Elizabeth Warren's Fuzzy Math

Study: Productivity gains less impressive than Democratic senator suggests

Elizabeth Warren / AP
March 25, 2013

Sen. Elizabeth Warren’s (D., Mass.) argument that the minimum wage would be triple what it is today if it were linked with productivity relies on oversimplified and faulty data, a new study says.

Warren’s rhetoric "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," said the report by the Employment Policies Institute (EPI), a free market think tank specializing in wage issues.

Warren raised the prospect of a $45,000 annual minimum wage at a March 14 Senate Health, Education, Labor, & Pensions Committee hearing. Warren embraced tying wages to productivity during a question and answer session with radical activist-turned-University of Massachusetts Amherst economist Arin Dube.

The federal minimum wage is currently $7.25 and is raised through congressional action. President Obama called for an increase in the wage during his February State of the Union Address.

"As productivity goes up, that is, as workers are producing more, the minimum wage is going to be the same, and if that were the case the minimum wage today would be about $22 an hour," Warren said during the Q&A. "What happened to the other $14.75? It sure didn’t go to the worker."

Dube testified that tying minimum wage to other sectors of the economy, namely the income growth of high earners, would have produced a $33 minimum wage before the 2007 recession.

However, EPI research director Mike Saltsman says Warren and Dube oversimplify the nation’s growth in productivity.

"There’s a considerable difference between what people are doing and what they’re producing—there’s only so fast you can bus a table or cook a burger," he said.

"The productivity gains don’t match the overall economy. It’s completely inaccurate to link the minimum wage to overall productivity."

Most minimum wage workers are employed in the service sector, rather than the computer and cell phone companies that experts say drove productivity gains in the latter half of the 20th century.

Productivity in the food service industry, a hotbed for entry-level positions, grew by only 7 percent over the last 20 years, as opposed to nearly 60 percent gains in all businesses.

"These national gains don’t translate in the service industry and the data shows that," Saltsman said.

Warren did not return calls for comment.

Warren and Dube called for an incremental approach to raising wages rather than a retroactive one-time increase to $22.

President Obama called for a 24 percent wage increase in February. Sen. Tom Harkin (D., Iowa) took that one step further, proposing a $10.10 per hour wage, amounting to a 40 percent increase.

Saltsman said employers are already dealing with thousands of dollars in labor costs to adjust to Obamacare’s insurance mandates. Many shops and restaurant chains have slowed hiring and reduced employees to part-time status rather than pay a $2,000 fine per full time employee who does not receive health care, according to Saltsman.

"For a $9 minimum wage it wouldn’t be unreasonable for 400 to 450,000 entry level jobs nationwide to be lost … we’ve already seen with [Obamacare], employers are moving to a part-time workforce," he said. "Levels like [Warren’s] would have a lot of businesses close, while others would automate their processes entirely with almost no human service."

Harkin did not respond to requests for comment.

The National Federation of Independent Business (NFIB), a trade group representing thousands of small and local companies, echoed Saltsman’s concerns about wage hikes.

"Small businesses are the least able to absorb such a dramatic increase in their labor costs … because a large amount of their earnings go directly to pay for operating expenses, such as equipment, supplies, lease or mortgage, credit lines, inventory and employee wages and benefits," NFIB said in a release.

"These proposals do not incentivize growth or hiring—they make it nearly impossible."