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Henry Ford and the Minimum Wage

01/08/2007 06:07 pm ET | Updated May 25, 2011

By Dmitri Iglitzin and Steven Hill

As President Bush and the 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 and a
supporter of fascists, but he was also an economic pioneer. He not only
perfected the techniques of mass assembly 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 own bottom line, and good for
the national economy too.

So Ford shocked the world in 1914 when he unilaterally introduced his own
minimum wage for his employees, more than doubling the average wage in the
auto industry by raising it from $2.34 per day to $5 per day. 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 U.S. has utilized many times since:
adequate wages create happier consumers which contribute to a humming
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
an hour. 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 who are likely to receive raises due to the spillover effect of
a minimum wage increase. Over half of these workers work full-time, and
another third work between 20 and 34 hours per week.

Assuming 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 over $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 positively impact 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 greater sales, higher profit, and a "trickle up" effect
that creates a more robust economy.

But President Bush and Democratic congressional leaders don't seem to grasp
the wisdom of Fordism. Typically the 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 to the price of a hamburger at McDonalds. 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.

Yet a broad swath of the middle class can easily understand how giving
low-wage workers more money in their pockets will result in a lot more money
being pumped into the economy. Moreover the Republicans can't dispute this
impact of a minimum wage increase because it is precisely this "trickle up"
phenomenon they have pointed to for the past several years to justify the
Bush administration's massive tax cuts.

So when the debate gets fired up this January, 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 will 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. 718 words

[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 and author of "10 Steps to Repair
American Democracy" (www.10steps.net).
]