Do minimum wages drive industrialization?

Minimum wages kill employment, right?

Maybe not. After doubling the wages at his auto plants, Henry Ford explained:

our own sales depend on the wages we pay. If we can distribute high wages, then that money is going to be spent and it will serve to make… workers in other lines more prosperous and their prosperity is going to be reflected in our sales

Of course, this is the man you brought you The Protocols of the Elders of Zion, so maybe we can’t accept everything at face value.

Now, evidence from Indonesia’s industrialization:

Big Push models suggest that local product demand can create multiple labor market equilibria: one featuring high wages, formalization, and high demand and one with low wages, informality, and low demand. I demonstrate that minimum wages may coordinate development at the high wage equilibrium.

formal employment increases and informal employment decreases in response to the minimum wage. Local product demand also increases, and this formalization occurs only in the non-tradable, industrializable industries

A new paper from Jeremy Magruder.

4 Responses

  1. Gavin Wright argues that something similar happened to the southern US as a result of New Deal farm programs and labor law changes(pdf):

    As Wright explains, “The modern period of equilibration [between North and South] only began in earnest when the institutional foundations of that regional labor market were undermined, largely by federal farm and labor legislation dating from the 1930s.” . . . The end result was a fundamental change in the southern economy. With employers no longer operating in a low-wage labor market isolated from the rest of the nation, the incentives for those who dominated the southern political system were now different. After decades of resisting economic integration, southern leaders actively sought industrialization and inflows of northern capital . . .

  2. I think Chris’ point is that Ford’s intellectual honesty might be doubted. If Einstein’s opinions of Stalin were wrong-headed, at least they were honest–the Protocols, on the other hand, were downright fraudulent.

    Of course, it’s a bad idea to take everything at face value, no matter who’s talking–Ford, Einstein, Blattman, or whoever. This is why we gather, interpret, and (try to) replicate data.

  4. Reminds me of the CEO who called into NPR in winter 2009, explaining that he’d be willing to accept a higher tax burden, greater deficit, etc. because his customers were middle class, and he needed them to have a little more money to spend on his products.