Prof. Oren M. Levin-Waldman will discuss his most recent article: “Amazon Finally Leads with an Efficiency Wage” By Oren M. Levin-Waldman, on Wednesday, October 10, 2018th at 10am EDT on the Westchester On the Level Internet radio broadcast. Use the following hyperlink … http://tobtr.com/s/11002581 … to listen “Live” or “On Demand”. Please recognize the broadcast is initiated at 9:55am EDT and is archived within 15 after the conclusion of the broadcast day at 12Noon. Share your perspective and/or inquiry of the professor by calling 347.205.9201. Participants are asked to be respectful and to stay on topic. This segment will air from 10-11am.
Amazon Finally Leads with an Efficiency Wage <br> By OREN M. LEVIN-WALDMAN
Last week Amazon announced that it was raising the minimum wage that it pays its employees to $15.00 an hour. For those who typically criticize increases in the federal minimum wage, this increase should be acceptable largely because it is voluntary. It may also be acceptable because the workers at Amazon are perceived to be more productive, thereby justifying the increases on the grounds that the marginal benefits to the company exceed the marginal costs of increased labor costs.
Students of history will recall that early in the Twentieth Century Henry Ford announced that he would be paying his workers a minimum of $5.00 a day. His competitors thought he was crazy, but Ford argued that if the nation was to have a middle class that could afford to purchase his automobiles, then industrialists like him would need to pay workers middle class wages.
So too the argument can be made to the retail industry. Given the transformations that have already occurred in our global economy from industrial-based manufacturing to post-industrial based services, it is clear that the manufacturing base that left the country over the last four decades is not likely to return. Rather the creation and maintenance of a middle class in the new global service economy has to be based on paying workers in these sectors middle class wages.
In this regard, Amazon may be seen as taking the lead toward that end, but it may not be enough. Let’s concede the point that Amazon is not really an economic actor concerned with the larger public interest which would include the maintenance of a middle class. To pay its workers an efficiency wage — a wage bound to get more productivity out of its workers and hence efficiency — will save the company other costs in the long run.
The company will save on hiring and training costs. But it will also save on monitoring costs because an efficiency wage in the language of the neoclassical model is an anti-shirking wage. Economics Nobel Laureate Joseph Stiglitz along with economist Carl Shapiro argued over three decades ago that workers who receive this anti-shirking wage are less likely to shirk for fear that they will lose their higher paying jobs and be forced to work for someone else paying considerably less. It is in this vein that the higher wage becomes an efficiency wage. When workers shirk less, their employers don’t have to spend as much on monitoring them.
While bearing some resemblance to the early institutionalist Sidney Webb, it isn’t quite the same. Webb argued that workers paid higher wages would be able to better take care of themselves and therefore become more productive. Hence the efficiency of the firm would increase. Employers would also have an incentive to make their workers more efficient by providing on-the-job training. This would make the workers worth the new wage. This came to be known as the Webb effect.
Both versions of the efficiency wage assume to a certain extent an increase in a mandatory wage floor. Others over the years have suggested that the mandatory floor is perhaps essential because many firms would like to do the right thing and pay their workers more, but are loathe to do so on their own because they fear that their competition will be able to undersell them due to paying their workers less.
Of course Amazon may be paying its workers more out of nothing other than sheer enlightened self-interest. If Amazon’s workers have more to spend in the economy, the economy will grow and Amazon will benefit as even more people are now in a position to buy more from Amazon due to greater purchasing power.
By paying more, Amazon is likely to have less turnover because their workers have greater loyalty. If this move does what it is supposed to do, its competitors will feel the need to raise their own minimum wages so as not to lose workers to Amazon and others who choose to pay more.. Moreover, workers earning above the new minimum will see their wages increase too due to wage contour effects, which are the ripple effects on those in wage ranges immediately above. But as each wage range increases, so too do others.
Somebody has to begin the process of increasing wages. There really cannot be any substantive economic growth without a corresponding wage growth. Although the typical economics model assumes that growth will lead to wage growth, the reality is that because growth requires an increase in aggregate demand for goods and services, wages need to be rising if that growth is to occur, let alone continue. This can only really happen with a wage policy.
A voluntary move by one firm does not constitute a wage policy, but if it leads others to follow suit, it creates some momentum that at least leads in the direction of a putative industry minimum. Maybe it does not matter how we get there, but it is critical that the retail sector, which has long characterized the low-skilled sector of the economy, pay its workers what might be considered middle class wage or what closely approximates it, precisely because the manufacturing base that was responsible for the creation of the American middle class is simply not coming back.
Were more companies to follow suit and pay the new putative minimum, codifying it through a new legislated minimum would politically be easier, if for no other reason than it would be moot. Conservatives have long argued that free markets should lead, and economic actors raising their own minimum wages is an example of that. But this lead needs to be followed up with some public action that codifies the new standard and applies it across the board.
It should not be understated how important this move by Amazon is for the economy. At a minimum, it signals that workers need to earn more if the economy is to grow, and that if corporate America wants to be in the driver’s seat and lead it is then time for it to do so. After all, the only reason why we would need a legislative response is because corporate America has so far failed to lead, which, in and of itself, is the classic definition of market failure.
This book makes the case for minimum wage as a way to improve well-being of middle-income workers, reduce income inequality, and enhance democracy….
The Minimum Wage: A Reference Handbook By Oren M. Levin-Waldman. As of 2014, the minimum wage in Seattle is $15 an hour — double the federal minimum wage.
Dr. Oren M. Levin-Waldman, Ph.D., Professor at the Graduate School for Public Affairs and Administration at Metropolitan College of New York, Research Scholar at the Binzagr Institute for Sustainable Prosperity, as well as faculty member in the Milano School for International Affairs, Management, and Urban Policy at the New School. Direct email to: firstname.lastname@example.org