Many people assume that to raise wages, big companies must be dragged along by government policy. Amazon’s eye-opening announcement yesterday suggests otherwise. The online retail giant announced it would raise its company minimum wage to fifteen dollars per hour, and lobby for an increase in the federal minimum wage.
This new policy is not merely cosmetic. Amazon’s current median wage hovers right around fifteen dollars, meaning half of its 566,000 employees earn less. Amazon is putting real money behind its decision.
CEO Jeff Bezos’s statement was worthy of an Eagle Scout: “We listened to our critics, thought hard about what we wanted to do, and decided we want to lead. We’re excited about this change and encourage our competitors and other large employers to join us.”
Of course, Amazon would not be voluntarily raising the pay of at least half of its workers unless it thought the move was good for business. But why? We can boil its rationale down to two likely hypotheses:
- Amazon believes it will directly benefit from the wage hike through some combination of public relations, political capital, worker retention, and morale.
- Amazon is seeking to raise its rivals’ costs, believing that brick-and-mortar retailers would be hit harder by an increase in the minimum wage.
These two hypotheses are not mutually exclusive. In fact, we’ll see below that Amazon’s reasoning is likely driven by a bit of both.
Clash of the Titans
We can shed some light on the prospects of raising rivals’ costs by comparing Amazon to the brick-and-mortar monolith that provides its greatest competition. Walmart’s current median wage is around twelve dollars per hour, meaning it would take a bigger hit if forced to implement a fifteen dollar minimum wage.
State minimum wages are also important. As the chart below shows, Amazon’s employees are disproportionately located in states with the highest minimum wages (particularly Washington and California). Amazon therefore has less to lose from a wage hike.
However, there are limits to this potential “kill Walmart” strategy. I had always assumed that a brick-and-mortar operation like Walmart was significantly more labor-intensive than Amazon. By at least one measure I constructed from readily available data, that’s not the case. Dividing each company’s 2017 net sales by its number of employees yields very similar figures for both, right around $200,000.
That doesn’t mean each firm has the same mix of skilled and unskilled labor. Walmart’s lower median wage suggests it depends more on the latter. But if Amazon was far more labor intensive, I would expect it to have higher revenue per employee. Could this strategy cause problems for Amazon’s biggest competitor? Sure. Is it enough on its own to explain Amazon’s voluntary wage hike? Probably not.
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