Tuesday, October 27, 2015

If higher wages kill jobs, explain Gravity Payments

In April of this year, we were treated to a story about a CEO who raised the minimum wage at his company to $70k a year. That CEO was Dan Price, founder of Gravity Payments and you can read all the cool details about his decision at Inc's website. I love this story for so many reasons and a few of them aren't even discussed in most of the articles I've seen covering it. So today, I want to bring forth some of the subtext for the story.

I first wrote about the story back on April 19th of this year. In that piece, I did more of an ideological perspective on the event. In the following months, there were doom and gloom articles about how the plan would fail because, well, "socialism just doesn't work". Never mind that France has a 32 hour work week and some of the most productive employees in the world by any measure.

I encourage you read the piece at Inc because it brings to light the details and backstory that were missing from the initial reporting. For example, the Inc piece discusses the genesis of Dan Price's decision. He had an interaction with one of his employees where he was confronted with a problem: Price was paying the employee the market rate, but the market rate was not enough. Price was bothered by this for weeks and gave it much thought.

Price and the unfortunate employee noticed together that the market is rigged. Just as Elizabeth Warren has noticed. Just as the courts have noticed, too. In May of this year, a judge approved a $415m payout to employees that suffered economic harm due to a "no-poaching agreement". Apple and Google had agreed not to poach employees from each other to avoid wage escalation due to competition for talent. This is how large companies can collude to set market rates for compensation and the no poaching agreement is very likely the tip of the iceberg.

Consider that there are many business associations like the Grocery Manufacturers Association, the Construction Contractors Association and the National Mining Association. Pick an industry and you'll find a way for so-called competitors to meet and collude...I mean, collaborate...on setting national and local policies that promote their respective businesses. They're sort of like a union, aren't they?

When power is consolidated in business associations, then setting public policy and rigging the market to suppress wages becomes much easier. An added bonus is the ability to write and pass laws that suppress union membership in the market.

Back to the story at Gravity Payments. The company is reporting that since the minimum wage increase, profits have soared, customer retention has increased and turnover has decreased. Price has noticed that morale is better, employees stopped worrying about the money and got focused on the work resulting in a productivity increase of 40%. The mainstream media would have us believe that a $70k minimum wage is not sustainable. But the numbers prove that it actually pays for itself. 

Another interesting facet of Price's decision to raise the minimum wage is this:
"I began wondering what my friend would have to make so she wouldn't have to worry about a $200 rent hike," says Price. He recalled a 2010 study by Princeton behavioral economist Daniel Kahneman finding that, while people did not feel happier on a daily basis as their income rose above $75,000, they were decidedly unhappier the less they earned below $75,000. At Gravity, new hires made $35,000 a year.
I read about that study, too. I even wrote an article that touched upon it. But here's the kicker. The mainstream media would have us believe that higher wages are not supported by economics even though Gravity Payments is proving otherwise. The Inc article notes that a couple customers went elsewhere because they didn't support the political statement implied by the $70k minimum wage. Another was worried that the news would somehow force their company to raise their own wages.

But if the economics support the increase in wages, then there must be something else going on. The mainstream conservative justification for wage austerity is that it "builds character" and that it makes people more willing to compete in the market. In other words, if you gave them a guaranteed income like unemployment insurance and/or welfare, they won't be willing to work for a low wage. Take that away and bingo!, people get really interested in work.

But that's not what the numbers tell us. The numbers tell us that if you raise wages, people stop worrying about the money and get really interested in work. I think the motive is a bit more grim as noted by Timothy Noah at Slate:
"Living conditions improve over time. But people do not experience life as an interesting moment in the evolution of human societies. They experience it in the present and weigh their own experience against that of the living. Brooks cites (even though it contradicts his argument) a famous 1998 study by economists Sara Solnick (then at the University of Miami, now at the University of Vermont) and David Hemenway of the Harvard School of Public Health. Subjects were asked which they'd prefer: to earn $50,000 while knowing everyone else earned $25,000, or to earn $100,000 while knowing everyone else earned $200,000. Objectively speaking, $100,000 is twice as much as $50,000. Even so, 56 percent chose $50,000 if it meant that would put them on top rather than at the bottom. We are social creatures and establish our expectations relative to others."
I think that the top 1% are in a race to the top. They all want to be the highest earner. But the only way to support that race is to suppress wages for everyone else. That's because there is only so much money in the economy and it has to go somewhere. To keep escalating non-wage income at the top, wage income, capital allocated to labor, must go down.

The problem is that none of this race is making anyone happier. Happiness is a choice, not a number. Dan Price has recognized this problem and put a solution into practice and profited from it. The only reason I can think of to keep the charade going is that conservatives just want to save face.
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