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Corporate America needs to raise wages. Why? It’s good for business

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Pity the poor hedge fund manager. After making billions during the financial crisis betting on a housing market crash, the heads of some of the nation’s biggest funds made bets recently on a U.S. economic liftoff. Those wagers so far have flopped. GDP growth projections hover around—at best—a tepid 2%, and the Fed seems determined to keep interest rates near zero for a “considerable” time. As a result the macro funds managed by illustrious names like Paul Tudor Jones, Alan Howard, and Louis Bacon have fallen in rough proportion to the bond market’s rise. What did the gods of finance miss? The lack of consumer demand.

Perhaps it is difficult to see the plight of lower- and middle-class mortals from the heights of Mount Olympus. A new book, House of Debt, by Princeton economist Atif Mian and Chicago University finance professor Amir Sufi, could help them see through the clouds. The authors argue that the folks who needed help during the crisis were not financial institutions but the economically vulnerable households to whom they lent. Falling demand from these households was the root cause of the 2008 recession, and they have yet to recover. The last thing they need is more debt, even at the Fed’s rock-bottom rates. What they need—and our economy needs—is real wage growth.

A century ago, Henry Ford gave a huge boost to the American middle class by more than doubling workers’ daily pay to $5. Ford was no altruist. He wanted to address high turnover and chronic absenteeism in his workforce. Paying workers more to increase profits was counterintuitive at the time, but it worked. Realizing the good deal they were getting, Ford’s workers became more productive. Not only that, but they bought more Ford cars with their new wages. In just one year Ford’s car production rose nearly 20%.

Ford’s bold—and successful—move was a game changer in how companies thought about worker pay. Though his fellow magnates initially saw him as a traitor, they eventually emulated his success.

Today too many companies look at the rank and file’s wages as an expense item to minimize, vs. an investment in greater productivity and top-line growth. Even as capital distributions to shareholders soar to the heavens, workers’ pay remains in the pits.

Granted, it’s a buyer’s market in the labor force, but is it right for a company to pay below-poverty-level wages just because it can? Okay, putting aside the ethical question, does it make good business sense? How many companies have done a serious analysis of absenteeism and turnover rates to determine what their cost savings might be with a bit of a wage hike? And for investors taking a long view, how much benefit would accrue to the economy by reallocating more corporate profits to lower-income workers, who will spend the money instead of just plowing it back into the stock market?

We hear corporations defending the high pay of senior management as a cost-effective strategy to keep good talent and reward performance. Companies love to pay their top executives a little more than their competitors under the theory that they can recruit and retain better people. So why doesn’t the same thinking apply to employees at the other end of the pay scale?

For companies that sell goods and services to low- and middle-income households, boosting wages seems a no-brainer. To its credit, Gap recently said it was raising its minimum wage to $10 an hour. But what we need is a big kahuna like Wal-Mart to take the lead. As many analysts have concluded (including Fortune’s Steve Gandel), raising wages wouldn’t hurt Wal-Mart’s shareholders.

BAI.07.21Graphic Source: S&P Capital IQ
THE RICH GET RICHER While S&P 500 dividends and stock buybacks have soared, workers’ wages have stalled, keeping U.S. economic demand soft.

There is heated debate in Washington over President Obama’s proposal to raise the minimum wage. While I support the proposal, I recognize that the federal minimum wage is a blunt instrument, indiscriminate when it comes to a company’s size, business model, or workers’ location. It would be far better for companies to take the initiative based on their own enlightened self-interest. Market-based conservatives might oppose the minimum wage, but they should applaud companies that for sound business reasons decide to better reward workers. And hedge fund managers who are betting on America’s economic revival should do the same.

Fortune contributor Sheila Bair is former chair of the FDIC.

This story is from the July 21, 2014 issue of  Fortune.