What Do We Learn from Amazon and the Minimum Wage?

Amazon’s widely touted increase in its minimum wage was accompanied by an ending of their monthly bonus plan, which often added 8% to a worker’s salary (16% during holiday season), and its stock share program which recently gave workers shares worth $3,725 at two years of employment. I’m reasonably confident that most workers will still benefit on net, simply because the labor market is tight, but it’s clear that the increase in the minimum wage was not as generous as it first appeared.

What lessons does this episode hold for minimum wage research? Amazon increased its wages voluntarily but suppose that the minimum wage had been increased by law. What would have happened? Clearly, Amazon would have, at the very least, eliminated their bonus plan and their stock share plan! In this situation, researchers examining employment data would discover that the increase in the minimum wage did not much lower employment. Such researchers might conclude that minimum wages don’t reduce employment much because the demand for labor is inelastic. The conclusion is correct but the reasoning is false. The correct conclusion and reasoning would be that the minimum wage didn’t reduce employment much because the minimum wage didn’t increase net wages much.

Amazon is a big and newsworthy employer so its actions have been closely monitored but in most cases we never know the myriad ways in which firms respond to a law. Even using administrative data it would be difficult to pick up changes in a stock share plan or a pension plan, as this compensation doesn’t show up in earnings until years after the work is completed. Even a simple employment contract is a complicated bargain with many margins. During the holiday season, for example, Amazon hires a CamperForce of workers who live in RVs and it pays their campsite fees–no big deal, but that is a form of compensation that is hard to find on a W-2. More generally, firms can respond to a minimum wage by changing compensation on non-wage margins, adjusting working conditions, reducing benefits, changing wage growth patterns, and adjusting the type of workers they hire, to give just a few examples–and notice that all of these changes are difficult to measure and none of them have a first-order effect on employment.

Comments

and isn't America's unusual health insurance set up a function of firms responding to a new law. They weren't allowed to increase wages so they added benefits.

In my experience left wing people don't care much for business or the details of incentives and how companies respond to changes in the law - they focus almost entirely on symbols, including the minimum wage. An increase is seen as a win for their side.

I'm conservative, but I think "they focus almost entirely on symbols", rather than the complexity of reality, is a criticism that can be applied more or less equally to both sides. Everybody wants to "win", meaning move policy in the direction of their ideological preferences (and who cares whether it is a well-designed policy that will actually be beneficial).

I'm in favor of limited government and a symbolic win for limiting government is incidentally almost always an actual win for improving the functioning of society. 🙃

For instance, a symbolic tax cut that doesn't have any attached underlying spending cuts? 😬

Cosign. There is very little appetite for well thought-out health care policies. One of the best examples is that both left and right believe the myth that there are two kinds of health care systems in the world: 1 used by the US, and 1 used by everyone else. In reality the US system is more in the middle of the pack in terms of policy.

Why would they eliminate those programs if it's increased by law? They would now be competing for workers against all the other employers who are paying $15 dollars a hours. If they want to compete and get good workers, they need to offer something better than the bare minimum. They've obviously been paying more than the minimum wage all along. Unless you don't believe the labor market is functioning well and has prices set by supply and demand.

That does seem to be the common fall back position among "free market" types who don't want government intervention. They go from the free market is wonderful to the market is so horribly broken that employers/producers have all the market power and would be able to avoid all the costs of the government intervention by passing them on to the workers/consumers.

Raising the minimum wage alters both the supply of workers (more may be willing to enter the workforce at higher rates) and the supply of jobs (employers may hire less).

Therefore, raising the minimum wage by $X doesn't automatically raise the true market rate for all jobs by $X. The market rate may go up, stay the same, or even go down. (By market rate, I here mean the rate someone would hypothetically be willing to work for absent the minimum wage rule).

To give an extreme example that illustrates the point, suppose minimum wage were raised to $100. The labor market would flood with additional potential workers, since nearly everyone would want to work if they could make that much money. However, Amazon and many other employers would replace most of their workforce with robots. There would be a huge glut of workers, and jobs would disappear. Any company who was willing to pay minimum wage would attract dozens of overqualified candidates for every open position. They would be able to offer no perks and horrible working conditions, and still fill all of their jobs.

Yes, I think the logic here is that Amazon was attempting to attract more workers by increasing wages, and in attempting to do so, they still eliminated bonuses/stock grants. If they were forced to increase wages by statute, then they abso-f'ing-lutely would have eliminated those bonuses/stock grants, because in that scenario, they're not concerned about attracting new workers, just complying with the minimum wage laws.

The market rate may go up, stay the same, or even go down.

This is a good assessment. We don't know exactly what will happen.

Maybe the workers lack market power and even though they provide $20 worth of value, Amazon can bid them down to $12, so a minimum wage of $15 is a boost.

Or maybe if wages are set by law at $15 an hour, Amazon fires their current workers and hires an entire better class of workers, which is an extreme case of hurt on those old workers the law was nominally to help.

When Canada increased its minimum wage to $14 from $11.60, Tim Horton's eliminated paid breaks, fully covered health and dental plans, and other perks.

