Monthly Archives: September 2015

Ford paid his workers the equivalent of $15 an hour in 1914. Should that be the minimum wage?

Standard

The following is a comment I wrote on a post published by The Intercept about raising the minimum wage in New York, which argued that since Ford paid his workers the inflation adjusted equivalent of $15 per hour in 1914, a $15 minimum wage would be appropriate today.

I appreciate Mr. Schwarz’s concern for low-skilled workers. We all want everyone to be able to afford a decent living. However, in economics, it is important to separately consider positive and normative questions (though, of course, the former can inform the latter). So part of the positive question in this instance is, what factors determine prices? As Mr. Schwarz alludes to (though expressing contempt for such an idea), and what most economists would say is, price is a function of supply and demand. Employers provide the demand for labor. However, if the price of labor is higher than the marginal productivity of that labor engaged in a certain purpose, employers will generally not hire labor for that purpose because it will result in a loss. Thus, any jobs at which people are employed in which they create less than $15 per hour in productivity will not be profitable with a $15 per hour minimum wage. Perhaps one could make an argument that employers have a certain level of bargaining power (for reasons such as occupational licensure, costs of starting a business, etc.) such that they are able to pay employees less than their marginal productivity, but regardless of this, employers will not pay their employees above their marginal productivity without incurring losses.

Thus, there are some limitations in Mr. Schwarz’s analysis. One is that he has not established that the marginal productivity of Ford employees in 1914 is directly comparable to the marginal productivity of all workers currently making less than $15 per hour. If the marginal productivity of Ford workers then was higher than the marginal productivity of low-skilled workers today, then we are comparing apples to oranges. For similar reasons, there are limitations in comparing a 1914 Model T to a 2015 Ford Fiesta, which are obviously quite different products in terms of technology, comfort, performance, etc. Although value is subjective, there is a good case to be made that, other than for collector purposes, the latter car is much more valuable than the first in terms of actual function (in other words, if Ford made the Model T today with the same physical properties that it had in 1914, it would likely fetch a much lower price than the Fiesta. Therefore, in terms of actual purchasing power, being able to buy a Ford Fiesta is evidence of much greater purchasing power).

The fact that GDP per capita is several times higher now than in 1914 does not mean that a $15 minimum wage will increase the incomes of those with a marginal productivity below $15 an hour, for the reasons mentioned above. No matter how rich an employer is, they will not willingly pay a wage that is greater than a worker’s marginal productivity because they will incur a loss by hiring that worker. The empirical question is whether those workers making less than $15 an hour are being paid significantly less than their marginal productivity. For those whom the answer is no, a minimum wage will not increase their wages if their productivity remains below $15 per hour.

Advertisements