U.S. Sen. Elizabeth Warren (D-Mass.) wonders why we do not pay workers a minimum wage of $22 an hour (hat tip: The Corner). Regarding that $22 an hour, Sen. Warren probably is referring to this study by the Center for Economic and Policy Research (CEPR) that showed what the minimum wage would be if it had kept up with increases in worker productivity. However, one key thing that Sen. Warren fails to notice is the source of that increase in productivity.
The study linked to above talks about average productivity. Average workers do not earn the minimum wage. This study does not track changes in the productivity of workers who make at or below the minimum wage. Isn’t it possible that the largest increases in productivity have been among more skilled employees who already earn above the minimum wage?
Also, if workers do not feel that they are being fairly compensated, they are free to look for employment elsewhere. In non-monopolies, employers have to compete for workers and thus offer a competitive wage in order to attract and keep talent. Christina Romer, President Barack Obama’s former chair of economic advisers, made this point in her analysis of increasing the minimum wage: “Robust competition is a powerful force helping to ensure that workers are paid what they contribute to their employers’ bottom lines.”
Minimum wage laws simply amount to “compulsory unemployment,“ as they make it illegal to hire a worker below the prescribed minimum. At an hourly minimum of $22, an employer loses money if he or she hires anybody who produces less than $22 of value an hour. One Missouri small business owner stated that he “would fire one employee, maybe two” if the minimum wage increases to $22. That is quite a lot, given that he only employs three people. Politicians understand all of this, which is why they typically propose only modest increases. After all, if the forgoing economic critique is flawed, why not raise it to $100 an hour?
Raising the minimum wage is an attractive idea to many voters (at least on the surface). Yet, it really is not an effective way to help poor families. According to David Neumark, in his 2012 study for the Show-Me Institute, “. . . minimum wages may do little or nothing to help poor and low-income families.” People from both sides of the ideological spectrum have issues with raising the minimum wage, and increasing it all the way to $22 an hour would just be silly. Let’s focus on ways to truly help the poor.