Henry Ford's idea was better When debating a raise in the minimum wage, remember: Higher pay lets workers buy more.

Posted: January 10, 2007

Dmitri Iglitzin is a labor-law attorney in Seattle and a lecturer at the University of Washington School of Law

Steven Hill is political reform director at the New America Foundation

As President Bush and Congress prepare to debate an increase in the federal minimum wage, they could learn much from the economic wisdom of one of America's most successful business leaders - Henry Ford.

Ford was, among other things, a famously domineering employer, but he was also an economic pioneer. He not only perfected the techniques of mass production of automobiles, but he also foresaw that his efforts would not amount to great profits if average Americans could not afford to buy all those cars. He saw that putting higher wages in his workers' pockets was good for his, and his company's, financial well-being, and good for the national economy, too.

So Ford shocked the world in 1914 when he unilaterally introduced a minimum wage for his employees, more than doubling the average wage in the auto industry from $2.34 per day to $5. As Ford put it, raising wages "has the same effect as throwing a stone in a still pond," creating an "ever-widening circle of buying" that increases everyone's prosperity.

It was a simple formula that the United States has followed many times since: Adequate wages create happier consumers, who, in turn, contribute to a healthier economy. Thus was born the American middle class.

This lesson should inform the minimum-wage debate. Recent proposals call for increasing the current federal minimum wage of $5.15 an hour - the lowest minimum wage in inflation-adjusted dollars in more than 50 years - to $7.25. According to the Economic Policy Institute, an estimated 14.9 million American workers would benefit from an increase in the federal minimum wage - 6.6 million who currently earn less than $7.25 an hour, and 8.3 million likely to receive raises because of the spillover effect of a minimum-wage increase. More than half of these people work full time, and an additional one-third work between 20 and 34 hours a week.

Assuming that a minimum-wage increase raises earnings for those employees by an average of one dollar per working hour each year, we're talking about a net increase in purchasing power of well more than $15 billion annually being pumped into the economy. Those are the kinds of numbers Henry Ford understood.

In other words, raising the minimum wage will benefit the entire American economy, not just low-wage earners. From a macroeconomic point of view, if low-wage workers have more money to buy things, then businesses selling their products and services will have more customers. And more customers will mean better sales, higher profit, and a "trickle-up" effect that creates a more robust economy.

But Bush and Democratic congressional leaders don't seem to grasp the wisdom of Fordism. The recurring debate over a minimum-wage increase follows predictable lines, pitting the poor against the middle class, a useless and no-win battle.

Democratic proponents usually focus on the impact of a wage increase on low-wage workers living below the poverty level. They will tell harrowing stories of minimum-wage workers trying to live on a measly $5.15 an hour.

Republicans and business leaders will counter that the minimum-wage increase will lead to fewer entry-level and low-skilled jobs, and also to higher prices for goods and services as the cost of the wage increase is passed along as a higher price for a hamburger at McDonald's. They will paint support for a minimum-wage increase as yet another example of Democrats trying to help the undeserving poor at the expense of middle-class consumers.

A broad swath of the middle class can easily understand how giving low-wage workers more money can lead to a lot more money being pumped into the economy. Nor can Republicans easily dispute this impact of a minimum-wage wage increase; because it is precisely this "trickle-up" phenomenon that they have pointed to for the last several years to justify the Bush administration's massive tax cuts.

So when the debate gets fired up this month, let's hope the president and congressional leaders, Republicans and Democrats alike, remember the economic lesson of Henry Ford. An increase in the minimum wage would be good for the national economy, including most businesses, the middle class, and workers at the bottom of the economic ladder. And that makes it an idea that all sides ought to endorse.

Contact Dmitri Iglitzin at iglitzin@workerlaw.com. Contact Steven Hill at hill@newamerica.net.

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