Is Amazon a Corporate Mother Teresa?

Amazon is in many ways a fascinating company and deserves to be defended against most of its mainstream critics. However, it would be simplistic to explain its campaign for a $15 federally-imposed minimum wage by identifying it with a corporate Mother Teresa. Its more obvious reasons to preach for minimum wages are not defendable.

I will not repeat all the arguments against the minimum wage, summarized in a good article by Cato Institute’s Ryan Bourne (“The Case Against a $15 Federal Minimum Wage: Q&A”). My co-blogger David Henderson has also defended many of the standard economic arguments. There exist some disagreements among economists about the employment effect of minimum wages, but they mainly relate to the size and victims of the negative effect (see Bourne’s overview).

One thing is sure: Amazon would benefit from forcing higher costs on its small competitors, including mom-and-pop businesses. A higher minimum wage would have exactly this effect while it would have zero effect on Amazon’s costs. As the company already pays a starting wage equal to the proposed $15 minimum, the latter would be non-binding and irrelevant for the retail behemoth.

One reason why Amazon was able to bid up the wage of its entry-level workforce is that its technology and other capital embedded in its warehouses and distribution network increase the productivity of its employees, which justifies the bidding up from a pure profit-maximizing viewpoint. There is nothing wrong with profits, but there is something wrong wtith using state power to bankrupt one’s competitors. This is what is happening. Jonathan Meer, an economist at A&M University observes:

It’s a lot harder for Joe’s Hardware. We should take note that Amazon—the place with no cashiers—is the one calling for a higher minimum wage.

Other large companies—such as Walmart—have come out in favor of an increase in the federal minimum but not up to $15. In their case, indeed, $15 would be binding for some employees. (Cf. Eric Morath and Heather Haddon, “Many Businesses Support a Minimum-Wage Increase—Just Not Biden’s $15-an-Hour Plan,” Wall Street Journal, March 1, 2021)

Amazon has another reason to be politically correct, that is, to signal its virtue under current faddish and unrealistic ideas. The company can hope to cajole DC’s powerful men to spare it from some regulation that would bite. The systemic effects of such behavior point to crony capitalism and groveling toward the state, which are not good for free enterprise and future prosperity.

It is not clear, to say the least, what kind of acceptable ethics could justify Amazon’s current behavior.

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L’Etat, C’est Ro

Louis XIV, pictured above, the king of France from 1643 to 1715, famously said, “L’Etat, C’est Moi.” Thus the title of this post.

Ro Khanna, a Democratic member of the House of Representatives, was recently asked what his plan was for the small businesses that might be hurt by the Democrats’ (and some Republicans’) proposal to raise the minimum wage from its current $7.25 an hour to $15.00 an hour by 2025.

The interviewer asked:

I’m wondering what is your plan for smaller businesses? How does this, in your view, affect mom-and-pop businesses who are just struggling to keep their doors open, keep workers on the payroll right now?

Khanna answered:

Well they shouldn’t be doing it by paying people low wages. We don’t want low-wage businesses.

What does Mr. Khanna mean by “we?” Many small businesses want to pay what he would regard as low wages. Many workers would like to work at those low wages if the alternative is higher wage rates but fewer hours, being worked harder, getting fewer benefits, or, in the limit getting zero hours. Many customers would like to buy goods and services produced by businesses paying wages less than $15 an hour.

But none of these people count, in his view.

His “we” means “he” or, more inclusively, people like him who are willing to ignore the desires of those three groups.

Thus the title of this post.

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Free trade and free labor markets

This caught my eye:

[Arindrajit] Dube responds that “one has to be honest about not knowing what would be the impact in every place.” But he points to 2019 research by Anna Godoey and Michael Reich of the University of California at Berkeley, who found that increases in state minimums didn’t hurt employment even in low-wage counties where the new floor equaled 82% of the prevailing median wage. And even if a high minimum wage does kill some jobs—as many studies, though not Dube’s, show it would—it can still be worthwhile if it raises incomes of low-wage families overall, he says. Some experts say that as with free trade, which helps more people than it hurts, any losers could be made whole with government assistance.

Yes, free trade is an excellent analogy for labor market policy, but not for the reasons cited by Peter Coy in this Bloomberg article.

Economists typically evaluate issues from both an equity and efficiency perspective.  Many economists favor policies that maximize efficiency (making the pie as large as possible), combined with some redistribution to compensate the losers.  Thus they favor free trade, combined with a program to help workers that lose their jobs due to import competition.

Oddly, Peter Coy seems to think this analogy points in the direction of boosting the minimum wage.  Exactly the opposite is true.  If we wanted to match the standard economic approach to international trade, we’d abolish the minimum wage and replace it with some sort of subsidy for low wage workers.  Even if that were politically impossible, you would definitely not want a $15 minimum wage.  A much superior policy would be a $10 minimum wage combined with a $5/hour wage subsidy, where the subsidy phases out at the rate of 50 cents/hour for each $1/hour pay raise, ending entirely when pay reaches $20/hour. (Teenagers could be excluded from the subsidy, if they are not living independently.)

I’m not saying this would be ideal (I’d prefer no legal minimum), but it would be much more in the spirit of the “free trade plus compensating the losers” analogy that Coy uses to justify a higher minimum wage. It would be aimed at making the pie as large as possible, while compensating the less fortunate.

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A Floor, A Hurdle, or Nonsense on Stilts?

