Low Wages, High Unemployment

Henry Ford is famous for raising his employees' wages so they could afford to buy a Model T. The Fed Reserve chair nominee, Janet Yellen, did research quite a few years ago showing that low wages leads to high unemployment.

If her research holds true, then it would make sense to raise the minimum wage as many states are doing. We stimulate the economy, creating a demand for goods and services and generating a need for more people in our companies. The employment cost index (ECI from the Bureau of Labor Statistics) shows a 3% increase in 4 years from 2001 - 2005 and then it peaked in 2008 and has since dropped so that 2013's ECI is on par with 2005 on a constant dollar basis. I've done a correlation of the BLS data from 1981 to 2008. (The years 2009-2013 indicate a deviation from any relationship between the two variables.) However, even excluding the recent 'outliers,' the data shows a correlation of only 42%, meaning there are other significant influential factors influencing the unemployment rate.

According to Yellen's and coauthors' work, employees withdraw effort when they perceive that their wages have fallen below fair market levels. Unfortunately, the end result is that unemployment goes up--sort of self-sabotage, don't you think? There used to word circulating through business in the 1980's that when Japanese workers were unhappy, they became more productive to prove their usefulness and indispensability to management. Their conclusions are based on social psychology and social exchange theories. There must be some validity to their theory. If so, then we as workers are as irrational as the stock traders. She also has research that shows that higher wages leads to higher unemployment because workers are more productive when their wages exceed fair market levels, thus mitigating any need for any new employees. In that light, the states' efforts to increase minimum wages would be misguided.

They just can't win.

I guess that, really, there are many other significant factors that influence unemployment beside wage levels, as shown by the correlation results.