The unintended consequences of Amazon's wage hike

The unintended consequences of Amazon's wage hike
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Amazon’s recent announcement that it will increase the pay of all of its employees to a minimum of $15 per hour has been widely viewed as great news, especially for Amazon employees getting a significant pay hike. 

One important consequence of that action — the intense competition for qualified employees in tight labor markets — will force up wages at many other businesses, and not just those competing against Amazon, such as Walmart and Target.

Materially higher pay, though, will not be an unalloyed blessing, especially if, as Amazon CEO Jeff Bezos is championing, Congress enacts a major increase in the minimum wage.

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Quite simply, a higher across-the-board, one-size-fits-all minimum wage will reduce job opportunities for less-skilled workers and new entrants to the workforce. As wages rise, employers will have an increased incentive to automate various business processes. 

For example, fast-food restaurants, a major employer of the relatively unskilled and inexperienced, will automate more food-preparation activities while shifting customers toward ordering on a touchscreen rather than giving their order to a live person.

Many businesses, especially smaller and labor-intensive ones, will be unable, though, to suddenly pay a much higher hourly wage. Instead, they will shrink in size or simply go out of business, leaving their employees without a job.

An example will illustrate the consequence of pushing the minimum wage too high:

Assuming a 40-hour work week and after taking payroll taxes, paid time-off and the cost of employee benefits into account, the cost to an employer of boosting an employee’s pay from the present federal minimum of $7.25 per hour to $15 could easily rise from approximately $10 per hour today to $20 per hour. That cost increase equates to approximately $21,000 per year per employee.

For many businesses, that additional cost will justify automating the work currently performed by suddenly more costly employees or at least introducing labor-saving equipment to reduce the number of workers required to produce “X” amount of output, such as boxes packed and shipped or customers served per hour.

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Of course, installing labor-saving equipment and automating various activities has the very beneficial effect of boosting labor productivity, which pays for increases in real wages and higher living standards across the economy. Productivity-enhancing investments also increase employment elsewhere in the economy.

Although not widely known, last year’s tax legislation increased the incentive for small businesses to invest in labor-saving machinery by permitting those business to take an immediate tax deduction for investments in equipment and computer software. That has incentivized job automation and, therefore, job elimination by small employers.

However, and this is an extremely important however, more productive jobs usually require more skilled and diligent employees, even in a warehouse or a fast-food restaurant.

Forcing up wages through minimum-wage increases will therefore be counterproductive for those with limited job skills, such as folks just entering the workforce and in regions of the country with few job opportunities. 

Consequently, employment in economically marginal areas of the country will likely shrink due to a higher minimum wage as businesses in those areas find it harder to compete against larger, more-efficient businesses located in metropolitan areas. 

Stores in small towns will lose even more business to stores in larger towns. Businesses will close, jobs will disappear and customers will have fewer choices.

A $10 or even a $15 minimum wage might be tolerable in a major metropolitan area but will be a job-killer in economically marginal areas, and there are many such areas in the United States. A minimum wage amount suitable for Manhattan will be far too high for a small town in upstate New York or southern West Virginia.

Simply put, many small businesses, especially those located in marginal areas, cannot afford a $10 minimum wage, let alone $15. Among other factors, they may not have sufficient capital or enough business to justify investing in labor-saving equipment.

Jeff Bezos may feel a political need to support a national minimum-wage increase, or “political insurance,” as The Wall Street Journal called it, while driving up his competitors’ costs would enhance Amazon’s business prospects. What might be good for Amazon and Bezos, though, will not be good for many workers and businesses.

Legislators — both federal and state — should leave the minimum wage where it is and instead rely on the United States’ strong, vibrant economy to continue creating jobs while improving employee productivity. 

Doing so will lead to a more sustainable increase in employment and wage growth while not harming those with few job skills or living where there are few jobs.

Bert Ely is the principal of Ely & Company, Inc., where he monitors conditions in the banking industry, monetary policy, the payments system and the growing federalization of credit risk. Prior articles by Ely on banking and economic issues can be found here.  Follow Bert on Twitter: @BertEly