The New York Times ran a long editorial over the weekend arguing that higher wages can cause economic growth instead of its always having to be the other way around. The basic argument is succinct if conclusory: “Consumption drives the American economy, and workers who are paid more can spend more.”
The contrary view that wage growth will in the long run follow productivity growth is, the Times claims, mistaken: Since 1970, wages have increased much less than productivity. In saying that, it links to another Times story that, oddly, says nothing about productivity and includes no references to wage trends prior to 2000. That story does, however, make the related claim that workers’ share of national income dropped in the U.S. between 2000 and 2015. But these claims are misleading. Wages and productivity have not decoupled in recent decades, and the labor share of income has not been unusually low in recent years.
The editors of the Times further stack the deck for government-directed wage increases by misstating the argument against them. For decades, they say, the conventional wisdom has held that higher wage minima “would raise unemployment because there was only so much money in the wage pool, and if some people got more, others would get none.” This is not true. The reason a higher minimum wage is thought to cause higher unemployment is a straightforward matter of supply and demand: Raise the price of labor and its purchasers will buy less of it. It is certainly possible that this effect will be small, or that it will be considered worth it for the higher wages that some workers will receive; but the argument does not require there to be a fixed amount of money available for wages.
The Times itself used to editorialize against raising the minimum wage because it would cost some people their jobs — and when it did, it said nothing about there being “only so much money in the wage pool.” In 2019, the Congressional Budget Office found that raising the minimum wage to $15 an hour would increase workers’ earnings by a net $44 billion while still causing 1.3 million people who otherwise would have been employed to go jobless. The increase in unemployment just isn’t based on an assumption of flat payrolls.
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