Should the Minimum Wage Track Productivity?

Last week, Sen. Elizabeth Warren argued for a minimum wage increase even more extreme than what President Obama or Sen. Tom Harkin are asking for. She referenced a chart showing that the federal minimum wage would be $22 an hour – or roughly $45,000 a year – had it tracked economy-wide gains in productivity.

It’s a comparison that makes zero economic sense, and demonstrates how out of touch Sen. Warren is with business realities faced by employers who hire people and pay them the minimum wage.

Consider the chart below, which tracks gains in economic productivity over the last 20 years. This includes dramatic gains in technology-related industries like computers, software design, and telecommunications. (Think of the computer or cell phone you used 15 years ago versus the one you use today.)

Productivity Comparison Graph

But the chart also shows that the productivity gains in an industry that actually hires people at the minimum wage (e.g. the food service industry) look far different. On net, productivity has increased just seven percent in the industry over the last 20 years. It’s not surprising: You can only bus a table, cook a hamburger, or serve a meal so fast.

What happens when mandated wages outstrip the value that  employees provide? One option is to increase prices. But especially in a tight economy, higher prices can mean lower sales. Instead, employers have to provide the same product in a less costly manner—in other words, with less service. That might mean having a server bus your table instead of hiring bus boys, or even placing your order via a touchscreen computer rather than with a server.

The food industry will adjust to higher mandated labor costs if forced. But those adjustments means fewer jobs for the very people Sen. Warren wants to help.