In the United States we have approximately 314 million citizens. In the United States Senate, the upper house of our country’s bicameral legislature, there are exactly 100 senators. That means only 1 senator is selected for every 3.14 million people in the nation. Because two senators come from each state and the population is spread unevenly, the ratio of citizens to senators isn’t exact. Still, you’d think out of a pool of millions the chances are high that people selected for the Senate would have an above-average understanding of basic economics.

Sadly, that is not the case.

A prime example is Massachusetts Sen. Elizabeth Warren asking why the minimum wage is not $22 an hour.


Here’s Sen. Warren’s full question:

If we started in 1960, 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. And, if that were the case, the minimum wage today would be about $22 an hour. So, my question, Mr. Dube, is what happened to the other $14.75?

Let’s consider the implications of her question. If it is true that the lowest skilled workers should be earning $22 an hour, then the average hourly wage for U.S. workers should be somewhere $50 an hour. So what is the actual rate?

Along with a nice office, every senator is given a staff to help them with such matters as research. Sen. Warren didn’t even have to use Google, she could have just asked her legislative assistants. If she had simply asked them to check she would have discovered that as of last month the average hourly wage in the U.S. is $23.82.

Why is the actual wage only $1.82 more than the expected minimum wage? Is it that the average worker is only slightly more productive than the lowest skilled workers?

If you’ve taken a basic economics course (or just have above-average common sense), you’re probably saying to yourself, “Perhaps productivity and wages do not grow at a constant rate?” And you’d be right. As Erika Johnsen explains:

[S]hould the increase in crop yield from a farmer using a donkey and plow versus a farmer using a tractor be directly proportional to an increase in those crops’ market worth because of some sort of imagined moral law about productivity and wages? No, because the market value of those crops has diminished as the ease of production has increased, and if that was the way the world worked, we’d all be paying a heck of a lot more for food right now.

Sen. Warren makes two flaws in reasoning. The first is her assumption that increases in productivity should automatically lead to increases in the minimum wage. She assumes that one variable automatically (productivity) automatically affects a second variable (the minimum wage) at a constant rate. Ironically, her second flawed assumption takes just the opposite approach. She believes (based in part on a flawed economic study) that raising the minimum wage will not cause prices to rise, at least not significantly, and have no detrimental affect on employment.

Her assumption is that rather the passing the cost of higher wages on to the customer, employers will just take less profit. While this may be true of some employers—it could even be true for the majority of businesses—it may not be true for all businesses. What about the employer whose profit margins are already so narrow that any additional cost would eliminate her profits? Her only recourse would be to reduce cost, and since labor was the key cost increase, she’d likely have to lay off workers.

As I’ve written before, raising the minimum wage increases the wages of the few at the expense of the many. This is the basic economic principle of supply and demand applied to labor. Yet Warren puts her trust in one empirical study that tells her increasing the minimum wage won’t lead to increased unemployment (a study which economists admit is an outlier), rather than listening to what actual employers are telling her they will have to do.

Warren’s hubris is as astounding as her lack of economic understanding. But it is all too common among our legislators, who are more interested in appearing compassionate than in acting in a morally responsible and economically sound manner.


  • xcapital

    Production also rises with the lack of job security. When people have no idea if they’ll still have a job tomorrow, they work harder and are more productive to keep it. So, if you keep people scared and frightened for their livelihood, they perform better out of fear – it’s a business model.

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  • http://www.facebook.com/darris.hawks Darris Hawks

    I’m curious what your opinion of Norway’s wage decision engine is.
    Rather than establishing a minimum wage they have codified collective bargaining so the effective minimum wage is around $20. They seem to be doing alright.

    • RogerMcKinney

      Good economics looks at the long run. Bad economists get fooled by watching only the short run. Socialism is heaven while the money lasts; it’s hell when the money runs out. Ask a Greek.

      Sweden has rolled back a large part of their socialist programs in order to keep the state solvent longer. Also, they have reduced corporate tax rates to give their companies an edge in exports. So how do you separate causes and effects that are highly correlated? There is no statistical method for doing it. All you can do is logical controlled experiments in which you hold all things constant but the one in your mind.

      Attempting that with the minimum wage, one realizes that any wage above the market rate will cause unemployment, all else being equal. So if it appears that Sweden is doing all right in spite of their high minimum wage, it only means that other factors, such as rolling back socialism in other areas, are producing benefits that are greater than the costs of the minimum wage.