My view on what's going on in the financial markets and the global economy, and a few other things that might interest me from time to time.

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  • tim@emorningcoffee.com

The collateral effects of "selective" wage increases to $15/hour

Remember when Bernie Sanders, supported by most of the Democratic party, was jumping up and down back in 2018 over Amazon (AMZN) paying its employees less than the “minimum living wage” of $15/hour? Mr Saunders has been a long-time advocate of a minimum living wage of $15/hour, well above the current federal minimum wage of $7.25/hour. You can find Mr Sanders’ well-articulated views directly on the website feelthebern.org here. This growing crescendo of fist-banging over Amazon reached its climax in the autumn of 2018. CEO Jeff Bezos finally capitulated, agreeing to raise the minimum wage of around 350,000 full- and part-time Amazon employees across the US to $15/hour which became effective November 1, 2018 (press release here).


In March 2019, US retailer Costco (COST) followed suit, announcing that it would raise its minimum wage to $15/hour. (Two years later, COST announced a further increase to $16/hour.) In July 2020, US retailer Target (TGT) announced that it would increase its starting wage for employees to $15/hour (here). More recently in February 2021, Walmart (WMT) agreed to raise its average minimum wage to $15/hour, affecting around 425,000 US employees (embedded in FY2020 results, press release here). WMT’s wage increase is different than AMZN, TGT and COST though, because WMT maintained its starting wage at $11/hour to give employees the opportunity to progress in the company and eventually earn higher wages. Nonetheless, it is another example of a major US employer bowing to both post-pandemic labour market pressure and pressure from Congressional progressives to offer what is deemed to be a minimum living wage of at least $15/hour.


I have no issue considering an increase in the federal minimum wage, a topic which I wrote about on March 26th here. However, I think given the size of the United States and the disparity in regional economies, a minimum wage should be determined on a regional basis that better reflects the cost-of-living in that specific region. The reason is simply because the cost-of-living varies dramatically across the US, such that a single federally mandated minimum wage might prove too much in some regions and too little in others. I covered this matter rather extensively in the article I wrote in March, and it is not the point of this discussion. Rather, I want to point out that selective minimum wage rises like these by large US companies with hundreds of thousands of employees are not universally positive for everyone.


I read an article recently in the Financial Times entitled “’Amazon effect’ sets the tone for US workers’ renumeration” (link here, available only to FT subscribers). This article caught my eye because the post-pandemic recovery in the US is highlighting more than ever the reality that labour costs are under significant pressure in many cases, and this is not only because of labour shortages in some areas. Labour is one of several operating costs for a business. For many labour-intensive businesses, it is often the most significant operating cost. The fact that AMZN, TGT, COST, WMT and other large US companies have raised wages means that other companies with businesses, production facilities, warehouses and so on in the “local” area of one of the facilities of these giants might be (and usually are) forced to raise their wages to retain their own staff. Otherwise, these smaller companies will be at risk of their employees defecting to one of these higher-paying companies. This might be fine for many businesses that are able to absorb wage increases and / or pass the higher costs through by raising prices. However, the need to raise wages to compete for limited labour might also be a death knell for small- and middle-sized businesses that simply cannot afford it, the subject of the FT article and a phenomenon that is being exacerbated as the US economy roars forward following the darkest days of the pandemic. (A very academic paper on the effect of AMZN raising its wages on businesses that are close by can be found here, should you be interested: “Spillover effects from voluntary employer minimum wages”.)


Since the living minimum wage is an emotive point and is one that most Americans favour, I wanted to highlight that the collateral effects of selective wage increases by the largest US employers cannot be ignored completely in the spirit of taking the higher ground. The broad-based collateral effects absolutely must be understood as Congress and the President are debating and ultimately developing US minimum wage policies. Of course, to drag large employers like AMZN through the mud has become popular sport of the progressive members of Congress. However, just as we are seeing now, these populist policies might very well have the opposite effect on workers and businesses than that which might be intended. I think the FT article highlights this perfectly and shows that popular policy stances can be well-supported but might ultimately prove shallow and poorly thought out from a broader economic perspective. This is exactly where we find ourselves today in many US cities and towns, with small- and medium-size businesses unable to compete profitably for labour, an input factor like others that needs to be both available and at “the right price.”


In closing for the sake of brevity, I am intentionally not going to digress into a discussion of cost-push inflation caused by growing demand for labour and higher wages. Tight labour market conditions and wage inflation are topics that economists and investors are currently debating, and specifically, whether or not these sorts of effects will ultimately lead to overall inflation that is transitory or persistent. Whilst my view is that inflation will prove transitory, there are underlying components – one of which is wages – that will most certainly be permanent.


In conclusion, whilst several well-known, large US companies have decided to collectively and voluntarily adopt a minimum living wage of $15/hour, the collateral effects of these selective wage rises on nearby businesses – and hence on workers at large – are far from universally positive.

 

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