Joe Biden has suggested that as our next president, among his first acts would be to boost the minimum wage level to $15 per hour.

In so acting he will be relying on the theory that this law is akin to a price floor. Raise it, and the compensation of all those now standing on it (those now being paid less than this amount, often at the $7.25 level mandated by present federal legislation) will in effect be able to hitch-hike on the increase, and now be paid at the rate of the aforementioned $15. Not that this level of remuneration is anything to write home about, but at least it beats the roughly half that amount, presently proscribed by law.

Why do most dismal scientists dismiss this justification as blithering economic illiteracy? This is because, if it were but the case, why stop the elevator at the 15th floor?  Why not raise the minimum wage, instead, to $150 per hour, or $1,500, or $15,000? If this theory were correct, if people could be made wealthy beyond the dreams of avarice by mere legislative enactment, why in bloody blue blazes settle for $15? If this theory were true, the entire case for foreign aid would vanish in smoke. Instead of shipping goods and services and money abroad, all we need to do is advise present recipients to implement a minimum wage law, and keep raising its level until poverty were ended in these countries. Yet no one, not even Bernie Sanders, advocates any such crazy thing.

Clearly, this theory is nonsense on stilts.

What then is the correct way to look at this matter? It is to see such legislation not as a rising floor, but rather as a hurdle over which a person has to jump in order to be employed in the first place.

Why is this? What determines wages?

In a word, productivity. LeBron James and Michael Milken earn high wages because they are tremendously productive. Hire one of them, and your revenues shoot through the roof. Middle class people also contribute to the GDP, but at a much more modest level. And the person who asks if you “Want fries with that?” or pushes a broom? He or she also does so, but again less so. Suppose a firm has 100 workers, and shows receipts of $10,000 for a certain time period. They hire the 101st employee, and total revenue rises to $10,010. The company properly attributes this rise to that additional member of the staff. His productivity is thus $10/hour.

What will his wage likely be? Well, there are only three possibilities. Either he will earn more than that, say, $12 per hour, exactly that amount, e.g., $10 per hour, or less than that, for example, $4 per hour. We can easily eliminate the first possibility. Any business paying $12 hourly to all their employees who bring in only $10 will face bankruptcy; they will lose $2 every hour, multiplied by their entire staff. But the $4 wage is not sustainable either. The firm will then garner a pure profit of $6 from his labor. Some competitor will offer $4.25; another $4.50 and we will be off to the races. No, the only equilibrium wage rate will be $10. This gives rise to the economic law that compensation tends to equal productivity. Will all those who contribute at that level earn exactly that amount? No, of course not. This theoretical bidding war is not costless. But there is a continual grinding market force that pushes wages in the direction of productivity. The two cannot long remain too far apart.

With a minimum wage of $7.25, will this person who can improve your bottom line by $10 get a job? He certainly has a good chance to do so. But what will ensue with a minimum wage of $15? Any firm foolish enough to hire him will now lose $5 per hour. Bankruptcy will ensue for such an employer, and unemployment for the would-be market participant. This legislation does not undergird wages, precluding very low compensation. Productivity, alone, does that. Before the advent of this law in 1938, people were earning compensation in accordance with their contribution to the bottom line.

It is no accident that the unemployment rate for teenagers is double that of people in their middle years. The former can undoubtedly jump higher over physical hurdles than the latter, but the reverse is true for economic barriers such as productivity levels. Also, black unemployment due to this law is twice that suffered by whites. Joblessness for black teens is quadruple that of white middle-agers. This has nothing to do with “privilege.” These statistics did not exist before this legislation was passed.

Should the minimum wage remain where it is at $7.25? No. Because the exact same analysis applies to those (mainly the mentally handicapped, but some severely physically handicapped), whose hourly productivity is $2, $4 or $6. They are now in effect totally frozen out of the labor market.

Why does this law exist given that it is so deleterious for the weakest economic actors? Northerners favor it since it enables them to better compete with lower skilled southerners. The minimum wage is a vicious, nasty, depraved law. It negatively impacts the “least, last and lost” amongst us. It ought to be repealed, and salt sowed where once it stood.
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Oksana Boyko Interviews Henderson on RT

The interview went 28 minutes and is here.

I won’t do my usual time-stamping because I’m busy with other things.

What I will point out is that approximately the first half is on my Wall Street Journal article, co-authored with Jonathan Lipow, that analyzed the findings of the major cost/benefit analyses of lockdowns and other measures that were in response to the coronavirus. We get into an interesting discussion of the value of a statistical life. It also gave me a chance to use the main thing I took away from my debate with Justin Wolfers back in April: how the concept of least-cost avoider strengthens the case against lockdowns.

The second half is about my latest article for Hoover’s Defining Ideas, “Black Livelihoods Matter,” Defining Ideas, June 17.  We get into the minimum wage, Senator John F. Kennedy’s racist case for increasing the minimum wage, occupational licensure, how restrictions on housing supply drive up housing prices in San Francisco, Los Angeles, New York City, and other cities, and charter schools. Early in the second half, I dealt briefly with the issue of white privilege.

Also, right at the end, I get in a major criticism of mega-murderers Chairman Mao and Joseph Stalin.

Oksana Boyko did her homework and so the result was an excellent conversation.

P.S. I wanted to do a screenshot at the 1:27 point that shows both Oksana, me, and my Rocky movie poster, but with my new MacBook Pro, I couldn’t figure out how.

 

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