There is an argument you hear every time wages come up. It sounds so reasonable that most people never question it: workers should earn enough to buy back what they produce. If they cannot, who will buy the stuff? The economy collapses. Therefore, higher wages are not just fair – they are economically necessary.

It is one of the most seductive bad ideas in economics. Unions use it to justify ever-higher wage demands. Politicians repeat it in stump speeches. Social media activists post it like it is settled science. It is not. When you push on it even slightly, the whole thing falls apart.

Apply It Specifically and Watch It Break

The argument sounds compelling in the abstract. Now apply it to actual jobs.

Should workers at a mink coat factory earn enough to buy mink coats? A single coat might cost $10,000. Should every sewing machine operator on that line take home enough to casually purchase one? Should the workers assembling Rolexes earn enough to wear Rolexes? Should the crew building a $4 million luxury yacht earn enough to buy a $4 million luxury yacht?

Obviously not. Nobody even tries to defend the argument when you frame it this way. But if the principle is valid, it should hold for every product, not just the convenient ones. The moment you limit it to “well, workers should earn enough to buy basic goods,” you have abandoned the original argument entirely and replaced it with a different one about living standards. Which is a fine discussion to have, but it is not the same claim.

Tesla factory workers in Austin assemble vehicles that start around $40,000. The average manufacturing worker in that plant earns roughly $22-28 per hour. After taxes, a Model Y represents about a full year of take-home pay. Should Tesla triple those wages so workers can comfortably buy the cars they build? If Tesla did, the Model Y would cost $120,000. Nobody would buy it. Including the workers.

The Economy Is Not Just Factory Workers

The purchasing power argument assumes that factory workers are the primary consumers. But the national product is not created exclusively by assembly line workers, and it is not bought exclusively by them either.

Doctors buy cars. Farmers buy laptops. Accountants buy furniture. Gig workers buy groceries. Software developers buy houses. Investors buy everything. The economy is a web of exchange where everyone is simultaneously a producer and a consumer – usually of completely different things. The dentist does not need to earn enough to buy dental equipment at retail prices. She needs to earn enough to buy what she actually wants, and the price of dental equipment needs to be low enough for dental practices to be viable.

In a modern economy, your income comes from producing one thing, and you spend it on thousands of other things. The mink coat worker does not need to buy mink coats. She needs to buy groceries, pay rent, get her car fixed, and maybe buy a winter jacket from H&M. Her ability to do that depends on the productivity of the entire economy, not on the retail price of what her specific factory produces.

Everyone’s Income Is Everyone Else’s Cost

Here is the part that breaks the purchasing power argument permanently.

In an exchange economy, your wage is someone else’s production cost. When you get a raise, the price of what you produce goes up. This is not sometimes true. It is always true, by definition. Labor is a cost of production. Raise the cost, raise the price.

Say you successfully push wages up 30% across the board. Congratulations. Production costs just went up roughly 20-30%, depending on how labor-intensive the industry is. Prices follow. Within months, the cost of groceries, rent, cars, clothing, and services has risen to absorb most or all of the wage increase. Workers look at their bigger paychecks and then look at their bigger bills and realize they are running on a treadmill.

This is not theoretical. This is 2022-2024 in the United States, in real time. Wages rose. Prices rose faster. The average American worker’s real purchasing power – what their paycheck actually bought – was flat or negative for over two years. Nominal wages went up. Real wages went sideways or down. The extra dollars in the paycheck were eaten by the extra dollars on the price tag.

The Two Paths to Nowhere

When wages are forced above productivity levels, the economy has exactly two options. Both are bad.

Path one: money supply stays constant. If you raise wages without printing more money, businesses cannot afford to employ as many workers at the new rate. Result: unemployment. The workers who keep their jobs earn more. The workers who lose their jobs earn zero. Total purchasing power in the economy does not increase. It just gets redistributed from the newly unemployed to the still employed.

Path two: money supply expands. The government prints more money to support the higher wage levels. For a while, it looks like it works. Everyone has more dollars. Then prices adjust. More dollars chasing the same amount of goods means each dollar buys less. This is inflation, and it cancels the wage gain with mathematical precision. You earn 30% more and everything costs 30% more. You are back where you started, except now your savings are worth less.

There is no path three. You cannot hand out more purchasing power than the economy produces. You can shuffle the existing purchasing power around – giving more to one group, less to another. But the total is bounded by total output. Always.

The Henry Ford Myth

People love to bring up Henry Ford’s $5 per day wage in 1914 as proof that paying workers more creates more demand. “Ford paid his workers enough to buy his cars, and it worked!” This gets repeated so often it has achieved the status of economic gospel.

