Question

One of the key aspects of labor economics is the relationship that exists between worker productivity and wages. This short article from Business Insider suggests that had the national minimum wage kept up with American worker productivity in general, it would be nearly $20.00 per hour in 2017. What I would like you to do for this assignment is to explain how this is a flawed way of thinking about the topic of the minimum wage. Specifically, why is it a mistake to compare the wages of specific workers to the productivity of the economy as a whole.

https://www.businessinsider.com/how-much-higher-the-federal-minimum-wage-should-be-2017-12

Answer 1

Solution

It is given that the article in the above mentioned article was comparing the growth rates of minimum wages with the average worker productivity.

As mentioned above it is not correct to measure minimum wage against wages with the productivity of the economy as a whole.

Firstly an economy consists of different sectors and jobs.Each sector and job see a different extent of rise in labor productivity.In other words some jobs have seen a greater rise in productivity in comparison to other jobs which were almost stagnant in terms of their productivity over the years.Employers / Firms tend to increase the wages comparatively more to the best performers more than those to the medium and low performers.The point to note here is that they are willing to pay more if they can see / believe that they are / will create value.Value can be in terms of higher productivity , higher revenue,higher profitability,etc.,So higher the productivity, higher wages that particular job / sector would attract / demand.So increase in wages in like an encouragement for the workforce to move to more productive / higher value / complicated jobs which create higher value.

So, I believe that only those jobs which see increase in productivity should be rewarded accordingly.

Here, the article compare the minimum wages with the Average american productivity which is not meaningful.Average productivity (considering productivity of all sectors / jobs) will increase even if there are some which have not seen any rise in productivity like those jobs mentioned below.So,the statement that minimum wages should see the same rise as that of average productivity is unfair and irrational.Then there will not be any incentive for people engaged in the higher value jobs thus will not motivate people to move up the value chain.Rise in minimum wages means implementing the same wage (upto some extent / level) to all the sectors / jobs which will not fit in.

The idea of Minimum wages is to ensure income security.The growth should be such that the it should take care of the rise of inflation and rise in compulsory needs over the years.So ,definitely there should be a rise in the minimum wages but it should not be to such extent / equal to the rise in average productivity.

Example: Consider there are three different types of jobs - A cycle mechanic, A computer programmer and a waiter in a restaurant.The cycle mechanic and the waiter have not seen any improvement in their efficiencies over years but the computer programmers have seen a tremendous rise in their productivity ( ex: increased complexity in programming leading to  automation).

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