Raising Wages By Raising Wages

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 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.”

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.”

This Drucker Institute post first appeared on its DX blog and is republished with permission.