By what other mechanism do you propose non-broken markets should set prices except by supply and demand? I guess you took a very different micro class than I did.

Jonathon misses the point of Alex's post: we are reduced to speculating about the effects, because we know there are large impacts that we know we do not measure.

I'm impressed that workers with so low hourly rates can wait for a long time to profit from the stock grants.

Another alternative is that Amazon is weaponizing the minimum wage. As the article says the wage increase may be less than 1% of annual revenue, but what about Amazon's competitors? What if it's more difficult for competitors to pay this wage? This has been the history of Amazon, having low profits at the expense of growth.

Yep. And Amazon is already more automated than competitors and probably expects this strategic advantage to grow over time (in their distribution centers and possibly also with their 'Amazon Go' automated store concept), so a high national minimum wage would probably be a great thing for the company.

... ”but what about Amazon's competitors?”

What competitors?

Smaller online retailers plus Walmart, Costco, Home Depot, Best Buy, Barnes & Noble, etc. A higher minimum wage would hurt bricks and mortar competitors relative to Amazon especially (since staffing a retail store is more labor intensive than a distribution center per unit of sales).

Hasn't Amazon just recently opened some B&M store? Kinds suggests competition somewhere.

Costco won't be affected; they've long paid their workers well above minimum wage to minimize turnover. But then, Costco is I believe somewhat less labour intensive compared to most retail stores because they minimize the number of different products they sell and sell a lot of products right from pallets. Restocking is presumably much easier for them.

Every other company that sells things Amazon sells...

Amazon made this change because it was difficult hiring a full compliment of EEs with the wage package as offered. Thus, positions were open all time. Paying $15 to start should mean all positions get filled. Thus the level of employment goes up by that number along with the quality(?). Other employers are not forced to pay $15, thus are left with lower average quality, but hire the same number of people.

Would the average economics researcher really come to the conclusions Alex suggests? This is either propogating false stereotypes about economics or revealing them to be somewhat true.

What false stereotypes?

Observe change measurable along one dimension. Fail to see other factors. That’s a common stereotype. Like Alex’s would-be researchers. I’m just asking is it just rhetorical flourish, or would most researchers really reach the ‘correct’ but misleading conclusion as Alex suggests?

Probably only when it's a partisan issue

A follow up might be what do we learn from Amazon about discrimination: https://www.reuters.com/article/us-amazon-com-jobs-automation-insight/amazon-scraps-secret-ai-recruiting-tool-that-showed-bias-against-women-idUSKCN1MK08G

Another example of how lawmakers do not understand incentives....

Or how the average public pundit doesn't understand political incentives for lawmakers....

Has the misuse of the apostrophe in the possessive of "it" become acceptable in English? One of my pet peeves.

It's cool.

It's its destiny to be acceptable.

If it's acceptable to use "begging the question", "tribalism" and "dead heat" incorrectly why worry about "it's" as a possessive?

"Amazon’s widely touted increase in its minimum wage"
Minimum wage is a government mandate for all employers.
Starting wage is a policy for one specific company. Amazon increased the lowest entry-level wage for its company.
It might be a distinction without difference, but it seems to me that using the term "minimum wage" places the story in a political rather than a business context.

Minimum wage is the term used in company produced literature provided to current associates explaining the new wage policies.

Was any Amazon employee in any position to refuse the hourly wage increase in order to retain the benefits of the stock share program and/or the monthly bonus plan? (Is any US employee entitled to refuse an hourly minimum wage increase?)

Why or why not?

What would having given Amazon employees this option have meant for the company? for perceptions about "wage fairness"? for (further) discussions concerning minimum wage outcomes?

No. There was no choice. All current hourly associates retain any potential stock awards. Those awards have a two year vesting period from the date of award.
It’s also important for people to know that the monthly performance pay of 8% is split into two pieces. 4% is awarded if an associate has no unexcused absences for the month. The other 4% is based on the fulfillment center achieving more than 100% of monthly plan goals. Many centers do not do earn the second 4% at all. Others only occasionally. Some very few nearly every month.

Shades of the Ford $5 a day wage. Most naive mentions in history books don't note that not all workers were automatically entitled to that wage and that with it came onerous conditions that would justly be labeled fascistic or communistic given the intrusions on the personal lives of workers by Ford's Sociology Department (what a great name for an intrusive, spying, paternalistic organization!)

It's also misrepresented as a move to allow workers to buy the cars they built, rather than a move to keep them from working at Ford's quickly growing competitors.

Not to mention invoked as a sort of economic perpetual motion machine. E.G., "if Caterpillar pays its workers more, the workers will spend part of that money buying excavators and bulldozers from the company so Caterpillar's profits will be higher! Henry Ford proved it!"

It was a brand new labor market. The old wages were insufficient to keep people on the job because working on assembly line, while efficient and good for quality, is incredibly mind-numbing.

It's almost as if one might conclude that there's no free lunch.

Amazon warehouse and McDonalds select for different characteristics. Although I'd expect Amazon would be more selective.

Amazon's fulfillment centers are fast-paced and, unlike the warehouse jobs of old (where you might hide behind a pallet or something if you got tired) Amazon's computers always know exactly how fast you are working and how many mistakes you are making.

