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The Daily Signal
How Liberals
Manipulate Data About the Minimum Wage
James Sherk
June 20, 2015
Does the U.S.-Canadian speed gap bother you? Americans can drive no
faster than 65 on Massachusetts highways. Meanwhile Canadian motorists
zip along at speeds of up to 100. Congress should close this
inequitable speed gap!
This argument sounds ridiculous, because it is. Canadians measure speed
in kilometers per hour, not miles per hour. Moreover, many states have
higher speed limits than Massachusetts. Any comparison that doesn’t
account for such differences means little.
Yet many liberals do exactly that when arguing the minimum wage has not
kept pace with productivity growth. They use one metric to adjust
productivity for inflation and another to adjust the minimum wage,
while ignoring workers who have experienced faster pay growth. This
produces highly misleading comparisons.
Consider the chart below (all charts available at the link below),
produced by the left-wing Economic Policy Institute (EPI). The EPI
argues that the minimum wage has lost purchasing power since 1968.
Their figure juxtaposes the inflation-adjusted federal minimum wage
with projected changes had it increased at the same rate as (1) average
hourly earnings of production and non-supervisory (i.e. hourly)
workers, or (2) economy-wide productivity. EPI argues this demonstrates
the need for Congress to raise the minimum wage.
This chart is highly misleading, but for reasons invisible to most
readers. EPI used different metrics to measure and adjust their pay and
benefit figures for inflation. This creates completely spurious
differences—just like comparing speeds calculated in kilometers and
miles per hour. The EPI used the Consumer Price Index Research Series
(CPI) to adjust the minimum wage and average hourly earnings for
inflation. It used the Implicit Price Deflator (IPD) to adjust
productivity for inflation. For methodological reasons (that I have
written about elsewhere), the CPI consistently reports more inflation
than the IPD.
The figure below shows this choice makes a large difference. The CPI
reports the minimum wage stood at $9.27 an hour in 1968 (in 2013
dollars). The implicit price deflator reports the minimum wage stood at
$7.39 an hour (2013 is the most recent full set of data available for
doing this adjustment). Using one deflator shows a substantial drop in
the purchasing power of the federal minimum wage. Another deflator
shows almost no change.
The CPI and IPD measure inflation differently. The Congressional Budget
Office itself uses a third measure, the Personal Consumption
Expenditures (PCE) index, for its minimum-wage research. The PCE
produces figures roughly in between the other two. As it happened, EPI
chose the metric that showed the minimum wage dropping in real value
the most.
However, EPI used an entirely different measure of inflation, the IPD,
to adjust productivity growth for inflation. Since that measure reports
less inflation than the CPI, this choice causes inflation-adjusted
productivity to grow faster than it would using the other measure. A
substantial part of the difference in pay and productivity growth EPI
depicts comes from using different metrics to adjust them for inflation.
Nowhere in its figure does the EPI explain they did this. Their “note”
only mentions the CPI. But their analytical choices make a large
difference for their overall story. Using the same measure of inflation
for both productivity and pay would show the real value of the minimum
wage has barely changed over the past half-century.
Let’s Compare Apples to Oranges
EPI compounds this problem by juxtaposing figures for completely
different groups of workers. Less than 3 percent of workers earn the
federal minimum wage. The “average hourly earnings” measure, by
contrast, covers about three-fifths of the workforce. The productivity
figures cover the entire economy. That productivity and wages should
grow at different rates in different parts of the labor force should
surprise no one. Drivers can go faster in Texas than in Massachusetts,
too.
Worse, the EPI’s “average wages” figure covers a shifting group of
workers. In the 1980s, the Bureau of Labor Statistics expanded that
survey to include workers at smaller (and lower-paying) companies. So
it now includes more low-wage workers than in the 1970s. This
mechanically depressed average wage growth.
Fortunately, the Bureau of Labor Statistics has another estimate of
employee hourly compensation for the private sector. It comes from the
same report containing the productivity estimates. This data tracks the
same group of private-sector employees (virtually all) over time.
Better yet, it includes both wages and non-cash benefits, not just cash
benefits alone. Curiously, EPI chose not to use it.
These choices make a large difference in their overall story. EPI’s
figures showed pay stagnating for the average worker (not just
minimum-wage employees) while productivity doubled. That seems unfair.
The real story is quite different. The figure below shows the growth in
average hourly compensation and productivity for the same group of
workers (the entire non-farm business sector) and using the same
measure of inflation (the IPD).
These comparably adjusted statistics show that productivity and pay
have moved nearly in lockstep over the past generation. Analyzing the
data this way makes it hard to claim workers do not enjoy the fair
fruits of their labor.
EPI chose not to analyze the data this way. But serious analysis
requires it. Using different measures of inflation and comparing the
productivity and pay of different groups of workers shows little. It
makes as much sense as objecting to a 65-to-100 Massachusetts-Canadian
speed gap.
They’re Right About One Thing
Despite these inaccuracies, one of EPI’s points stands: Over the past
generation the minimum wage has grown more slowly than economy-wide
productivity. The real value of the minimum wage has remained largely
flat while productivity has doubled. Of course, economists would not
expect productivity of a small minority of the workforce to necessarily
track economy-wide productivity.
So how has pay tracked productivity in minimum-wage jobs? The Bureau of
Labor Statistics breaks down productivity growth by industry. This next
figure shows average hourly compensation and productivity in the
industrial subsector employing the greatest proportion of minimum-wage
workers—limited-service eating places, aka “fast food.”
Over this period, productivity has grown much more slowly in fast-food
restaurants than in the economy as a whole. It’s up just 13 percent.
Hourly compensation has closely tracked this modest productivity
growth—it’s up 9 percent (both figures are inflation-adjusted using the
IPD for limited-service eating places).
The minimum wage has not risen as fast as economy-wide productivity.
Neither has productivity in minimum-wage jobs. Of course, most workers
do not stay in low-productivity minimum-wage jobs very long. For the
most part, minimum-wage jobs are entry-level positions. More than half
of Americans start their careers making within a dollar of the minimum
wage. Few stay there long. As they develop workplace skills, they
become more productive and move into better jobs.
In fact, two-thirds of minimum-wage workers earn a raise within a year.
New entry-level workers then replace them, until they move on. Jobs
such as fast-food cashiers have remained low-productivity positions
even as the workers filling them move on and up their career ladders.
Bad Data Leads to Bad Conclusions
EPI compared statistical apples and potatoes. Their bad data has led
policymakers to bad conclusions. On the basis of such analysis, members
of Congress have introduced legislation that would raise the federal
minimum wage to $12 an hour by 2020. The bill’s sponsors argue the
minimum wage has lost purchasing power; they simply intend to return it
to its previous level.
In fact, they have proposed a historically unprecedented increase in
the minimum wage that would force millions of less skilled workers out
of their jobs. They could just as justifiably argue that Canada proves
the safety of driving 100 on the highway.
Read the article with charts and links at The Daily Signal
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