FacebookTwitterRedditEmail

What the Minimum Wage Would Be If It Kept Pace With Productivity

Until 1968, the minimum wage not only kept pace with inflation, it rose in step with productivity growth. The logic is straightforward; we expect that wages in general will rise in step with productivity growth. For workers at the bottom to share in the overall improvement in society’s living standards, the minimum wage should also rise with productivity.

The distinction between inflation and productivity is an important one. If the minimum wage rises in step with inflation, we are effectively ensuring that it will allow minimum wage earners to buy the same amount of goods and services through time, protecting them against higher prices. However, if it rises with productivity that means that as workers are able to produce more goods and services per hour, on average, minimum wage earners will be able to buy more goods and services through time.

While the national minimum wage did rise roughly in step with productivity growth from its inception in 1938 until 1968, in the more than five decades since then, it has not even kept pace with inflation. However, if the minimum wage did rise in step with productivity growth since 1968 it would be over $24 an hour today, as shown in the Figure below.[1]

It is worth considering what the world would look like if this were the case. A minimum wage of $24 an hour would mean that a full-time full year minimum wage worker would be earning $48,000 a year. A two minimum wage earning couple would have a family income of $96,000 a year, enough to put them in the top quintile of the current income distribution.

It is worth noting the standard counter to the argument that the minimum wage should keep pace with productivity growth. It would be claimed that the productivity of minimum wage workers has not kept pace with average productivity growth, so that it would not be feasible for minimum wage workers to earn pay that rises in step with average productivity growth.

There is some truth to this claim, but only at a superficial level. The productivity of any individual worker is determined not just by their skills and technology, but also by the institutional structure we put in place. In a world without patent and copyright monopolies, the skills of bio-technicians and software designers would likely be much less valuable than they are today.

Similarly, the skills of experts in stock trading and designing complex financial instruments would have much less value if we had a financial transactions tax in place and allowed large banks to fail when their mistakes made them insolvent. And, the skills of doctors and other highly paid professionals would have much less value if our trade policy was as committed to subjecting them to international competition, as has been the case with auto and textile workers.

Lower pay for those at the top increases the real pay for those at the bottom and middle. A $15 an hour wage goes much further when all drugs are selling as low costs generics, the financial sector is not sucking 2 percent of GDP ($230 billion a year) out of the economy, and doctors get paid the same as their West European counterparts.

If the productivity of less-skilled workers has not kept pace with average productivity, this was by design. It was not the fault of these workers; it was the fault of those who designed policies that had the effect of devaluing their skills.

This raises a final point: we can’t imagine that we can just raise the minimum wage to $24 an hour without serious disruptions to the economy, many of which would have bad effects (i.e., unemployment) for those at the bottom. While there is certainly room to raise the minimum wage, and many states have done so with no measureable impact on employment, there clearly is a limit to how far and how fast we can go.

It is quite reasonable to have a target where the minimum wage returns to where it would be, if it had tracked productivity growth over the last 50 years. But we will have to reverse many of the institutional changes that have been put in place over this period to get there. This is where the sort of policies described in Rigged (it’s free) come in, but that is a much longer story.

Notes.

[1] This calculation uses a productivity growth figure that is economy-wide, is based on net output, and adjusts for differences between the NDP deflator and the consumer price index. These issues are discussed in more detail here.

This article originally appeared on the CEPR blog.

More articles by:

Dean Baker is the senior economist at the Center for Economic and Policy Research in Washington, DC. 

bernie-the-sandernistas-cover-344x550
February 24, 2020
Stephen Corry
New Deal for Nature: Paying the Emperor to Fence the Wind
M. K. Bhadrakumar
How India’s Modi is Playing on Trump’s Ego to His Advantage
Jennifer Matsui
Tycoon Battle-Bots Battle Bernie
Robert Fisk
There’s Little Chance for Change in Lebanon, Except for More Suffering
Rob Wallace
Connecting the Coronavirus to Agriculture
Bill Spence
Burning the Future: the Growing Anger of Young Australians
Eleanor Eagan
As the Primary Race Heats Up, Candidates Forget Principled Campaign Finance Stands
Binoy Kampmark
The Priorities of General Motors: Ditching Holden
George Wuerthner
Trojan Horse Timber Sales on the Bitterroot
Rick Meis
Public Lands “Collaboration” is Lousy Management
David Swanson
Bloomberg Has Spent Enough to Give a Nickel to Every Person Whose Life He’s Ever Damaged
Peter Cohen
What Tomorrow May Bring: Politics of the People
Peter Harrison
Is It as Impossible to Build Jerusalem as It is to Escape Babylon?
Weekend Edition
February 21, 2020
Friday - Sunday
Anthony DiMaggio
Election Con 2020: Exposing Trump’s Deception on the Opioid Epidemic
Joshua Frank
Bloomberg is a Climate Change Con Man
Jeffrey St. Clair
Roaming Charges: Billion Dollar Babies
Paul Street
More Real-Time Reflections from Your Friendly South Loop Marxist
Jonathan Latham
Extensive Chemical Safety Fraud Uncovered at German Testing Laboratory
Ramzy Baroud
‘The Donald Trump I know’: Abbas’ UN Speech and the Breakdown of Palestinian Politics
Martha Rosenberg
A Trump Sentence Commutation Attorneys Generals Liked
Ted Rall
Bernie Should Own the Socialist Label
Louis Proyect
Encountering Malcolm X
Kathleen Wallace
The Debate Question That Really Mattered
Jonathan Cook
UN List of Firms Aiding Israel’s Settlements was Dead on Arrival
George Wuerthner
‘Extremists,’ Not Collaborators, Have Kept Wilderness Whole
Colin Todhunter
Apocalypse Now! Insects, Pesticide and a Public Health Crisis  
Stephen Reyna
A Paradoxical Colonel: He Doesn’t Know What He is Talking About, Because He Knows What He is Talking About.
Evaggelos Vallianatos
A New Solar Power Deal From California
Richard Moser
One Winning Way to Build the Peace Movement and One Losing Way
Laiken Jordahl
Trump’s Wall is Destroying the Environment We Worked to Protect
Walden Bello
Duterte Does the Right Thing for a Change
Jefferson Morley
On JFK, Tulsi Gabbard Keeps Very Respectable Company
Vijay Prashad
Standing Up for Left Literature: In India, It Can Cost You Your Life
Gary Leupp
Bloomberg Versus Bernie: The Upcoming Battle?
Ron Jacobs
The Young Lords: Luchadores Para La Gente
Richard Klin
Loss Leaders
Gaither Stewart
Roma: How Romans Differ From Europeans
Kerron Ó Luain
The Soviet Century
Mike Garrity
We Can Fireproof Homes But Not Forests
Fred Baumgarten
Gaslighting Bernie and His Supporters
Joseph Essertier
Our First Amendment or Our Empire, But Not Both
Peter Linebaugh
A Story for the Anthropocene
Danny Sjursen
Where Have You Gone Smedley Butler?
Jill Richardson
A Broken Promise to Teachers and Nonprofit Workers
Binoy Kampmark
“Leave Our Bloke Alone”: A Little Mission for Julian Assange
FacebookTwitterRedditEmail