Why Wages Rise; M. Skousen

close relationship between wages per hour and output (GDP) per hour, expressed in constant dollars, between 1910 and 1960. Harper's theory of wages is not new-it is the classical theory of labor taught in college economics. John B. Taylor, economics pro fessor at Stanford, produces graphs that show a similar relationship in his latest textbook (see the next page for a graph showing the rise in hourly compensation since 1955). Even Wallace Peterson, an economist who favors increasing the mini mum wage and other forms of government intervention in the labor market, supports the view that, in the long run, "productivity gains are the ultimate source of . . . in creases in real living standards."2 ,... Produd per hour Wage per hour ~ CHANGFS IN PRODUCTIVIlY AND WAGE RATES UNITED STATFS PER CENT OF AVERAGE (Ratio leole) +80~----------------....., +70 +60 +50 +40 +30 +20 First, let's discuss the genuine ways that wages can rise. Here Harper focused on the critical role of production and worker pro ductivity. "Production comes first," he ex plains. "Higher wages come from increased output per hour of work." (p. 19) Harper produces a graph (see below) showing a Genuine Means of Raising Wages Dr. Skousen is an economist at Rollins College, Department ofEconomics, Winter Park, Florida 32789, and editor of Forecasts & Strategies, one of the largest investment newsletters in the country. For more information about his news letter and books, contact Phillips Publishing Inc.

at (800) 777-5005. -40 1910 1920 1930 1940 1950 1960 SOURCE: This chart is designed so that a constant percentage increase would appear as a straight line. The values of product and wages are both expressed in dollars of constant buying power. The data for product are for the private sector, and are from the series by John W. Kendrick in his paper, National Productivity and lts Long-Term Projection (National Bureau of Economic Research, May 1951), brought up to date by the National Industrial Conference Board. For the data on wage rates, see Chapter I, p. 11. 584 585 Harper, Mises, and other free-market economists warn politicians not to seek artificial ways to increase income, such as: -minimumwage legislation, -welfare programs, -labor union power, and -anti-immigration laws. All of these measures either cause unem ployment or economic inefficiency. On the other hand, there are a few policies the government can undertake to encourage productivity and higher wages, such as tax cuts on business and investment. Reducing corporate income taxes will increase net income and thereby increase the capability to pay workers more and provide greater Do's and Don'ts Detroit plant from $2.50to $5 a day. It made Henry Ford an industrial messiah.

The effect of the instant pay raise was dramatic: a tremendous surge in output and skyrocketing morale among Ford workers. Thousands of potential employees moved to Detroit in hopes of getting a job. Ford argued that the higher wage had two great benefits, increased efficiencyat the automo bile plant, and increased buying power of his workers. Importantly, the $5 wage per mitted Ford workers to buy their own cars for the first time. Indeed, sales of Model T's continued to soar as wages went up and prices declined. By 1916, over half a million cars were sold.3 Ludwig von Mises adds the following point to Harper's original argument: it is marginal productivity, notjust total produc tivity, that has raised average wages over the past hundred years. He points out that many jobs have not changed over the years (barbers, butlers, etc.), yet they benefitfrom higher wages due to labor competition. "It is not any merit on the part of the butler that causes this rise in his wages, but the fact that the increase in capital invested surpasses the increase in the number of hands. " Mises concludes, "there is only one means to raise wage rates permanently . . . namely, to accelerate the increase in capital available as against population.,,4 '\ 0.3 percent peryear trend ~ 2.4 percent per year trend Real compensation"

per hour '" 90 70 80 100 1~;(Jf:x. WS2 =100 110 The Henry Ford $5-a-daystory is a classic example. As a fesult of the huge success of the Model T, in 1913 the Ford Motor Co. doubled its profits from $13.5 million to $27 million. With these profits, Ford decided to share the wealth with his employees and overnight doubled the minimum wage at his 60 '---~_---'-_--'-_-L.-_..L..------J_-L._--J 1955 1960 19n5 1970 1975 1980 1985 1990 1995 The Ford $5-a-Day .Story FIGURE 12.2 Growthof Real Hourly Compensation In the UnitedStates,averagereal hourlycompensation(including fringebenefits)grewrapidlyfrom the mid-t050sto the mid-t070s. Startingin the mid-t070s,the growthratesloweddown. SlYUrce: U.S. Departmentof Commerce. How is it that workers tend to receive higher wages as output increases? The key is profitability. When firms increase their profits, there are dual benefits to workers: (1) more and better products and services are sold to consumers, and (2) more funds are made available from retained earnings to pay workers and to improve tools, equip ment, and training. When firms are success ful, company officers aren't the only ones who benefit. Workers also receive higher wages and more services, includ ing training, better equipment, and fringe benefits. The advantages of giving higher compensation are: (1) less job turnover, (2) better workers, and (3) higher incentives to work more productively.

Two Benefits of Higher Profits 586 THE FREEMAN • AUGUST 1996 benefits. Cutting capital gains taxes will encourage private savings, reduce interest rates, and stimulate capital formation. MinimumWage Millionaires But the most dramatic improvement in the lives of the working poor could be achieved by converting Social Security into a genuine private pension system. Privatiz ing Social Security would increase the na tion's saving rate and, most importantly, provide a high retirement income for all American workers. Even minimumwage earners could have over $1 million in pen sion assets under a privately funded Social Security at retirement. 5 These measures are far superior to raising the minimum wage and other counterfeit proposals to help the working poor. 0 1. Wallace C. Peterson, Silent Depression: Twenty-five Years o/Wage Squeeze and MiddleClass Decline (New York: Norton, 1994), p. 232.

2. Ibid., p. 232. 3. For a retelling of the $5-a-day story, see Jonathan Hughes, The Vital Few (New York: Oxford, 1986), pp. 301 304. 4. Ludwig von Mises, The Anti-Capitalistic Mentality (South Holland, Ill.: Libertarian Press, 1972), pp. 88-89. 5. Sam Beard calculates that Social Security contributions of minimumwage earners ($1,240 a year) would make them millionaires in 45 years if their Social Security contributions earned 8 percent a year. See his book Restoring Hope in America (ICS Press, 1996). Also, see my column "$4,000 A Month From Social Security?", The Freeman, June, 1994. The power of one. "There is really nothing that can be done except by an individual. Only individuals can learn. Only individuals can think creatively. Only individuals can cooperate. Only individuals can combat statism." -LEONARD E. READ founder of FEE And only your individual help can make The Freeman grow!

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