I came across an interesting article on Forbes regarding Henry Ford and his decision to pay his workers more. The basic argument on the site is that while it sounds nice to think he wanted to pay everyone enough to allow them all to afford his cars, the fact remains that you can't pay your workers a wage high enough to buy a luxury product or your wage costs will be astronomical (The article uses an example of Boeing employees who obviously can't be paid enough to buy planes.)
The interest part of the article comes afterwards, where it argues that the real reason Henry Ford increased his wages ($5 a day vs $2.50 a day) was in order to cut employee turn over because it was destroying profits. It then goes on to say that
a higher wage is only useful towards cutting turn over if it's higher than other competitors. If all employers pay the same higher rate, it does nothing for turnover.
That raises an interesting point. Consider the minimum wage jobs of the economy, which all pay the minimum wage. There is very little price competition at that range. Take for example McDonald's vs Burger King. Both will start a new employee at minimum wage. Both are aware of this, and therefore there is no reason to offer more, because they know that if the person walks away, they'll just get the same minimum wage job somewhere else.
Consider an alternative scenario, without a minimum wage. Companies have to price workers based on demand. As McDonald's starts to lose workers due to turn over, it needs to raise it's wages because turnover has a very real cost. When people find out that you can make an extra $1/hr at McDonald's, Burger King would start to lose employees and have to increase prices to compensate. It
could create an upward pay cycle, compared to today when both companies have a fixed level to start at.
The alternative is that it could go the other way. With no floor price and too much supply, McDonald's says it wants more profit and realizing it has a surplus of employees, it offers $1 less. Burger King realizes that employees are still working for McDonald's at less, so it drops to match. Overtime, it creates a down ward wage cycle because there are too many employees.
So my overall question is this:
Does the minimum wage prevent wage increase wars or prevent wage decrease wars?
Full article:
The Story of Henry Ford's $5 a Day Wages: It's Not What You Think - Forbes