I have not read a single word from the EPI paper claiming that if the minimum wage had followed “productivity growth” it would now be $22/hour, so everything I am writing in this blog post is predicated on Daniel Kuehn’s interpretation being sound. Having said that, consider the following fable:

In 1968, a nation of identical workers collectively puts in 1 billion labor-hours, to produce 1 billion units of finished consumer goods, at a price of $1 per unit. (There are different types of goods, but they all have the same unit price.) Everyone gets paid $1/hour. This is the only production, so nominal GDP is $1 billion. The government also happens to set a minimum wage law of $1/hour, but this has no effect because that’s what the competitive wage was anyway. (Assume that not only the average product, but also the marginal product, is $1/hour.)

In 1971, there is a major policy change that unleashes the printing press. The government’s cronies start getting humongous payments of new $100 bills, which they do partially spend on consumer goods, but which mostly go into financial assets, real estate, and precious metals. After decades of this new pattern, we find…

In 2013, the same workers collectively put in 1 billion labor-hours, to produce 1 billion units of finished consumer goods, at a price of $2 per unit. Everyone gets paid $2/hour. This contributes $2 billion in nominal GDP. However, the fat cats provide “financial services” of $8 billion in nominal GDP, for a total nominal GDP of $10 billion. Since CPI has doubled, in 1968 dollars real GDP is $5 billion, a five-fold increase.

EPI publishes a paper saying that if the minimum wage kept pace with “inflation,” it would be $2 in 2013. If it kept pace with real productivity growth, it would be $10/hour. A senator asks a guy employing the average worker–and who pays him his marginal product–where the “extra $8” went. Progressives around the world explode with happiness at the economic wisdom thus displayed. Everyone who is in favor of jacking up the minimum wage cites this brilliant exchange, but of course the people responsible have plausible deniability, since they technically never said anything about raising the minimum wage. They just accused the guy of skimming $8 per hour out of his workers’ checks, that’s all.