WASHINGTON — In 1914, Henry Ford announced he was more than doubling the average wage of Ford Motor Co. factory workers to $5 a day, in part so they could afford a Model T. His act took the world by surprise, spurred auto sales and helped create an American middle class.
One hundred years later, U.S. companies including Gap and Wal-Mart Stores are caught up in the debate over raising pay — this time an increase in the federal minimum wage. President Barack Obama and Senate Democrats want to raise it to $10.10 an hour from $7.25, saying doing so will bolster the economy and reduce income inequality. House Republicans and industry groups oppose the plan, deeming it a job killer.
“When Henry Ford announced the $5 day, the response was that it would diminish the auto industry and bankrupt his company,” Harley Shaiken, a labor economist at the University of California-Berkeley, said. “Instead it jump-started purchasing power, reduced turnover and increased the profitability of Ford Motor Co. There’s a lesson we can still learn from that.”
A boost in the minimum wage to $10.10 would add $200 million — or less than 1 percent — to Wal-Mart’s annual labor bill, the University of California-Berkeley Center for Labor Research and Education estimates.
If Wal-Mart passed along the $200 million to consumers, it would equal about a penny per $16 item, said Ken Jacobs, the labor center’s chairman. Meanwhile, the raise could boost purchases among the chain’s core shoppers, many of whom might see their earnings climb, he said.
Wages among retail workers have been the focus of some conflict at locally based retail powerhouses for years.
Last April, for example, low-wage workers in Chicago held demonstrations in front of Victoria’s Secret — the lingerie brand owned by Columbus-based L Brands — demanding that the state raise the minimum wage.
Abercrombie & Fitch has been criticized for its pay, given its requirement that employees project a particular “look.” A decade ago, Abercrombie was successfully sued by employees in California for being required to buy the company’s clothing, a cost that when subtracted from worker salaries, plunged their hourly wage well below the minimum.
L Brands had no comment for this story. Calls to Abercrombie and other central Ohio retailers seeking comment were not returned.
The corrosive effects of income inequality on companies came into renewed focus on Thursday when Wal-Mart said profit this year will trail analysts’ estimates as its low-income U.S. customers continue to struggle. The Bentonville, Ark.-based retailer, which previously backed a higher minimum wage, is trying to assess whether raising it again would help or hurt.
Gap didn’t wait for Congress to act and announced raises for store workers starting next year. Obama hailed the San Franciso-based chain’s action and urged others to follow.
The 1914 pay increase was a more dramatic change than the current proposed increase. Raising wages to $5 gave workers an extra $62.22 daily in purchasing power in 2014 dollars, based on a Bureau of Labor Statistics inflation calculator, assuming they were earning the $2.34 industry average. Today, workers will gain $22.80 per eight-hour day with a raise from $7.25 to $10.10.
The nonpartisan Congressional Budget Office has estimated raising the federal minimum wage to $10.10 an hour could wipe out as many as 500,000 jobs, but it could also boost the incomes of 16.5 million low-wage workers by
$31 billion in 2016.
“High wages make your employees better customers,” said Wallace Hopp, associate dean of faculty and research at the University of Michigan’s Stephen M. Ross School of Business. “You’re putting this money in the hands of people who are most definitely going to spend it. They’re not socking it away in mutual funds. The money goes back into the economy pretty quickly.”
While the U.S. economic recovery is in its fifth year, disposable income only inched up in 2013, for the fourth year in a row. Low-income shoppers have been buying mostly necessities even as wealthier consumers shell out for big-ticket items, such as appliances and cars. As a result, Ford and General Motors last year posted the strongest auto sales in the U.S. since 2007. By contrast, retailers from Wal-Mart to Lululemon Athletica have cut their forecasts.
The calculations for the Berkeley study are based on Wal-Mart’s wage-distribution data, which the company published as part of a lawsuit more than a decade ago, Jacobs said. That data is indexed to Wal-Mart’s average full-time wage, which the company updates each year, and his estimates of its state and federal minimum-wage workforce are very close to the retailer’s, he said.
“It’s a rough estimate, but however you change the parameters, at $10.10, you are not going to come up with a big number vis-a-vis their overall cost structure of business,” Jacobs said.
Dispatch Reporter Tim Feran contributed to this story.