Jeffrey Dorfman offers some good insight into the minimum wage and who actually earns relatively low wages.
That leaves only about 1.1 percent of all workers over 25 and 0.8 percent of all Americans over 25 earning the minimum wage.
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In fact, according to a recent study, 63 percent of workers who earn less than $9.50 per hour (well over the minimum wage of $7.25) are the second or third earner in their family and 43 percent of these workers live in households that earn over $50,000 per year.
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Further, almost two-thirds of today’s minimum wage workers are in the service industry and nearly half work in food service. Because this is where the minimum wage workers are, that is what we will focus on for the rest of this column.
In summary, those on whom the minimum wage is binding are largely younger, are secondary or tertiary (or more) income earners in their respective households, and the majority work in the service industry. I would only add to Dorfman's argument here that many of these workers in the service industry, maybe even most, have their earnings supplemented by tips. (From personal experience also, my guess is that many of these workers and others receive income that is not reported.)
Dorfman then goes on to berate liberals, especially Elizabeth Warren for making the following claim.
Liberals have been trumpeting a study claiming that if the minimum wage had risen in tandem with worker productivity, the minimum wage would be nearly $22 per hour.
He challenges this argument using data from the Bureau of Labor Statistics (BLS) on labor productivity in the food service sector.
Taking a longer view, from 1987 to 2012 the same BLS data show that worker productivity in the food service sector rose by an average of 0.6 percent per year. In limited service restaurants, the gains were slightly lower, only averaging 0.5 percent per year. Meanwhile, unit labor costs have risen by an average of 3.6 percent. Over this period the minimum wage has risen from $3.35 to $7.25 per hour which is an average annual increase of 3.1 percent. In other words, at least in food service, the minimum wage has risen at a rate five or six times as fast as justified by the gains in worker productivity.
Is this relevant? Well, yes and no.
The theory of comparative advantage explains how the wages of two people or groups of people who trade with each other can increase even if the labor productivity of just one of them increases. Suppose I can mow LeBron James' yard in one hour, and to do so I have to give up earning $10 doing something else. (Let's just say that $10 per hour accurately reflects the productivity of my labor services for that one hour.). And let's suppose that LeBron James' could mow his own yard, but in doing so must forego an hour of practice that due to some incentive clause would increase his income by, say, $1,000. Then he and I have a mutually advantagous trade by me mowing his lawn for anything between $10 and $1,000.
Suppose now that LeBron's labor productivity subsequently increased so that his opportunity cost of mowing his lawn doubles to $2,000 per hour. Now the mutual advantages to our exchanging my labor services for payment increases to between $10 per hour and $2,000 per hour. Where we end up depends. If barriers to entry preclude others from entering the lawn mowing business, my wage would increase closer to the $2,000 threshold. If, however, plenty of people could enter this market, then it would remain closer to the $10 range.
My labor productivity did not change at all, but that doesn't mean that my wages would not necessarily increase. Whether my wage increases or not depends on the gains from trade by employing my labor services mowing LeBron's yard. As an actual example, the labor productivity of barbers and other cosmetologists has probably not increased much over the past twenty-five years either, but I'm guessing the real wages in this sector have increased over that period.
Now, this doesn't mean that Dorfman is incorrect, only that the labor productivity of a worker is not the only determinant of his or her wage. You have to also consider the opportunity costs of labor to determine the value of the labor that person provides.
So why haven't wages in the food service industry kept up with overall labor productivity? Because what determines exactly where the terms of trade end up within the wedge of a worker's productivity and the opportunity cost of the person or persons with whom they trade depends on the relative value to each party of the services or good each party provides the other. In the case made by Dorfman, since food service work requires relatively little skill, plenty of people are willing to enter that industry and compete away additional wage payments above and beyond their opportunity costs. This means that the terms of trade are closer to the actual productivity level of food service workers and not upwards to the opportunity costs of workers whose labor productivity increased.
For another comparison, consider the labor productivity of academics, which has not likely increased over the past twenty-five years either, even though their real wages have risen significantly. This is because it is much more difficult and costly to become an academic, and demand for the services of academics has increased significantly over this time. This means that both the marginal revenue product of an academic has increased over the past two decades (almost all of that due to gains in marginal revenue, not in productivity), and barriers to entry allow the wages of academics to rise without new entrants competing to push them downward.