there are fewer highly-skilled workers whereas low-skilled workers are common. However if there was a sudden drop in the worker population then the wages for low-skilled work can become surprisingly high. Hence from the employers’ perspective they want strong immigration and/or a high birth-rate.

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