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Taking Stock: Productivity boost should justify raising wages

Malcolm Berko: Managerial economics suggests that higher productivity — along with higher wages, which increase demand — is the answer to achieving a higher standard of living, especially for the working poor.
By Malcolm Berko Published: January 19, 2014

Dear Mr. Berko: You'll probably throw this away, but I need to vent about the proposed increase in wages in my state for nonskilled labor to $15 an hour. It's stupid to increase wages to $15 an hour if earners don't have skills worth $15 an hour. Since serving in Vietnam and getting out of the Army at 24 in 1968, I've had five jobs. I'm a barber, and my wife worked cosmetics counters at large department stores. I didn't make $15 an hour until I was 50. That's not fair! We watched our spending, saved our money, invested smartly and raised three children, and we're comfortable.

My friends/customers and I are smoking mad at the media, the unions and the politicians who support raising the minimum wage to $15 an hour so unskilled workers can make more. A customer and his partner own a parts and service business with 17 employees. He says raising wages to $15 an hour would increase his labor costs by more than $100,000 a year. So he'd have to raise prices, put off adding an 18th employee and perhaps lay off his most recent hire. He says many small businesses have the same problem.

I suppose that like others in the news business, you'll mention Henry Ford, who doubled employees' wages in 1914 and increased profits because his employees could buy the cars they made. Those times were different. Millions weren't on the dole; the government wasn't trillions in debt; and businesses weren't stuck with Obamacare. If businesses are forced to follow Ford's example, our country will go to the dogs. Hiring will be reduced; inflation will make things more expensive; and the country will go to ruin. If we continue raising wages, paying unemployment, issuing food stamps and supporting nonproductive people, America will collapse like all those European countries. Is there a solution?

DH, Cincinnati

Dear DH: Yes, times were different then, but then, times are always different.

Like most folks (and unions), you fail to understand this Henry Ford thing. Ford's strategy was a well-reasoned series of steps, not an automatic doubling of wages. Ford intended to lower costs by increasing worker productivity. He believed that if he could increase productivity enough to offset the increase in wages, the reduction in costs would equate to a larger market share, increasing aggregate demand. Ford reckoned that doubling wages to $5 a day would reduce employee turnover. And in return, a greater workforce retention would justify Ford's investment in teaching his workforce the skills to operate a high-speed assembly line. The higher-speed line (five times faster) reduced the cost per car, enabling Ford to reduce prices, which translated to higher sales. And by 1920, the cost of a Ford fell from $2,000 to $500, and an employee could purchase a car with 100 hours of his labor. This lesson in managerial economics suggests that higher productivity — along with higher wages, which increase demand — is the answer to achieving a higher standard of living, especially for the working poor. So increasing the minimum wage to $15 an hour without a reasonable increase in productivity and a similar increase in demand only rewards sloth.

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