A perfect storm

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2014-03-18 perfect storm

When minimum wage meets maximum stupidity

You may know the name of Elizabeth (Pocahontas) Warren. What you may not know is that she is also the original author of the “You didn’t build that” argument that Obama made famous. The argument is revolting, but I think Senator Warren surpassed that performance in this Senate hearing about the minimum wage. It’s only five minutes, watch it, but here is the essence in a few sentences:

“….that if we just started in nineteen sixty not the high-water mark for a minimum wage but a good time on minimum wage; if we started in nineteen sixty and we said that as productivity goes up that is as workers are producing more, then the minimum wage is going to go up the same. If that were the case the minimum wage today would be about twenty two dollars an hour. So my question Mr. Dube with the minimum wage at seven dollars and twenty five cents an hour is what happened to the other fourteen dollars and seventy five cents? It sure didn’t go to the worker.”

What follows is some pitiful waffling with maybe two points made:

In the restaurant business, overall employment did not change as the result of changes in the minimum wage; and the number of people affected by the minimum wage is so small that the inflationary effect is negligible.

With this in mind, let me try to answer Senator Warren:

Senator Warren,

You said in the lead up to your question that “if we started in nineteen sixty and we said…”
I must ask you: who is that “we”? I did not say it and no economist I know would say something so spectacularly stupid. Whoever did say it does not understand even the most basic concepts of productivity. Let me explain to you how productivity works.

The main drivers of productivity are technological innovation, capital investment and personal factors such as intelligence and experience.
Productivity does not grow evenly. The fact that we can make supercomputers ten times better for half the price does not mean that pizza can be delivered twenty times more efficiently. There are certain jobs that are quite clearly unaffected by the productivity increases in some other fields. There is not much one can do to increase the productivity of a Walmart greeter.
Technological innovation is practically unimaginable without capital investment. Investment is needed for research and development; and investment is needed to create the products that will realize the labour saving advancements that will make the worker more efficient – and therefore more productive than he was without that capital investment.

Without going too deeply into the sociology of minimum wage jobs, there are a few points that must be made. The lower the minimum wage is, the fewer people are affected by it. Not only does the minimum wage affect only a small percentage of the workers (~2% in Canada ~3.5% in the USA), within that group only a very small percentage works for it full time on a permanent basis.
It is the very essence of minimum wage jobs that they require very little knowledge and experience.
I hate to break it to you, but those working for minimum wage on a permanent basis are not the crème of the work force. They are working for a minimum wage precisely because they are not as productive as other workers.

The reason why McDonalds has such a high turnover rate is that people leave for better paying jobs. The job experience either will give them a promotion or a better job offer. That is where the productivity increase you are looking for shows up, in the upward mobility of workers. The pool of minimum wage workers is in a constant flux. The jobs won’t get more productive, the people do, then they move on to occupations where they can be more productive and appropriately better paid members of the labour force.

Minimum wage jobs can seldom be made more productive, but they can be replaced. In the history of technology, many minimum wage jobs simply disappeared. Elevator operators disappeared after a minimum wage hike forced the operators to automate. Telephone operators were also replaced by more productive, automated switches.

Minimum wage increases tend to accelerate this sort of productivity increases. There is already a growing number of big box stores such as Home Depot and Ikea that are introducing automated checkout counters. Restaurants are experimenting with wi-fi order taking. All of these technological advancements will increase the overall productivity of the industry, but it will do so at the cost of the minimum wage jobs they will replace.  Let me say this again: The jobs will not be made more productive. They will be replaced by more productive technology.

As for your two follow up questions, they are both underhanded misdirection. No serious economist says that the minimum wage increase will have a noticeable overall effect on unemployment. What they do say is that it will have a significant negative effect on the people the law is purported to help, young, unskilled and unexperienced workers, especially the ones from disadvantaged backgrounds. They don’t just say that. They have plenty of evidence from all over the world to prove it. Australia has a $16.- minimum wage and a 25% youth unemployment rate, over 40% amongst those from ‘areas of disadvantage.’

The inflationary effect works the same way. A 20% increase in the wages of 2% of the work force is indeed negligible. It is the pressure that it puts on the rest that it is not. It is the pressure created by labour unions indexing their own wages to the minimum that does it.

What I find most alarming about your question is the implications of the fact that you asked it. Anything I said here should be obvious to anybody. You don’t need to be an economist to understand it. It is frightening to know that the people like you, with so little understanding of the economy have so much power over it.

2 replies on “A perfect storm”

  1. […] few days after finishing my previous post, it just hit me that I left out the most important arguments. It is no accident that I did. I will […]
  2. […] wage (my personal experience) Maximum confusion (the Australian myth) A perfect storm (when minimum wage meets maximum confusion in the head of Elizabeth Warren) Maximum defense […]

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