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Amazon trades short-term costs for long-term goodwill with wage hike

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Minimum wage hikes are a good idea when they are born organically out of private-sector decision-making, usually in response to labor market conditions. This is the case with Amazon’s initiative to raise minimum wages within the firm to $15 an hour for all its workers.

In effect, this involves increasing hourly wages for 100,000 seasonal workers and 250,000 regular staff. For some of them, this represents a nearly 50-percent increase in wages from $10 to $15, while for others it is a more modest hike from $14 to $15.

A higher wage is always beneficial. However, attempts to pressure other companies to take a similar step, via a federal minimum wage hike, is misguided.

There are good business reasons for Amazon to consider a wage increase at this time. Amazon typically relies heavily on seasonal staffing, particularly in the fourth quarter of the year when holiday shopping is heavier. This last quarter accounts for more than one-third of their sales revenue in any given year.

However, the labor market this year looks very different compared to prior years. The unemployment rate is at a historic low, and Amazon has to actively compete with other companies in order to attract workers. One easy way to do that is to offer higher wages.

For months, economists have been predicting that as the labor market tightens, firms will have no option but to hike wages, and that forecast is coming true. While other companies have been able to do this sporadically and for only a few workers, the shift to a higher minimum wage across all workers gets Amazon better publicity.

It is also a smart response to other large retailers, such as Walmart and Target, that have already initiated such moves.

In addition to pressure from competitors, Amazon has also been facing some political heat. Senator Bernie Sanders (I-Vt.) introduced the Stop BEZOS Act to publicly shame Amazon into doing more for its workers.

This Act aims to force large employers like Amazon to pay a tax for every dollar that any employee claims from program such as Supplemental Nutrition Assistance Program (SNAP). While the intent is to force companies to hike pay for low-wage workers so that they no longer need to rely on public benefit programs, the practical implications do not align with this intention.

In effect, Stop BEZOS sends exactly the wrong signal to the company. If you hire such low-wage workers, your tax goes up. Given the outcry from both the right and the left, there is little prospect of this becoming legislation.

So, it’s hard to imagine that this proposal played a major role in Amazon’s decision to hike its wage. But it doesn’t hurt that Sen. Sanders is now applauding Amazon for its decision.

At a more practical level, however, Amazon does face the threat of unionization, given the complaints about poor warehouse working conditions voiced by many workers. Unionization cries are not new to Amazon. In 2000, an Amazon call center sought unionization, but the center closed before action was taken.

Again, in 2014, unionization threats came to a head when warehouse workers sought third-party representation. These unionization attempts were ultimately quashed in a vote, but there was much effort put forth by Amazon to ensure this outcome.

Most recently, employees at Amazon’s recently acquired Whole Foods are threatening to unionize. They are arguing for better pay, benefits and profit sharing. Hiking the minimum wage may help alleviate some of this pressure.

Whatever the reason, Amazon’s decision to hike wages is obviously a good one. But the long-run impact on workers will depend upon several other factors.

First, for the seasonal workers, the benefit from the wage hike is temporary. Most workers who get hired between now and December as seasonal staffers will lose their jobs after the busy season.

For Amazon, it’s a short-term hike in costs that coincides with a profitable season, but those expenses will disappear once workers are let go. In other words, they are trading short-term costs for long-term goodwill.

If the costs of hiring full-time workers go up significantly, as a result of both this policy and a generally tightening labor market, Amazon may invest even more in automation. Already, its warehouses are fairly automated, and this shift may become even more pronounced going forward.

While Amazon is adding jobs to the economy at higher levels than most retailers (40 percent annual headcount growth), in 2017, Amazon simultaneously added an estimated 75,000 robots to its production line. Furthermore, machines comprised about 20 percent of its total employee base at the end of 2017.

Finally, are minimum wage hikes coming at the cost of other benefits, so that workers on net, are not much better off? A recent National Bureau of Economic Research working paper suggests that this is often the case.

Using state-level minimum wage changes, the authors find that minimum wage hikes often came at the expense of benefits such as health insurance. Recent news reports also suggest that Amazon may be eliminating monthly bonuses and stock awards for hourly employees and warehouse workers, following the adoption of the higher minimum wage.

The biggest lesson to take away is that Amazon’s actions should not be used as a pretext to push forward a federal minimum wage hike. As research shows, minimum wage hikes may have unintended dis-employment effects.

A forced higher wage, and subsequent increase in costs, forces companies to choose between hiring low-wage and low-skilled workers or substituting for them through automation.

Many companies are already preparing for this in their future. Further mandates will push them onto this path sooner than we like. If the federal government wants to help low-wage workers, it can do so directly, through an expanded Earned Income Tax Credit.

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