Saturday, August 3, 2013

Elizabeth Warren's Flawed Understanding of the Source of Worker Productivity

Doug Altner at Voices for Reason responded to Senator Elizabeth Warren who recently asserted that if the Minimum Wage had kept pace with the growth of worker productivity over the past half century, the legal minimum would be $22.00 per hour. Warren asks:

So my question is … with a minimum wage of $7.25 an hour, what happened to the other $14.75? It sure didn’t go to the worker.
The implication in Warren's statement is based on a completely eroneous premise.  Altner writes:

By asking why low-wage workers are not making more money, Senator Warren is insinuating that these dramatic productivity gains were largely caused by the workers themselves. But what about the small minority of innovators who invented new technologies and processes that vastly improved worker productivity?
After listing a handfull of these technologies and processes given to workers, Altner concludes:

Where did the other productivity gains go—Senator Warren asks? Hopefully a lot of it went to the forward-thinking innovators and entrepreneurs whose advancements boosted worker productivity.
I would add that there are two ways in which workers gain from higher productivity, of which higher wages is only one.

Keep in mind that what counts is real wages; the purchasing power of the dollars one earns. The benefits of productivity are not just reflected in rising nominal wages. The whole point of companies increasing the productivity of their labor force is to better compete in the market by lowering the cost of production. This facilitates higher profits by enabling the company to lower prices in order to increase sales and expand markets. (Inflation camouflages this process, but doesn't alter it.) Everyone, including workers, benefit from this even without a wage increase, through lower prices for goods and services. In other words, your money goes farther.

This doesn't mean workers have nothing whatsoever to contribute to higher productivity. They do, which is why, over time, higher nominal wages do occur. New productivity-enhancing tools and processes require the initiative of workers. New knowledge and skills are only as good as the next person making the effort to acquire it. Workers must work to acquire training and continuing education to keep up with the latest advances given them by innovators, and that takes effort and initiative. And, ambitious workers regularly figure out ways to make more efficient use of their time, contributing in myriad small ways to productivity. (Such workers often don't benefit financially because of uniform wage contracts negotiated by unions, under which all workers in a given job make the same pay regardless of personal productiveness.) So, the worker's own efforts do factor into his higher wages, and in that respect he does earn his higher wages even though he wasn't the originator of the productivity advances.

Of course, productivity increases vary greatly from industry to industry and from occupation to occupation, and no one-size-fits-all formula can capture that (a fact minimum wage warriors evade). The construction trades, for example, has wages several times the legal minimum (at least in NJ), thanks to tremendous productivity gains in that industry. Other industries--like, say, the food service industry--may have smaller productivity increases and so it employs more minimum wage workers (though even these workers gain from productivity increases across the economy, as noted above).

Of course, this discussion hinges on the assumption that America has a free market, which it does not. Yaron Brook at Laissez-Faire: The Uncompromised Case for Capitalism strongly addresses this fact here.

But, fundamentally, a rising worker standard of living is a gift from innovators and entrepreneurial businesses that gives workers the ability to work ever more productively.

Related Reading:

The Stock Market Record, Income Stagnation, and the Regulatory State

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