Minimum wage calculations mislead

New York Gov. Andrew Cuomo (D) has given fast food workers a $15 minimum wage. Now people in eighteen different states are creating citizen “wage boards” to advocate wage increases of their own.

This call for an increase in the minimum wage stems from the belief that it hasn’t kept up with inflation and/or productivity. But how accurate are these claims?

{mosads}The minimum wage was first created in 1938, as part of the New Deal, by the Fair Labor Standards Act. The original minimum rate set was $0.25. Three-quarters of a century later that wage would equal $4.06 in 2013 dollars. Not only did the wage keep up with inflation, it increased by 79 per cent.

The president claimed in his 2014 State of the Union Address that the minimum wage is “worth about twenty percent less than it was when Ronald Reagan first stood here.” However, the cost of living is not similar across the country. Since 1981, for example, the cost of living in Houston has grown at almost half the rate of the country as a whole. And the value of the wage differs from region to region as well. So a one-size-fits all minimum wage policy would not be beneficial.

The real question, then, is why has the growth in the cost of living varied between different locations, and what route should be taken to curb it? Understanding the growth in the cost of living is a greater long-term solution to helping the working poor then a short-term artificial increase in nominal income.

Even analyzing the value of the minimum wage from its maximum peak in 1968 results in subjective analysis. Over the past five decades, the United States has seen an evolution in technology. The Consumer Price Index does not always factor in the social changes that result from this. This advancement has contributed to a strong increase in the standard of living. Those earning the minimum wage today have access to a greater standard of living than those of fifty years ago.

The second argument made for raising the minimum wage is that it hasn’t kept up with the growth in productivity. According to the Economic Policy Institute, if the minimum wage had kept up with productivity it would be $18.67 an hour. The problem with this metric is that a wage is not based on the productivity of the entire economy, but rather the productivity of the individual, the firm, and the industry itself. For a more accurate measure we must look at the productivity of the specific industries that employ minimum wage workers.

Each industry changes differently over time. This is because advancements in technology contribute more to some sectors than others. Capital improvement for a factory will result in greater or less productivity than capital improvement for a restaurant. They are not equal because they are not similar industries. For example, since 1987, the restaurant industry’s productivity grew at triple the rate of grocery store productivity.

A Pew Research Center report found that the largest employer of minimum wage workers is the restaurant industry. When adjusting for the growth in productivity and factoring for inflation, the real minimum wage for the restaurant industry—had it kept even with productivity—would be $6.88. So for the restaurant industry, the minimum wage has kept up with productivity growth.

The reduction in the minimum wage’s purchasing power by inflation is a problem. However, since the cost of labor is linked to productivity, it is more viable to concentrate on inflation. Understanding how to control the cost of living will have a greater long-term benefit than artificially raising labor costs.

Finally, it is an inaccurate measure to use the national productivity level for the minimum wage as they only contribute a fraction of the total labor force. A more accurate approach would be to analyze the productivity levels of the industries that employ minimum wage workers. Doing so finds that many have kept up with the growth in productivity. The best way of helping those on the minimum wage is to improve productivity and reduce the cost of business for their employer.

Sharp is a Young Voices advocate and a student at West Virginia University