Unsound Wage Boosts

August 8, 1955

Among the measures passed by Congress was one to raise the legal minimum wage from 75 cents to $1 an hour. The changes brought about by this measure will do more harm than good to marginal workers.

So far as basic principles are concerned, there is nothing I need add to my Newsweek article of Jan. 17, discussing President Eisenhower’s proposal at that time for an increase in the minimum wage from 75 cents to 90 cents an hour. If wages can be raised in any desired amount by law, without harmful consequences, why stop at Mr. Eisenhower’s 90 cents an hour? Or Congress’s $1 an hour? Or the CIO’s demand for $1.25 an hour? Why not $1.50, $2—or even more? The truth is that insofar as a law is effective in forcing wages above the level at which competitive-market forces would fix them, it creates unemployment. It does most harm precisely to the marginal workers it is most designed to help. For marginal firms which cannot afford the higher costs are forced to drop their marginal workers or go out of business entirely.

It is an error to suppose that the effect of a 33⅓-percent increase in the Federal minimum wage will be confined to the part of the labor force now getting less than the proposed new minimum. For other workers will demand the maintenance of their existing differentials. The result must be upward pressure on all wage rates.

Congress, in voting for this measure, did not even take advantage of the opportunity to reduce the absurdities and contradictions in existing legislation. One of these is the joker in the existing wage-hour law, which provides that the employer must pay a 50 percent penalty increase for all hours above 40 a week no matter what his regular rate of pay. This provision penalizes most of the employers who are already paying most; it rewards most the workers who are already best off. This absurdity could have been easily cured if Congress, even when it insisted on boosting the regular minimum wage to $1 an hour, had simply fixed the minimum overtime rate at $1.50 an hour.

The other absurdity which Congress and the President could have taken this opportunity to get rid of is the Walsh-Healey Act. This law authorizes the Secretary of Labor to fix minimum wages in companies that are awarded Federal contracts. Successive Secretaries of Labor have used this act to force minimum-wage rates in particular firms or industries far above the general minimum-wage rate fixed under the so-called Fair Labor Standards Act. This is discriminatory legislation. It gives the country two minimum-wage laws, enforcing entirely different wage standards.

So much for the basic principles involved in the minimum-wage increase. But if ever a measure was unnecessary and ill-timed, this one is. The increase in minimum wages is being enacted at a time when wages in manufacturing industries average $1.87 an hour—the highest level in American or world history. And this figure does not yet reflect the formidable new increases that have just been achieved in wage rates in the automobile and steel industries and elsewhere. These increases have already led to an average increase of $7 a ton in the price of steel and are expected to lead to increases in automobile prices for 1956. Other things being equal, the effect of these wage increases, and of the consequent increases, should be to restrict the market for American products both at home and abroad, to bear heavily on marginal firms, and to cause unemployment.

The economic factors at work at any one time are so numerous and difficult to measure that the consequences of any one policy cannot be precisely predicted. Wage boosts of the present sort have in the recent past forced a further monetary inflation in order to make the wage boosts payable. That result may follow once more. But certainly the higher minimum-wage rate, on top of recent wage increases forced by strong unions, introduce an element of weakness, not of strength, in the present economic situation.