Could paying workers a living wage improve a company’s bottom line as well? That’s the possibility that Justin Fox explores in his recent column on HBR Blog Network.
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Most big businesses (and many politicians and economists) adhere to the following conventional wisdom:
1. Wages are set by the market. The low cost of foreign labor forces U.S.-based companies to pay their workers less in order to compete.
2. Raising minimum wage (or opting to pay workers more voluntarily, independent of legislation) would have a negative effect on employment and productivity.
3. Keeping wages low allows large companies like McDonald’s and Walmart to keep costs down, which in turn raises the standard of living of their own employees.
The problem is that pay levels, Fox writes, “aren’t entirely set by the market. They are also affected by custom, by the balance of power between workers and employers, and by government regulation.” Neither is pay tied directly to productivity. As he points out, German auto workers are well-paid and kept their jobs even when their American counterparts suffered. Going further back, Henry Ford doubled wages at his factories in 1914 in order to reduce turnover and make sure that Ford’s workers could afford its products.
“Economic analysis of Ford’s decision has focused on the efficiency gains of paying higher-than-market wages — less turnover and more-productive workers led to higher profits and higher market share, the reasoning goes,” Fox writes. “That in itself is a big deal. But the even bigger argument that by raising wages Ford might have led a shift in societal norms that put more money in average Americans’ pockets, thus boosting consumer spending and economic growth, hasn’t had much appeal to mainstream economists in the U.S..”
Maybe it’s time to take another look.
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