Raising Wages by Fiat

January 17, 1955

President Eisenhower’s decision to support an increase in the Federal minimum wage from 75 to 90 cents an hour marks another step toward the New Deal philosophy.

If wages can be raised to any desired amount by law, without harmful consequences, why stop at a minimum of 90 cents an hour? The CIO, in fact, has been demanding a minimum of $1.25 an hour. But why not $1.50, $2—or even more? The blunt truth is that insofar as a law is effective in forcing wages above the levels at which competitive market forces would fix them, it creates unemployment. Marginal firms which cannot afford the higher costs are forced to drop their marginal workers or go out of business entirely.

It is often argued that “business” (treated in such an argument as if it were a single big firm) can simply “pass on” forced wage increases by raising “its” prices. But even where competition is mild enough to permit this, the higher prices result in lower sales. These mean lower production and hence smaller employment in the firms and industries affected.

The Fair Labor Standards Act went into effect at the end of October 1938. Unemployment jumped from 8.1 million in October that year to 9.6 million in December and to 12 million in January 1939. In 1949, President Truman demanded that the legal minimum wage be boosted from 40 cents to 75 cents an hour. This went into effect Jan. 1, 1950. Unemployment rose from 3.5 million in December 1949 to 4.5 million in January 1950.

Of course the government can always resort to still further monetary inflation to enable industry to pay the higher wage rates it enforces. But in that case the higher money wages are offset by price increases and become illusory.

It is a mistake to suppose that the effects of an increase in the Federal minimum wage would 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.

This upward pressure will be still more widespread because of a joker in the existing wage-hour law. This joker is a provision 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. Under this provision, a law ostensibly passed to apply only to marginal workers and their employers has controlled in practice the wages of most of the workers of the country. The provision penalizes most, the employers who are already paying most; it rewards most, the workers who are already best off. Under it, the employer who pays his workers 75 cents an hour need pay only 37½ cents additional for overtime. But the employer who pays his workers $2.30 an hour must pay $1.15 an hour additional for overtime.

Of course this absurdity could be cured if those who now insist on boosting the regular minimum-wage rate to 90 cents an hour would at least consent to fix the minimum overtime-wage rate above 40 hours simply at $1.35 an hour, leaving workers and employers free to negotiate higher regular or overtime wages.

What really needs to be done at this time, in fact, is not to increase further the Federal government’s meddling with wage rates, but to reduce the absurdities and contradictions in existing legislation. One of these absurdities is the Walsh-Healey Act. This law, passed in 1936, two years before there was any general wage-hour act, authorizes the Secretary of Labor to fix minimum wages in companies that are awarded Federal contracts. Under this law, a series of mischievous rulings have been made by successive Secretaries of Labor. Secretary Mitchell is now trying to force a minimum rate of $1.20 an hour on textile companies working on government contracts. It is senseless, and violates the whole principle of nondiscrimination, to have two minimum wage laws which enforce entirely different wage standards. Is it too much to hope that enough sense and courage exist in Washington to remove at least this absurdity?