Can the minimum wage be used as a tool to increase the level of productivity in the economy?

Lindsey Piegza, chief economist at Stifel, was on the Bloomberg Advantage discussing the economic ramifications of a Trump or Clinton presidency. In it she commented on Clinton’s proposal to increase the minimum wage, noting, “the Clinton campaign contends this will not result in job losses for the US economy, but as we increase the cost burden for businesses, they will be forced to cut jobs across the board.”

While there is disagreement on what kind of net impact a slight increase in the minimum wage would have on the number of jobs, Piegza is right to note that it would certainly cause some churn on the lower end of the labor market.

However, she goes on to note that the economic recovery has been so stagnant because businesses haven’t been investing in new capital. Piegza says, “We need to provide incentives for business to develop, to hire… Seventeen consecutive months of negative business investment leads us at a very lackluster growth pace and just moderate job creation.”

Minimum wage is as blunt as a cricket bat

But herein lies a contradiction. Or at least, I’m going to provide a thought experiment as to why this presents a contradiction, and why an increase in the minimum wage could ultimately make the economy more efficient. If one can easily throw around the generality that “increasing the minimum wage kills jobs,” somebody has to make the same broad argument the other way.^

There is a tension between wages and productivity growth. Businesses become more efficient when they invest in new capital, and new capital investment generally increases both wages and the size of the labor force.

Since the Great Recession, though, the pool of available labor has remained deep, so businesses don’t have to invest in new capital. There has been enough cheap labor available to do what expensive machines could do. This could be one reason productivity growth has remained low in recent years.

Instead, if labor became more expensive – and it doesn’t matter it it’s organic or policy-driven – you would certainly see more touchscreen ordering in fast food restaurants, robot hotel maids, and investment in driverless cars.

But in the end, that’s fine. Paul Krugman’s idea that “productivity isn’t everything, but in the long it’s almost everything” is hinged on the premise that workers must become increasingly efficient in order to increase the quality of life across an economy.

This efficiency comes from business capital and R&D investment. Robot hotel maids would cost human hotel maids their jobs, but that doesn’t necessarily decrease the number of jobs in the economy. Instead this type of technology reallocates labor resources to more valuable uses. The churn that any technological innovation brings to the labor market is essential to this process.

The standard argument for a higher minimum wage is so workers can meet basic levels of food, clothing, and shelter for their services. Perhaps we should be looking at it differently. The minimum wage could be used as a tool to make the economy more efficient and shift around capital to its highest and best use (this is where policy kicks in, to help those most impacted by these effects).

But really, what’s the downside risk?

If it works, then capital and labor will ultimately become more productive, and we’re better off for it.

If it doesn’t work (as Matt Yglesias has argued), then we rein in that growing gap between income to capital and income to labor.


^In reality, I’m agnostic about an increase in the minimum wage.