In 1914, Henry Ford paid his factory line employees $97.30 per day, in 2005 dollars. Ford actually offered a $5 daily wage in an attempt to cut enormous costs associated with high employee turnover, absenteeism, recruitment, and retraining for the tedious assembly-line work in his auto plant.
The minimum wage is currently an issue in a number of states, North Carolina included, and at the national level. Interest in a new federal minimum has little to do with Ford’s productivity argument, however.
Overall labor productivity in the United States has risen rapidly since the 1970s, according to researchers, even though the 50-year trend shows that U.S. labor productivity lagged behind the G-7 (now G-8) countries before the 1970s.
Ford’s minimum wage was intended to ensure the loyalty of a supply of workers in a distasteful job situation. Today, those who advocate a minimum wage argue from one or several different perspectives, unrelated to the odiousness of a particular kind of work. Practically all of these arguments are tied to some numerical or statistical measurement.
The most popular reasons cited for a needed rise in the federal minimum wage, offered at the state level as well, are based on the cost of living. Because inflation erodes the purchasing power of a dollar, some advocates argue that increases in the minimum wage should keep up with the annual rate of inflation.
To begin to evaluate these claims, we should ask a few basic questions, starting with the reasons for which minimum wages were enacted in the first place. If the original intent of minimum-wage law was not to provide this level of financial support, it is unreasonable to expect that it should now do so. There is some historical debate over this point. The Fair Labor Standards Act of 1938 raised the minimum wage by 25 cents at a time when national unemployment was at 18 percent, decreasing the likelihood that the lowest-productivity workers would have any income to support their families.
Since 1938 is ancient history to many Americans, examples from the less- distant past may better serve to illustrate whether the minimum wage is hitting its target audience. Santa Fe, N.M. raised the city’s minimum wage to $8.50 per hour in June 2004, and again to $9.50 per hour Jan. 1, 2006. It will rise to $10.50 in 2007.
Lawmakers in Santa Fe cited Ford’s bold move as its inspiration, making the law applicable to private businesses and nonprofits that employ more than 25 people, not just to municipal employees, as some other local initiatives have been structured. In 2000, nonwage benefits added about 18 percent to total worker compensation. At that rate, the total value of the 2004 wage increase was about $10.37 per hour; the 2006 increase brought it to $11.59 per hour. Now the first-round results are in, and they’re not good.
Consider the “working poor” of Santa Fe. Based on studies following the initial 2004 increase, unemployment in Santa Fe has risen by 16 percent since enactment in June 2004. Also, fewer hours are worked by those who are employed at the new wage. Most significantly, employment for adults with 12 or fewer years of education—working, low-education adults, the target population—experienced the most severe decline. Young, unmarried high school males, however, entered the job market in large numbers after the wage increase, showing some employment substitution between the two groups.
North Carolina is on the brink of its own new experiment with a statewide minimum wage. Based mostly on a pronounced need to link minimum wage changes to the rate of inflation, there is ample evidence both in theory and in practice to suggest that productivity increases are the only way to raise wages without sacrificing workers in the most vulnerable, and presumably the targeted, categories.
There is no legislative magic wand for prosperity. Instead, the minimum wage closes access to the market to the workers who are least able to compete in any way other than wages. As Walter Williams notes, the minimum wage is “maximum folly.”
Dr. Palasek is assistant editor of Carolina Journal.