It is mostly wrong.

Ford did not raise wages to create customers. He raised wages because his turnover rate was catastrophic – 370% annually. Workers hated the monotony of assembly line work and kept quitting. He was spending a fortune constantly training replacements. The $5 day was a retention strategy, not a demand strategy. It worked brilliantly for that purpose.

Ford’s 15,000 workers, even at $5/day, could not have sustained demand for the hundreds of thousands of Model Ts rolling off the line. Ford’s customers were the entire American middle class – farmers, shop owners, professionals, salesmen. The market for the Model T was millions of people. His own workforce was a rounding error in that market.

The lesson of Ford is actually the opposite of what people think it is. Ford did not pay high wages to create purchasing power. He paid high wages because the productivity of his assembly line was so extraordinary that he could afford to, and he needed to in order to keep people on the job.

The $25 Minimum Wage Question

The “living wage” campaigns pushing for $20 or $25 per hour minimum wages are the purchasing power argument dressed in modern clothes. The reasoning: if workers earned more, they would spend more, and the economy would boom.

Apply the logic. Mandate $25/hour nationally. What happens?

Every business whose lowest-paid workers currently earn $12-18/hour faces an immediate 40-100% increase in labor costs for those positions. Small restaurants, convenience stores, dry cleaners, daycares, landscaping companies – these are not tech firms with 70% margins. They operate on 3-8% margins. They cannot absorb a doubling of their labor costs.

Some raise prices. Customers buy less. Some automate. Workers get replaced. Some close. The jobs disappear entirely. The workers who keep their jobs at $25/hour are better off – until prices adjust. The workers who lose their jobs are categorically worse off. The net effect on total purchasing power is zero or negative, because the policy destroyed output by destroying businesses and jobs.

Amazon is the case study everyone should pay attention to. Amazon warehouse workers have pushed for higher pay while Amazon simultaneously invests billions in warehouse robotics. Every dollar increase in labor cost accelerates the business case for replacing that labor with machines. The workers are in a race against their own wage demands. Higher pay makes the robots cheaper by comparison, which makes the automation timeline shorter, which makes the higher pay temporary.

The Right Wage Is the Productive Wage

So what is the right wage? Not the highest possible. Not the one that sounds fair on a podcast. The right wage is the functional one – the one that maximizes production, employment, and exchange.

A wage that is too low relative to productivity means the employer is capturing value that could attract better workers. The market corrects this through competition, as other employers bid for underpriced labor. A wage that is too high relative to productivity means the worker costs more than they produce. The market corrects this through layoffs and automation.

The functional wage is the one where the worker produces enough value to justify the pay, and the pay is high enough to attract and retain the worker. That wage is different for every job, every industry, every region, and every moment in time. It cannot be set by legislation or by a slogan. It is discovered through the messy, imperfect, constantly adjusting process of millions of employers and workers making individual decisions.

You Cannot Distribute What Was Not Produced

This is the sentence that summarizes the entire argument.

The purchasing power of wages depends entirely on what those wages can buy. What they can buy depends on what the economy produces. What the economy produces depends on productivity – capital, technology, skill, efficiency. Mandating higher wages does not produce a single additional unit of output. It just changes the number printed on the price tags and paychecks.

Trying to run the economy for the benefit of one group – whether it is factory workers, union members, or any other subset – at the expense of the overall productive system does not lift that group up. It drags the whole system down. When you force prices or wages above their functional level, you do not create prosperity. You reduce production and employment, which reduces the total amount of stuff available for anyone to buy.

The economy is not a pie that exists in a fixed size, waiting to be divided. It is a pie whose size depends entirely on the incentive structures in place. Policies that distort those incentives – that punish production, reward idleness, or force costs above sustainable levels – shrink the pie. A bigger slice of a smaller pie can easily be less food.

The Takeaway

The idea that workers should earn enough to buy back what they produce is emotionally satisfying and economically empty. It confuses cause and effect. High wages do not create prosperity. Prosperity – driven by productivity, investment, and exchange – creates the conditions for high wages.

Every time wages go up because productivity went up, everyone wins. The worker earns more. The employer profits from the higher output. The consumer gets more and better products. This is the only version of rising wages that is sustainable.

Every time wages go up because a law, a strike, or political pressure forced them up without a corresponding increase in productivity, someone pays. Either through inflation that erases the gain, unemployment that eliminates it, or higher prices that transfer the cost to everyone else.

You cannot legislate purchasing power into existence. You can only produce it. And the economy that forgets this does not get higher wages. It gets higher prices, fewer jobs, and the slow grinding realization that you cannot distribute more wealth than you create.