In an interview promoting his new book on America’s economic future this week, NYU Stern Business School professor Scott Galloway presented the core trade-off of raising minimum wages: mandated wages climb higher, but may cause businesses to close or employees to lose their jobs as a result. He also cited some well-known but misleading talking points about tracking minimum wages with productivity.
Here’s the full quote:
“Something weird happened in the early 70s when productivity and wages largely tracked each other, and then in the 70s wages went flat and productivity upped…I don’t think there’s a free lunch here. The question is if minimum wage kept track with productivity it would be about $23 a share, I don’t doubt…that there are small businesses or more labor intensive businesses that could go out of business. The question is, would it be worth it?”
Setting the record straight, what would the minimum wage look like if it “tracked with productivity”?
Overall productivity increases generally reflect a wide variety of industries, including technology-heavy industries where labor productivity has skyrocketed. But when calculating productivity gains for industries that employ most minimum wage earners, such as the Accommodation and Food Services sector, the result is a productivity increase of only about 5% since 2009, when the current $7.25 minimum wage was implemented. Indexing the minimum wage according to productivity of typical minimum wage earners would lead to roughly a $7.60 hourly minimum wage today.
Similarly, even amid historically high inflation, a $15-$20 minimum wage calculation does not hold up. Indexing the federal minimum wage, last raised in 2009 to $7.25, according to inflation would lead to a roughly $10 minimum wage today, based on the latest U.S. Bureau of Labor Statistics data for the consumer price index.
As such, a $15 (or higher) minimum wage as Galloway and many others point to has no historical or theoretical basis. This makes the tradeoff between a higher hourly wage for some and losses for others even more concerning.
Minimum wage hikes cause a portion of affected employees to either lose their jobs or get scaled back hours on the job, for businesses that are able weather the increases. Galloway rightly points out that other businesses, unable to adjust to higher wage bills among other rising costs, are forced to close altogether, taking jobs with them.
- A review of economic research on the minimum wage finds a majority of studies conclude minimum wage hikes cause significant job loss. New research this year debunked an old study used as the main argument for raising wages, and found by changing the analysis to better reflect labor market trends, a 10% minimum wage hike could immediately cause a 2.4% decrease in affected employment. In the longer term, they found these hikes could cause more damage, nearly tripling the losses in just four years.
- In 2021, when a $15 minimum wage was debated in Congress (and ultimately failed in the Senate), the nonpartisan Congressional Budget Office estimated the hike could cost up to 2.7 million Americans their jobs.
- A Harvard Business School study on the effect of San Francisco’s annual minimum wage increases found every 1% increase in the minimum wage could cause a 14% increased likelihood in closure of restaurants, which employ the majority of minimum wage earners. Coverage of restaurant survival in high-wage markets such as San Francisco and Emeryville, CA reveal the “death march” of restaurant closures due to unrelenting wage hikes.
One Seattle restaurant employee put it this way when the city raised its minimum wage to $16.39 per hour in 2020:
“Instead of receiving a bigger paycheck, I’m left without any pay at all due to the policy change. That’s because the restaurant where I’ve worked for six years is closing as a consequence of the city’s harmful minimum-wage experiment.”
Those seeking to raise minimum wages should be wary of the real tradeoffs. Many employers raise wages for their employees on their own, without government mandates. In fact, recent research shows a large majority of employees starting at the minimum wage get a raise within 1-12 months.
So if achieving the “Fight for $15” or even higher wage floors by the government’s hand means closing businesses and taking millions of jobs from Americans, is that tradeoff worth it?