Why the Minimum Wage is Important

July 9, 2014
By Oren M. Levin-Waldman

Amidst the debate over whether the minimum wage really helps those at the bottom or whether it causes more unemployment, we often lose sight of why it was needed in the first place. Today the debate over the minimum wage has become a side show between those who argue that it results in disemployment and those who argue that it benefits the poor.

We conveniently forget that the Fair Labor Standards Act of 1938, which established the federal minimum wage, was about redressing power imbalances between workers and managers, reducing industrial strife and ensuring stability, and also about economic development. The minimum wage, in short, was about stabilizing labor-management relations.

Early reformers pushing for a minimum wage at the beginning of the Twentieth Century were concerned about the power imbalance between employers and employees. Employers possessed monopoly power and were able to set wages, and workers whose only options were to work in sweat-shops had no choice but to accept the low wages that were being offered. Typically this imbalance was rationalized with the constitutional language of “liberty of contract,” meaning that both employers and employees could freely negotiate the terms of employment. But the only liberty of contract that workers really had was take it or leave it. In short, workers were being exploited by unscrupulous employers who could also rationalize their exploitation on the basis that workers were no longer people but factors of production, and that the language of economics dictated that they minimize costs at the same time they maximize profit.

This behavior gave rise to the parasitic industry argument that employers that paid low wages were parasites on the community who only imposed larger social costs on the community. The minimum wage was seen as a way to give these workers, who weren’t covered by collective bargaining agreements, a degree of monopoly power. Prior to the FLSA, various state minimum wage measures only applied to women. Men were joining unions, but women weren’t allowed to join, and low wages, it was believed, only drove them into prostitution which at the time was still legal in many places. A minimum wage would then protect their morals too. But there were those reformers who saw the minimum wage, as it was originally a woman’s wage, as a larger family wage. Employers would then opt to hire their husbands instead at a wage sufficient to support them and their families.

The minimum wage was also about efficiency and achieving economic development. English Economist Sidney Webb argued that people who are paid better are able to work harder because they have greater energy, due in large measure to their ability to better sustain themselves. Moreover, the greater morale among employees deriving from higher wages would also lead to greater loyalty. Known as the “Webb” effect, this would lead to greater productivity and hence overall efficiency. This wasn’t merely an academic argument because members of the business community, most prominently Edward Filene, the founder of Filene’s Basement, argued that minimum wages were needed to achieve greater efficiency.

Arguments for the FLSA only built on these earlier arguments. The principal problem during the Great Depression was depressed wages and prices. Inflating wages was seen as essential to lifting us out of the depression. The National Labor Relations Act of 1935 was enacted specifically to end labor-management strife. By effectively giving legal sanction to unionizing, employers would be encouraged to bargain collectively with their employees, and this would ensure greater harmony and stability. But if workers through collective bargaining could achieve higher wages they would also have greater purchasing power. The FLSA, then, would provide a minimum wage to those uncovered by collective bargaining agreements. Again, it would boost the purchasing power of workers, which could only help the economy because increased spending would lead to increase demand for goods and services, which in turn would bid up prices.

New Deal planners also saw the minimum wage as a tool for economic development. Much of the opposition to the FLSA and other New Deal measures came from the South that viewed them as new examples of northern carpetbagging. Southerners particularly opposed the minimum wage as an intrusion on their southern way of life, which was traditionally agrarian and based on a system of patronage. Wages were typically lower, and those in the North, along with a few in the South, saw the minimum wage as a way to develop the South, modernize it and improve its efficiency.

As an extension of the Webb effect, employers forced to pay higher wages would find it more prudent to invest in new technologies that could also achieve greater efficiency.

From the perspective of New Deal planners, a minimum wage would force a restructuring of the southern wage structure, and along with other federal initiatives help to overthrow some of the region’s traditional political and economic arrangements.

This thinking wasn’t mere ideology, but was driven by a report titled Report on Economic Conditions of the South, which only underscored how much the South lagged behind the rest of the nation. This report was only embraced by President Franklin Roosevelt who was eager to bring economic development to the South. It was no accident, then, that the original bill known as the Connery-Black Bill was cosponsored in the Senate by Hugo Black who would later become a justice on the U.S. Supreme Court.

As more and more states and localities continue to pass new minimum wage laws amidst the failure of the federal government to do so, it is easy to lose track of the original purpose of the minimum wage. It was never intended as a feel-good measure as critics would like us to believe. It wasn’t specifically intended as an anti-poverty measures, although it can certainly help. And it was never intended to encroach upon liberty of contract or the freedom of both employers and workers as the late Milton Friedman used to claim.

Rather it was intended as a measure to help shore up good labor-management relations, by redressing the power imbalance that existed in so-called negotiations. It was certainly intended to help grow the economy by enhancing workers’ purchasing power, and it was intended to serve as a foundation for economic development by forcing modernization in an otherwise backwards region of the country.

Because we have lost sight of the original purpose, it is easy to dismiss the minimum wage as being inconsequential in a global economy where the loss of manufacturing is seen as one of the primary reasons for growing inequality. But as this brief history shows the minimum wage is anything but inconsequential.

July 8, 2014

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