Elizabeth Warren: Why isn’t the minimum wage at $22 per hour?

Massachusetts Democratic Senator Elizabeth Warren wants to know one thing: why isn’t the minimum wage at $22 per hour?

During a Senate Committee on Health, Education, Labor and Pensions hearing Monday, Warren cited a study that showed the minimum wage had stayed flat since 1960 and it has not risen with the rise of inflation and the increased cost of living.

She asked University of Massachusetts assistant professor Arindrajit Dube, whose research has included the short- and long-term effects of an increased minimum wage on unemployment, why the minimum wage is at $7.25 instead of $22.

“If we started in 1960, and we said that, as productivity goes up – that is, as workers are producing more – then the minimum wage is going to go up the same,” stated Warren. “And, if that were the case, the minimum wage today would be about $22 an hour. So, my question…is what happened to the other $14.75?”

Although the Massachusetts senator did not explicitly call for a minimum wage of $22 – she supports President Barack Obama’s initiative to hike the minimum wage to $9 – the suggestion that it should be at such a high figure has puzzled many of those who have at least some understanding of economics or even mathematics.

The research discussed in the hearing looked at how companies invested in technology to increase the amount of goods and services in a set period of time, which eliminated workers. When companies apply technology and reduce the workforce, this allows the former employees to enter a different sector of the economy and fill the needed positions.

The answer that Warren received noted that minimum wage could actually be $33.

“Had the minimum wage grown at the same pace as incomes going to the top one percent of the tax-earned taxpayers [then] the minimum wage would have stood at $33 an hour before the recession in 2007,” explained Dube.

Warren went onto explain that during her senate campaign she would eat quite a number of McDonald’s combos. One of the combos was $7.19 and she explained that according to the recent data that if the minimum wage was increased to $10.10 over a three-year period then that McDonald’s combo would be $7.23, a four-cent jump.

“Are you telling me that that is unsustainable?” asked Warren.

David Rutgliano, a full-service restaurant business owner, intervened in the discussion and noted that “not all restaurants are created equal.” McDonald’s, for instance, operates quite differently than tens of thousands of businesses across the United States. He also added that his business offers a lot of jobs that pay above the minimum wage, maintains a retirement plan and provides advancement opportunities – 97 percent of workers in the U.S. earn more than the minimum wage.

In the end, his company can’t deal with a rise of four cents.

When asked if a small increase would have any inflationary effects on the overall economy, Dube responded that it “would not have a noticeable effect on the overall price level because the math doesn’t add up: the number of people that are getting the raises is not enough for it to show up in a wage-price spiral. So the effects of overall price level? Very small.”

Since the video made the rounds, there have been quite a number of points that have been addressed. Even Christina Romer, former head of President Obama’s Council of Economic Advisers, opined in the New York Times:

“Raising the minimum wage, as President Obama proposed in his State of the Union address, tends to be more popular with the general public than with economists…” wrote Romer. “Most arguments for instituting or raising a minimum wage are based on fairness and redistribution. Even if workers are getting a competitive wage, many of us are deeply disturbed that some hard-working families still have very little. Though a desire to help the poor is largely a moral issue, economics can help us think about how successful a higher minimum wage would be at reducing poverty.”

The other $14.75

The senator’s point may not make much sense considering that the $14.75 never materialized in the first place. When consumers pay for a good and/or service, they are doling out cash for wages, benefits, overhead costs, revenues and profits. Customers are not paying for a wage that never came to fruition. Therefore, it may be labeled as a superfluous argument.

Why stop at $22?

Indeed, this question is usually asked at those who are in support of the minimum wage and increasing it periodically. If the minimum wage is beneficial then why not increase it to $50, $100 or $500? It would have immediate and long-term negative effects on not only those who are supposedly the beneficiaries of a minimum wage, but every company in the country.

Unintended consequences

There are quite a bit of unintended consequences from these good intentions, like raising the minimum wage. It is argued that minimum wage laws discriminate non-union and unskilled workers, it forces businesses to reduce staffing levels or cut hours and then all of this is a recipe of getting on food stamps, applying for welfare and becoming a dependent on the government.

No evidence

Empirical studies cannot prove or disprove that minimum wage laws increase or reduce employment opportunities. Instead, prices are a better indicator because when a business charges more for a product then consumers will go somewhere else.

Rise of the machines

When a labor force becomes too expensive to maintain then companies invest in technology to replace those workers. If the minimum wage is raised then there will be analyses and reviews at how that job could be replaced by a machine or even eliminated entirely.

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