Raising Wages By Raising Wages

Posted on Nov 16, 2012 | 13 Comments

Tens of millions of Americans earn under $25,000 a year, and real wages in many of their lines of work have been stagnant for the past 40 years. California entrepreneur and magazine publisher Ron Unz has a suggestion for how to help them: “Perhaps the most effective means of raising their wages is simply to raise their wages.”

Specifically, Unz, in a paper for the New America Foundation, proposes raising the federal minimum wage to $12 an hour. This would, he concedes, raise prices of most things for all Americans and drive some enterprises out of business, but Unz argues that neither of these drawbacks would be terribly severe.

The cost rises would be minimal, and the sectors most threatened—ones that are magnets for illegal employment arrangements between undocumented workers and low-paying owners—impose external costs on society that outweigh their benefits to begin with. “Sweatshops and similar industries,” Unz writes, “have no legitimate place in a developed economy.”

What’s more, Unz observes that “an enormous array of income subsidies, public benefits, training programs and educational loans” has been of little benefit to the working class. “Since this vast and leaky conglomeration has failed at its intended goal, perhaps we should just try raising wages instead,” Unz suggests.

The notion that preemptively raising wages would have positive ripple effects throughout society goes back at least a century. In his book Men, Ideas, and PoliticsPeter Drucker wrote admiringly of the “radical wage policy of the early Henry Ford, who in 1914 fixed his minimum wage at the then Utopian figure of $5 a day for unskilled labor.”  By doing so, Drucker wrote, “he proved that industrial production could give the workers increasing purchasing power to buy industrial products and to live on a middle-class standard.

Perhaps for that reason, Drucker rarely, if ever, expressed disapproval of minimum-wage statutes. Indeed, he liked to stress that wages are irrelevant apart from how they factor into per-unit production costs. If a workforce earning twice as much is three times as productive, then the math speaks for itself.

At the same time, he was wary of extensive government involvement in determining wage rates. Such intervention “can only convert the struggle over wages from one between private parties into a struggle for control of the government, which must in the long run undermine if not destroy free government,” he warned in The New Society.

The best way to set wages was to avoid both government overreach or “pure power play” by the private sector. Instead, negotiations should focus on the wage burden rather than the wage rate, to allow for “adjustment to economic fluctuations through flexible wage costs.”

Overall, though, Drucker shared Unz’s concern about working-class Americans being left behind. “They have been the modern economy’s favorite children, and its main beneficiaries,” Drucker wrote in The New Realities. “Now they are becoming the ‘other half’—but we cannot afford their becoming stepchildren.”

Do you think a federal minimum wage of $12 an hour would be good for the United States?



13 Comments

  1. Maverick18
    November 16, 2012

    An idea that patently stupid simply should not be set forth on the Drucker Exchange. Shame on you.

    Reply
    • Manny Cervantes
      November 18, 2012

      Why is it stupid? Is it because you’re a Republican or a real reason? Of course $12 is way too low in 2012-2012.

      Reply
  2. Don Lehmann
    November 16, 2012

    The minimum wage is the greatest killer of jobs for entry level unskilled workers and teenagers, as well as others. As Friedman has shown, the minimum wage ensures that those with few skills will never get a job because their skill level cannot justify the minimum wage. As a result, they never get a chance to get on the job training. Secondly, a minimum wage, particularly increases in the minimum wage set a new floor that ripples upward through all levels above it, resulting in poorer efficiency . . . The big winners are tradesmen and others with bullet-proof jobs to proportionally increase their earnings.

    I agree with Maverick’s conclusion, but I’d say it differently.

    Reply
    • Manny Cervantes
      November 18, 2012

      What job training are you talking about. Job training is dead. Companies simply outsource what they need and let others deal with training and labor conditions.

      As to teenagers being able to work, other than minority kids the white kids that we used to see at starter jobs like MacDonalds and in other part-time jobs have long disappeared for whatever reason. I’m guessing for the same reason that you don’t see adult white workers in other than the trades and white collar jobs-that it’s beneath them.

      Here in Southern California (and likely elsewhere) there is a thriving industry driven by low wage doubtfully legal minority workers who are hired for “one day short of one year” and who are procured through the temp agencies. The owners and policymakers just wink while expressing outrageousness at all the “illegals” in our midst taking jobs away from Americans. It’s a long-standing joke.

