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Maybe I’m wrong but what is the causal link between productivity and wages, especially minimum wage? I always thought that cost of living dictated wages and th

Maybe I’m wrong but what is the causal link between productivity and wages, especially minimum wage? I always thought that cost of living dictated wages and the so-called wage stagnation was due to relative lack of inflation for basic living expenses over the past 20 years. Also the past 20 years have seen a relative large influx of immigration compared to the previous 20 years. Increasing the competition between workers and would in turn lowering wages, at least according to supply/demand forces. This effect would be especially pronounced for minimum wage workers but with the expansion of the H1B program it will soon be observed for high income tech workers as well.

vsareto 6y ago
I don't think there is. This is mostly political in that businesses ought to be keeping up wages because that's the right thing to do. If the supply of labor is such that they always have access to lower-paid workers though, there's no real obligation to increase pay. This is when minimum wage should come in, and this would be an argument for increasing minimum wage to that end, but businesses themselves can just ignore these kinds of arguments. Certain benevolent PR acts run contrary to this where they do increase wages because it's the right thing to do.
- bleepblorp 6y ago
  There's a little more to preventing real wage erosion than it simply being the right thing to do from a humanitarian perspective. The interests of individual firms are not aligned with the interests of the broader economy. It's in the interest of every firm to pay its workers as little as possible, but it's in the interest of the broader economy that most people can afford to buy goods and services. Every employee's wage is ultimately some other firm's income; keeping the game going requires that enough people are paid enough money to be able to spend it on things other than absolute essentials. Even minimum wage workers have to pay for the basic necessities of life at prices that are largely set on the basis of what the median worker can afford. If minimum wages erode, minimum wage workers can't afford to live. This is a both a humanitarian concern and an economic problem because starving people don't make good employees, and people who don't have money can't buy goods and services from other firms. Every person who is pushed out of the economy in this way is an economic loss as they are no longer contributing to economic demand or producing goods/services with their own hands. In a society with a social safety net, under-paid workers are also a cost to government as they will not pay taxes and will be due social assistance payments/transfers to help cover their costs for food and shelter. Further, underpaid workers may also pose a crime problem (in part because starving people will steal food), which imposes direct costs on crime victims and costs to government for police, prosecution, and corrections. Underpaying workers benefits firms that do it, but the practice harms the overall economy and imposes externalities on others. Preventing this is why minimum wage laws exist and should keep up with the cost of living.
  - bhupy 6y ago
    > In a society with a social safety net, under-paid workers are also a cost to government as they will not pay taxes and will be due social assistance payments/transfers to help cover their costs for food and shelter. Social safety nets are typically paid for via progressive taxation, the burden for which falls on the rich. In the alternative, the employer covers that cost and passes it on to buyers in the form of higher prices. Higher prices affect rich and poor equally. There's arguably social value in having the government pay for that safety net: and it's lower prices for lower and middle class consumers.
- CyberRabbi 6y ago
  I don’t see how increasing wages with productivity is the “right thing to do.” Workers have never been paid for the value of what they produced, they have always been paid for the value of their skills. Too far of a deviation from this basic model will likely have disastrous unintended effects. If they are being paid enough to live I don’t see anything malicious. If people want a higher paying job, they should learn a more coveted skill.
jfengel 6y ago
There isn't a causal link. That's why we have minimum wage laws. The idea is that rather than paying people what we can get away with, we pay them what they are worth to us. If productivity improves, but wages are indexed only to inflation, then the rich get richer and the poor at best stay the same. They produce more but don't see their lives get better. In a country that has produced so much additional wealth, it would be nice if the people who produce it became themselves better off, rather than have the gains concentrate in a smaller and smaller minority. The minimum wage doesn't just stagnate. It's not inflation-indexed, so inflation eats into it: it hasn't increased since 2009, and even though we're often below the Fed's target rate, inflation has still reduced the value of that by 20%. That suggests it's time to raise it, and the $24/hour figure helps put the quantity into context. It makes a $15/hour wage seem very doable, since it's less than half of the productivity increase.
- bhupy 6y ago
  Well, while it's important that the minimum wage is $24/hr (or $15/hr), none of these results tell us whether the better way to do that is to mandate that employers pay that full wage, or for the government to fill in the blanks with a UBI/NIT funded by progressive taxation.
  - deleted 6y ago
    [deleted]
  - monocasa 6y ago
    If productivity is going up, why would we subsidizing their employers by paying part of their wage?
    - jfengel 6y ago
      Progressive taxation would mean that the subsidy comes from the people making the most money. The goal of a UBI is to decouple basic living from employment, giving employees more leverage to negotiate pay.

