Almost Everything You Have Been Told About The Minimum Wage Is False

The Democrats, their union supporters, and liberals in general are making a hard and concerted push for an increase in the minimum wage. President Obama mentioned the subject prominently in his State of the Union address on Tuesday night and even promised to take executive action to increase the minimum wage federal contractors must pay their workers starting in 2015. While Republicans and small business owners are sure to resist this push, it is important that everyone on both sides debates the issue with the correct facts. Much of what you hear about the minimum wage is completely untrue.

First, people should acknowledge that this rather heated policy discussion is over a very small group of people. According to the Bureau of Labor Statistics there are about 3.6 million workers at or below the minimum wage (you can be below legally under certain conditions). That is 2.5 percent of all workers and 1.5 percent of the population of potential workers. Within that small group, 31 percent are teenagers and 55 percent are 25 years old or younger. That leaves only about 1.1 percent of all workers over 25 and 0.8 percent of all Americans over 25 earning the minimum wage.
Within that tiny group, most of these workers are not poor and are not trying to support a family on only their earnings. In fact, according to a recent study, 63 percent of workers who earn less than $9.50 per hour (well over the minimum wage of $7.25) are the second or third earner in their family and 43 percent of these workers live in households that earn over $50,000 per year. Thus, minimum wage earners are not a uniformly poor and struggling group; many are teenagers from middle class families and many more are sharing the burden of providing for their families, not carrying the load all by themselves.

This group of workers is also shrinking. In 1980, 15 percent of hourly workers earned the minimum wage. Today that share is down to only 4.7 percent. Further, almost two-thirds of today’s minimum wage workers are in the service industry and nearly half
work in food service. Because this is where the minimum wage workers are, that is what we will focus on for the rest of this column.

Having established that the number of minimum wage workers is small and shrinking, that most minimum wage workers are not poor, and that most of them are young and working their way up the ladder rather than supporting a family, I want to bust one more myth about the minimum wage: the relationship over time between the minimum wage and labor productivity. This one is particularly obnoxious because those selling this myth almost surely know that they are advocating for their preferred policy on the basis of a lie.

Liberals have been trumpeting a study claiming that if the minimum wage had risen in tandem with worker productivity, the minimum wage would be nearly $22 per hour. Senator Elizabeth Warren (D-MA) has gone to great lengths to push this statistic into the policy debate. Liberals want you to believe that the minimum wage should have risen at the same rate as worker productivity to ensure that workers continue to take home the same share of the value of the output they produce. However, the statistic they quote is meaningless because it is not measuring the relevant concept.

Labor productivity may have risen faster than the minimum wage over the last twenty or thirty years, but the study getting all the press uses the productivity gains of all workers to calculate a hypothetical increase in the minimum wage. What is needed is a measure of the productivity gains of minimum wage workers.

Unfortunately, the government does not produce such a number. Luckily for the discussion at hand, the BLS does track labor productivity of food service workers. Because food service workers represent 44 percent of all minimum wage earners, this series is a pretty fair proxy for the productivity gains of minimum wage workers.

The BLS data show that in 2011 labor productivity gains in the food service industry were nonexistent (that is, equal to 0 percent). In 2012, it was slightly worse; labor productivity in the food service sector dropped by 0.1 percent. In limited service restaurants, where minimum wage workers are likely to be concentrated, labor productivity fell by 2 percent in 2012 while business owners saw their unit labor costs rise by 2.8 percent. Over the past few years, these workers, as a group, not only have not earned a raise, but they are getting paid more for doing less.

Taking a longer view, from 1987 to 2012 the same BLS data show that worker productivity in the food service sector rose by an average of 0.6 percent per year. In limited service restaurants, the gains were slightly lower, only averaging 0.5 percent per year. Meanwhile, unit labor costs have risen by an average of 3.6 percent. Over this period the minimum wage has risen from $3.35 to $7.25 per hour which is an average annual increase of 3.1 percent. In other words, at least in food service, the minimum wage has risen at a rate five or six times as fast as justified by the gains in worker productivity.

These numbers reveal not just the selective statistics employed by the proponents of raising the minimum wage, but also that the debate has little to do with helping the poor. Instead, this is really a debate about income redistribution. Raising the minimum wage is actually just an attempt by liberals to punish a subset of business owners by redistributing a share of their supposed wealth to their employees. It is just another attempt at class warfare. Unfortunately, in many cases (including restaurants), the minimum wage increase results in price increases paid by the customers; customers who may be no richer than the workers whose pay increase they are being forced to fund.

Comparing apples to apples, the facts change completely. If software engineers and mechanized manufacturing produce large gains in labor productivity that does not mean that minimum wage workers also became more productive. Focusing on the dominant minimum wage industry—food service—shows us the real story. In fact, the minimum wage has been pushed up much faster than any productivity gains by these workers.

If society believes in creating a minimum standard of living, the way to implement it is through mechanisms like the earned income tax credit, not the minimum wage. The myth that minimum wage workers are being treated unfairly is exposed by a look at the correct data on labor productivity.  In a truthful debate we see that the minimum wage has been generous to workers receiving it when compared to the changes in the value of their output.

h/t http://www.forbes.com/sites/jeffreydorfman/2014/01/30/almost-everything-you-have-been-told-about-the-minimum-wage-is-false/