Back in the
eighteenth century the Good Doctor, Samuel Johnson, chastised his Boswell . . .
who happened to be James Boswell . . . for ostentatiously giving a gratuity of
one shilling (12 pence) for a service for which the customary remuneration was
6 pence. If memory serves, it was the
tip to a porter for helping hand down passengers’ baggage from a coach.
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| James Boswell, Samuel Johnson's Boswell |
Johnson’s
rationale was that by doubling the compensation, Boswell made the recipient
dissatisfied with the sixpences offered by everyone else, and tempted him to
give lower quality service unless others also doubled the fee. Boswell had increased the cost of a common
service or product with no increase in quantity, quality, or value to the
customer.
In 1914, Henry
Ford more than doubled the base wage at the Ford Motor Company from $2.34 per
day, to $5.00 per day for certain classes of machinists and widows with
children. He was soon forced to raise it
across the board for every Ford worker or face a strike.
Other automakers
had to raise their base wages in order to keep trained workers. Riots ensued in the middle of a Michigan
winter — which destroyed a number of small businesses and were broken up with
fire hoses — when vast numbers of unemployed workers descended on Detroit to
apply for jobs at Ford.
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| Henry Ford and his horseless carriage |
Ford’s unilateral
increase in wages without any corresponding increase in productivity is
credited with being the “official” start of the modern wage-price inflationary
spiral (“cost-push inflation”). Combined
with Keynesian monetary theory intended to stimulate demand by issuing massive
amounts of government debt (“demand-pull inflation”), the U.S. economy was eventually
ground between the upper and nether millstones of increasing the costs of
production with no increase in production, and creating demand without
producing anything at all. Jobs either
disappeared as workers were replaced with more productive (and thus lower
relative cost) technology, or went to lower wage areas where workers would
produce the same goods at less cost.
The lesson here
is that increase the cost of anything
without a corresponding increased benefit, and you decrease demand for it. How much you can increase the cost or price
of something varies according to the “elasticity of demand” for a particular
good or service, but regardless how inelastic or elastic demand might be, if
the price keeps going up, eventually everyone will be priced out of the market.
At least Boswell
and Ford were playing with their own money. Three years ago the city of Seattle,
Washington, decided to play with other people’s money, and mandated the gradual
implementation of a $15.00 per hour minimum wage. When the increases started, studies showed no
change in employment, although the data sometimes appeared a little
questionable.
What did change
was the cost of living. Rents started
increasing, forcing people on fixed incomes to find lower cost housing in the
city, or move. While not factored in to
employment statistics (most people on fixed incomes are retired), there was a
spate of angry articles about greedy landlords and price-gouging grocers, etc., as if such increases were unheard
of in the wake of across the board pay increases . . . as happens inside the
Washington, DC Beltway every time the government gives an across the board
increase.
The latest study,
though, shows something unexpected by virtually everyone, ourselves
included. There have been some layoffs
and cutbacks in hours. This is usual, as
would happen, e.g., if the definition
of “full time worker” (with a corresponding increase in benefits) was defined
in some areas as working 40 hours a week. A large number of workers would find
themselves scheduled for 39½ hours per week.
No, the unusual
thing was that low-income workers started losing jobs to higher-income
workers. Better-trained and experienced
workers making $19.00 and $20.00 per hour can produce more goods and services
in the same time than untrained and inexperienced workers paid less money,
decreasing the relative cost of production.
As a result, the
average income of higher-income workers increased, while that of the average
low-income worker (the one the increased minimum wage is supposed to be
helping) decreased by $125.00 per
month . . . just as costs are increasing in anticipation of their increased
income. In effect, low-income workers
are experiencing on the micro level what the U.S. economy has been experiencing
on the macro level: rising costs, falling production.
At some point,
somebody is going to wake up and grasp the wisdom (today’s word for yesterday’s
common sense) of what the late labor statesman Walter Reuther pointed out half
a century ago in his testimony before
the Joint Economic Committee of Congress, February 20, 1967:
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| Walter Reuther |
The breakdown in
collective bargaining in recent years is due to the difficulty of labor and
management trying to equate the relative equity of the worker and the
stockholder and the consumer in advance of the facts. . . . If the workers
get too much, then the argument is that that triggers inflationary pressures,
and the counter argument is that if they don’t get their equity, then we have a
recession because of inadequate purchasing power. We believe this approach
(progress sharing) is a rational approach because you cooperate in creating the
abundance that makes the progress possible, and then you share that progress
after the fact, and not before the fact. Profit sharing would resolve the
conflict between management apprehensions and worker expectations on the basis
of solid economic facts as they materialize rather than on the basis of
speculation as to what the future might hold. . . . If the workers had definite
assurance of equitable shares in the profits of the corporations that employ
them, they would see less need to seek an equitable balance between their gains
and soaring profits through augmented increases in basic wage rates. This would
be a desirable result from the standpoint of stabilization policy because
profit sharing does not increase costs. Since profits are a residual, after all
costs have been met, and since their size is not determinable until after
customers have paid the prices charged for the firm’s products, profit sharing
as such cannot be said to have any inflationary impact upon costs and prices. .
. . Profit sharing in the form of stock distributions to workers would help to
democratize the ownership of America’s vast corporate wealth.
Louis Kelso’s
Employee Stock Ownership Plan (ESOP) was one step on the path Reuther laid
out. Capital Homesteading
is another. Perhaps it’s time world
leaders took economic reality and common sense into account. . . .
#30#