      Reply
  3. Jim Ruschman
    November 16, 2012

    Seriously? The arguments put forth in this article show a fundamental ignorance of economics and a lack of common sense. As Don said, the people most hurt would be the young and the uneducated, who because they are not skilled, need to start with minimum wages until they become skilled enough to move to better paying jobs.

    Unz shows arrogance in addition to his ignorance by stating that minimum wage jobs are the domain of illegals and business owners. Really? And all of those minimum wage foodservice, retail and other entry level service jobs across this country are held by illegals? It is easy to prove that is not true. Oh, and putting enterprises out of business and raising prices would be ‘drawbacks that aren’t that terribly severe’. How condescending can you get? Try seeing the youth unemployment rate skyrocket (as it has in European countries who have adopted this idea).

    He says “income subsidies, public benefits, training programs and educational benefits” have been of little benefit to the working class. He is right, but what is the common denominator with those programs? I will let him figure that out, since he did not bother to the first time.

    I could go on, but it would be more of the same. I do think publishing an article like this with such poor logic and common sense is an embarrassment for the Drucker Exchange.

    Reply
    • Zach
      November 16, 2012

      I think you’re missing the point of the post. It’s not an argument in favor of raising the minimum wage to $12, it’s a question right there in bold as the last line: Do you think a federal minimum wage of $12 an hour would be good for the United States?

      Be careful about rushing to judgment. If this post is “an embarrassment,” then what should we make of this passage from it? “In his book Men, Ideas, and Politics, Peter Drucker wrote admiringly of the ‘radical wage policy of the early Henry Ford, who in 1914 fixed his minimum wage at the then Utopian figure of $5 a day for unskilled labor.’ By doing so, Drucker wrote, ‘he proved that industrial production could give the workers increasing purchasing power to buy industrial products and to live on a middle-class standard.’”

      Maybe you want to argue that that was okay because Ford did it as a business owner and not as a result of government imposition. That could be a great argument. But I can’t know until I’ve read it.

      Reply
  4. Alba Patricia Valencia
    November 16, 2012

    I do not understand a federal minimum wage of $12.00 an hour if right now in the State of California legal employers are paying $8.75 an hour. Only in the California State will must has do an increase of 73%. At the moment, the state of California to lowered wages to state employees because they have a fiscal deficit higher.

    If federal service is thinking about minimum wage of $12 an hour for the United States that is a marvelous dream, but it is necessary a lot of money to make that dream come true. Additionally, we need a fairy godmother to organize treasury bills.

    Reply
  5. Maverick18
    November 17, 2012

    Just to be clear:

    The Federal Minimum Wage of $7.25 per hour is the minimum hourly pay any non-exempt worker in the United States can be paid for his work. Some jobs are exempt from minimum wage law, and can be paid an hourly wage that is lower then the Federal Minimum Wage under certain circumstances.

    Employees who receive tips (such as waitresses) can be paid less then the Minimum Wage so long as the tips they receive add up to more then the minimum wage every hour
    Employees working at seasonal establishments like summer camps may sometimes be paid less then the Federal Minimum Wage
    Workers under the age of 18 may receive sub-Minimum Wage pay for a training period of up to 90 days
    Some institutions like nonprofits and universities may obtain a certificate to pay workers under the minimum wage

    States can have a higher minimum wage, but not lower. The CA minimum wage at the beginning of this year was $8.00, the highest was WA at $9.04. San Francisco has actually passed its own minimum wage law that is higher than California’s.

    A Federal minimum wage of $12.00/per hour would be the equivalent of $25,000 per year for a full time worker. That would be an instant raise of over 65%. The probable results would include an instant increase in inflation, an instant increase in unemployment, an instant emphasis on eliminating labor through automation or whatever means, and a further drastic increase in the balance of trade deficit due to an even bigger gap between domestic and foreigh labor costs.

    The proposition is really too dumb for serious consideration, although it might be attractive to the legislature of the Peoples Republic of CA, which is, in fact, the worst legislature in all 50 states. A better question would be why not roll back the Federal minimum wage to $4-$5 per hour which is what it was during the Clinton administration.

    Reply
    • Don Lehmann
      November 17, 2012

      Why even have a minimum wage?

      Reply
  6. Jack
    November 17, 2012

    The comments are passionate, which is the sign of a good question.