vsareto 6y ago

I don't think there is. This is mostly political in that businesses ought to be keeping up wages because that's the right thing to do. If the supply of labor is such that they always have access to lower-paid workers though, there's no real obligation to increase pay. This is when minimum wage should come in, and this would be an argument for increasing minimum wage to that end, but businesses themselves can just ignore these kinds of arguments. Certain benevolent PR acts run contrary to this where they do increase wages because it's the right thing to do.

bleepblorp 6y ago
There's a little more to preventing real wage erosion than it simply being the right thing to do from a humanitarian perspective. The interests of individual firms are not aligned with the interests of the broader economy. It's in the interest of every firm to pay its workers as little as possible, but it's in the interest of the broader economy that most people can afford to buy goods and services. Every employee's wage is ultimately some other firm's income; keeping the game going requires that enough people are paid enough money to be able to spend it on things other than absolute essentials. Even minimum wage workers have to pay for the basic necessities of life at prices that are largely set on the basis of what the median worker can afford. If minimum wages erode, minimum wage workers can't afford to live. This is a both a humanitarian concern and an economic problem because starving people don't make good employees, and people who don't have money can't buy goods and services from other firms. Every person who is pushed out of the economy in this way is an economic loss as they are no longer contributing to economic demand or producing goods/services with their own hands. In a society with a social safety net, under-paid workers are also a cost to government as they will not pay taxes and will be due social assistance payments/transfers to help cover their costs for food and shelter. Further, underpaid workers may also pose a crime problem (in part because starving people will steal food), which imposes direct costs on crime victims and costs to government for police, prosecution, and corrections. Underpaying workers benefits firms that do it, but the practice harms the overall economy and imposes externalities on others. Preventing this is why minimum wage laws exist and should keep up with the cost of living.
- bhupy 6y ago
  > In a society with a social safety net, under-paid workers are also a cost to government as they will not pay taxes and will be due social assistance payments/transfers to help cover their costs for food and shelter. Social safety nets are typically paid for via progressive taxation, the burden for which falls on the rich. In the alternative, the employer covers that cost and passes it on to buyers in the form of higher prices. Higher prices affect rich and poor equally. There's arguably social value in having the government pay for that safety net: and it's lower prices for lower and middle class consumers.
CyberRabbi 6y ago
I don’t see how increasing wages with productivity is the “right thing to do.” Workers have never been paid for the value of what they produced, they have always been paid for the value of their skills. Too far of a deviation from this basic model will likely have disastrous unintended effects. If they are being paid enough to live I don’t see anything malicious. If people want a higher paying job, they should learn a more coveted skill.

jfengel 6y ago

There isn't a causal link. That's why we have minimum wage laws. The idea is that rather than paying people what we can get away with, we pay them what they are worth to us. If productivity improves, but wages are indexed only to inflation, then the rich get richer and the poor at best stay the same. They produce more but don't see their lives get better. In a country that has produced so much additional wealth, it would be nice if the people who produce it became themselves better off, rather than have the gains concentrate in a smaller and smaller minority. The minimum wage doesn't just stagnate. It's not inflation-indexed, so inflation eats into it: it hasn't increased since 2009, and even though we're often below the Fed's target rate, inflation has still reduced the value of that by 20%. That suggests it's time to raise it, and the $24/hour figure helps put the quantity into context. It makes a $15/hour wage seem very doable, since it's less than half of the productivity increase.

bhupy 6y ago
Well, while it's important that the minimum wage is $24/hr (or $15/hr), none of these results tell us whether the better way to do that is to mandate that employers pay that full wage, or for the government to fill in the blanks with a UBI/NIT funded by progressive taxation.
- deleted 6y ago
  [deleted]
- monocasa 6y ago
  If productivity is going up, why would we subsidizing their employers by paying part of their wage?
  - jfengel 6y ago
    Progressive taxation would mean that the subsidy comes from the people making the most money. The goal of a UBI is to decouple basic living from employment, giving employees more leverage to negotiate pay.