I'd expect Amazon would find it difficult to screen for employees who can and will keep up the required pace. Thus, I'd expect Amazon would hire lots of people but then quickly reject many who just weren't fast enough.

Therefore the Amazon starting wage wouldn't mean all that much as it's just what Amazon has to pay to find out who can do the work and who can't.

Although a McDonald's can be fast-paced during periods of peak demands it also has slow times and although you'd want "front" employees to be able to display at least a modicum of civility, I'd expect a McD's to be less selective, and mostly be satisfied if employees show up on time ready and able to work.

Amazon and McD's are different workplaces and, although both offer low-skill work, I'd expect they're different enough so that a higher starting wage at Amazon might have little effect on wages at McD's.

Thus, I'd expect Amazon would hire lots of people but then quickly reject many who just weren't fast enough.

That's the way many businesses work but in a slightly different way than you imply. Any foreman or middle manager that directs a substantial number of workers is aware that his own boss knows that some of his people will not be as efficient as the rest. It's part of management to weed out the inefficient so there must be a certain amount of "churn" in the workforce to indicate that foremen are keeping tabs on their men. If a manager controls 50 people he knows that he's going to need to get rid of a few of them regularly. If he doesn't, his boss is going to ask if all of these guys are perfect workers. The easiest way to tell the difference between the good workers and the slugs is by how fast they move.

There's lots of interest in the minimum wage and the adverse consequences of raising it. Why not have the federal government subsidize low wage workers by paying for the increase in the minimum wage. What about the deficit? One might ask. There wasn't much asking when the government paid for a large tax cut mostly to wealthy people with borrowed funds, increasing the annual deficit to over $1 trillion. Indeed, I don't recall a single comment at this blog questioning the adverse consequences of the tax cut.

Rayward, of course you are talking about the EITC that does just what you are proposing.

Interestingly, conservatives are always talking about how the EITC is superior to the minimum wage. Yet, Republicans now control all three branches of the federal government yet I see no evidence that they are even thinking about raising the EITC.

I tell you what, when I see conservatives actually doing something about the EITC, I will start to take some of their claims seriously. Meanwhile, all the talk about the EITC seems to be just that, talk they use to avoid actually doing anything about the minimum wage.

Wow, what happened to all that analysis a year or so ago that the Seattle minimum wage hike would cause all those Seattle workers to lose their jobs? Now we see Amazon -- one of Seattle largest employers -- raising their wages because they are having problems keeping employees?

Shouldn't we have as of those people forecasting gloom and doom about Seattle's high wages to explain why they were wrong?

Of course the comments here seem to ignore that the Seattle experiment with higher wages did not seem to harm low wage workers.
Anyone here care to disprove that?

Amazon does not have minimum wage employees in Seattle so this is totally irrelevant to that. Why should we have to disprove something you have not proven in the first place? The last information I am aware of is the study that concluded it was damaging.

Where can I confirm that Amazon has no minimum wage workers in Seattle?

"we conclude that the second wage increase to $13 reduced hours worked in low-wage jobs by 6-7 percent, while hourly wages in such jobs increased by 3 percent. Consequently, total payroll for such jobs decreased, implying that the Ordinance lowered the amount paid to workers in low-wage jobs by an average of $74 per month per job in 2016."

http://www.nber.org/papers/w23532

"The conclusion is correct but the reasoning is false. The correct conclusion and reasoning would be that the minimum wage didn’t reduce employment much because the minimum wage didn’t increase net wages much."

Is this fact or opinion? If it's fact, I'd be interested in seeing the supporting data. If it's opinion, then I believe it should be written as such, and not stated as a fact.

One interesting way that firms respond to laws is by following them.

The coverage of this has been embarrassing. How can people consistently claim that the hourly wage was exploitatively too low, and then turn around and complain about Amazon shifting compensation into the hourly wage while keeping total compensation constant or higher? Either the hourly wage is important or not; if it's important, then the low wages may be bad but shifting compensation into it is good, and if it's not important, then it being low in the first place wasn't an outrage and shifting compensation is irrelevant. It can't be that the hourly wage was outrageous and the shifting compensation around is also outrageous...

Reminds of similar events in UK when living wage was increased. For instance coffee shops cutting freebies for workers - from free food and unlimited coffee to discounted food and limited coffee.
https://www.google.co.uk/amp/s/amp.theguardian.com/uk-news/2016/apr/16/employers-claw-back-national-living-wage-cuts-pay-perks

I think that the increased hourly wage likely provides a higher utility to the workers than the deferred benefits. Suppose that the reduction in (especially) stock sharing and bonuses exactly offsets the increase in hourly wages. Then I think that the fact that lower wage workers almost never empirically max out 401(k) matches (a voluntary way to defer income for greater net compensation) shows that money now has greater current utility than a larger amount of money later.

Actions speak louder than words. When I owned a business and was required to increase hourly wages, I made adjustments to employees' work schedules, refigured commission plans, eliminated less skilled employees, and refigured benefit plans. All these actions were executed to control the business' costs so its' products and services were reasonably priced for customers and to maintain its financial health.

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