    In reading this article, I did not take away that the recommendation was to increase minimum wages — but to learn what others believed relative to Unz being in favor and Drucker being against (i.e. The best way to set wages was to avoid both government overreach or “pure power play” by the private sector. Instead, negotiations should focus on the wage burden rather than the wage rate, to allow for “adjustment to economic fluctuations through flexible wage costs.”)

    I agree with Drucker that the government shouldn’t get into the minimum wage business. And, the notion of the wage burden rather than the wage rate is the right question. Wages should be left to market forces. Yet, productivity is what funds wages. Wouldn’t it be nice to be able to double our productivity so that we could double our source for higher profits, higher wages and higher tax revenues? This is no doubt why Peter Drucker wrote that increasing knowledge work productivity was such an important personal, business and societal need.

    Reply
  7. HEDgear
    November 17, 2012

    For many reasons people make irrational decisions. A lack of basic necessities, such as food, shelter or safety, influences people to desperate acts of self preservation. A fundamental lack of understanding or compassion can lead an employer to try to take what they can get from employees with little or no remorse. Idealistically in an open market society employees tell underpaying bosses to go stuff themselves and employers understand that fundamentally healthy and happy employees perform better in every way often creating value beyond the added expense of providing a good work environment. Often enough neither of these ideals are true. It also requires less mental discipline to whip your employees into action than it does to inspire them making it a popular choice. Is it not a function of government to declare what we absolutely will not tolerate as a nation? So why not confront employers who unethically profit from moral dilemmas in the interest of strengthening our nation as a whole?
    In confronting them we must be careful that our actions do not attempt to regulate everyday business practice slowing down its evolution and prolong a truer betterment of society. Our government has as much of a moral obligation to protect our economic well being as it does tangible situations involving physical assault. In fact, an employer aggressively hording the economic well being of its employees for a profit is –directly- assaulting their physical well being. Why should they be treated differently than a purse-snatcher? The laws must not interfere with our pursuit of happiness or be unacceptable to us as a nation. The complexity of understanding these laws is where pondering minimum wage becomes interesting.

    Reply
  8. Ray
    November 19, 2012

    The current minimum wage in California is $8 an hour.

    Increasing wages has increased the teen unemployment rate, which is bad for our society.

    Why hire an inexperienced person, when for a little more you can hire an experienced person? When it becomes cheaper to automate than hire a person, the employment rate will just get higher. California already has one of the higher unemployment rates in the nation at 10.2%. Business can move, and will move, when the cost of business becomes justifies it.

    CA does have wonderful weather, but can that justify the premium for doing business in California? Intel for example, closed its last factory in California 6 years ago, and has not created a new job in Ca in 10-12 years.

    Reply
  9. Katie
    November 28, 2012

    Regardless of the arguments pro and con on this, wages are stagnant and it’s a huge drain on our economy. None of us prosper if we do not have a consumer class. For consumers to spend, they have to have wages. For middle class people to exist without government subsidies, wages have to be higher.

    How many tens of thousands of households get by each year on Earned Income Tax Credit? A form of welfare through the tax code that keeps these families from poverty. Without the credit, they wouldn’t make it. The problem is not the tax code, but the absence of living wage jobs that put them over the threshold. Factory jobs used to keep people in the middle class- solid pay and benefits, as those erode, the jobs replacing them pay half as much, a lot of the time, with no benefits. I read recently 50% of the nation is either poverty level, or right above it. We cannot sustain a robust economy with fully half of the people barely surviving. We cannot build a consumer driven economy without consumers. We cannot fund schools, roads, defense, healthcare, etc without a tax base. It’s bad for everyone.

    I am not sure what the government can do and I do understand the hesitance to falsely setting wages and/or prices. I am also skeptical of government intervention. However, doing nothing doesn’t seem to be working either. Perhaps the government should concentrate on providing real 21st century education and steering more young people into math and science, therefore technology disciplines. Increasing Knowledge Work candidates in the job pool to fit into the jobs of the future. Perhaps the government can provide incentives, through the tax code, and reward companies who hire people in THIS country, keep jobs HERE, rather than ship them overseas. With the recent news of factory workers being burned to death (over 100 souls) in Bangladesh, perhaps this is not just good for our economy, but a moral imperative as well. And maybe the government could also invest in the technologies of the future, rather than letting other nations take the lead. It’s a matter of priorities, and national pride.

    Reply

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