Populist Claims About Stagnant Wages Are Misleading, Federal Reserve Data Show by Jack Elbaum, 8/6/21, Foundation For Economic Education
Last week, Rep. Ro Khanna tweeted about the disparity in CEO and worker wage growth since 2009.
He wrote, ?From 2009-2019: CEO compensation rose 105%. The minimum wage rose 0%. CEOs work hard, to be sure, but workers also deserve to be compensated for their productivity. We need to raise the wage.?
There is widespread belief in the claims that Rep. Khanna makes in this tweet. Acc. to a 2016 survey by Stanford U, about 3/4 of Americans believe that ?CEOs are not paid the correct amount relative to the average worker.? And, acc. to Pew Research, 2/3 of Americans support a $15 min wage. So, his assertions deserve a closer look.
The Myth of Wage Stagnation ========================== First & foremost, Rep. Khanna is arguing that wages for the avg American have stagnated over time ? a claim that has become ubiquitous in today?s political conversation, with both those on the left & the populist right using that talking point as a cornerstone of their messaging.
The claim is not actually accurate.
The first trap Rep. Khanna falls into is conflating the lack of a govt-mandated min wage increase with a lack of actual wage increases. In truth, wages can rise ? & have ? even if the federally mandated minimum wage does not.
Acc. to Federal Reserve Economic Data (FRED), avg hourly earnings have increased from $21.97 in Jan 2009 to $30.40 in June 2021. That represents a 38% increase.
And income has actually risen even more than that due to non-wage compensation taking up a larger portion of total compensation over time. The NY Times reported that non-wage
compensation accounted for 32% of total earnings in 2018, up from 27% in 2000. Non-wage compensation includes ?bonuses, paid leave & company contributions to insurance & retirement plans.?
The Main Reason Wages Rise ======================= Even though the federal govt has not increased its min wage over the past decade or so, wages still rose due to the interplay between investment and competition.
When a company makes a profit ? meaning their total rev exceeds their total costs ? they have capital available to them beyond what is needed to cover their current total costs. As a result, they will usually invest some percent of that additional capital back into their business in order to improve productive capacity & create possibility of even greater profit in the future. This investment can come in many forms, including training existing workers in more advanced skills or integrating new tech & tools into the business.
By investing in new tech or skills, companies can increase each worker?s productivity. This means each worker has the ability to generate more additional rev for the firm than they could before, creating upward pressure on wages.
As a demonstration, take the following scenario: Company A was paying an employee, who was generating $16/hour of additional rev, $14/hour ? therefore making $2 of profit. Then, after the company invested in new tech & training, that employee began to generate $19/hour of additional rev for the company ? increasing the firm?s profit to $5/hour.
It may seem that the worker is being taken advantage of because they are now generating more rev for the company while not receiving a corresponding increase in pay. But the competition of a free market system solves this.
Company A may well increase that employee?s pay. But, if they do not, Company B now has the opportunity to outbid Company A for the worker?s labor. If they offer a higher wage ? say $16/hour ? in order to lure the worker away from Company A, they'll still be making a profit. And the only way for Company A to retain the employee would be to offer even more than that.
To recap: the investment of Company A increased the produc- tivity of the worker, thus creating competition between multiple firms for their labor and, in the end, raising their wage.
In the recent past, such competition for labor has led to wage increases for hundreds of thousands of workers at places ranging from Walmart to Costco to Amazon. And, because businesses are currently trying to attract as many workers as possible amid our labor shortage, we see many firms raising wages and offering other benefits as well.
?There is no other method,? as the great economist Ludwig von Mises summed it up, ?to make wage rates rise than by investing more capital per worker. More investment of capital means: to give to the laborer more efficient tools. With the aid of better tools and machines, the quantity of the products increases and their quality improves. As the employer consequently will be in a position to obtain from the consumers more for what the employee has produced in one hour of work, he is able?and, by the competition of other employers, forced?to pay a higher price for the man?s work.?
The Consequences of a Minimum Wage Hike =========================== At the end of Rep. Khanna?s tweet, he calls on Congress to ?raise the wage.? But raising the minimum wage to $15/hour would actually hurt the very people Rep. Khanna is intending to help ? namely low-skilled workers in general and teenagers in particular.
A minimum wage is simply a floor on the price of labor, meaning employers are unable (by law) to pay below that. If a minimum wage was set at $15/hour, that means all people who can't produce over $15 of additional rev per hour won't be hired ? & thus will be making no money at all. After all, if a company paid someone $15/hour who only has a productivity of $12/hour, the business would actually be losing money and, if they kept at it for long enough, would ultimately go out of business.
Thus the minimum wage especially harms the young, the inexperienced, the disabled, & individuals struggling in life, because they tend to be at the bottom of the value- creation ladder. And what is especially pernicious about the min wage, is that it prevents such individuals from ever being able to climb the value-creation/earnings ladder, because it knocks out its bottom rungs.
The min wage is a poverty trap. And, hiking the min wage to $15/hour (almost doubling it) would just make that poverty trap even bigger, economically bogging down even more marginal would-be workers.
And this has not just been reasoned-out theoretically, but actually demonstrated empirically. A recent paper surveying the economic literature on min wage hikes came to the conclusion that ?there's a clear preponderance? of evidence that they result in negative outcomes, most clearly ?for teens and young adults as well as the less-educated.?
Intentions don't equal Consequences ======================= We all, of course, have a shared goal of higher wages & greater prosperity for all Americans ? not just those on the top of the economic ladder. But well-meaning people in govt rarely achieve their intended goals when their primary aim is just to ?do something? about a given problem (in this case, the perceived stagnation of wages). Govt schemes often only serve to make problems worse than they need to be, as is the case when it comes to min wage laws.
Famed free-market economist Thomas Sowell wrote in his best-selling book, Basic Economics: A Common Sense Guide to the Economy, ?nothing is easier than to have good intentions but, without an understanding of how an economy works, good intentions can lead to disastrous consequences for a whole nation.?
This is exactly right.
So while the good-hearted advocates for an increased min wage truly believe that their policy will redound to the benefit of the average worker, their misunderstanding of how the economy works will inevitably lead to, in Sowell?s words, ?disastrous consequences for a whole nation? in the form of unemployment.