As many across the country argue for an increased federal minimum wage, such as the Fight for $15, Amazon announced on October 2 that they were raising their base pay to $15 per hour. While altering their own business costs is one thing, Amazon also plans to join others in lobbying Congress to mandate a higher minimum wage for Americans.
Amazon’s move to raise its base pay isn’t surprising; the company recently passed the trillion dollar value threshold, second to only Apple. While Amazon may be applauded for raising workers’ pay, its lobbying efforts aren’t as worthy.
Just as the company’s management had the freedom to consider the firm’s profitability and outlook in deciding whether to offer the higher wage, other private employers should have the same freedom. Amazon apparently thinks they shouldn’t, hence the lobbying for a national mandate.
Those lobbying efforts could end up doing even more harm.
Despite the commonly held perception that minimum wage laws reduce income inequality and provide the poor with a better life, the real effects are the opposite.
Fewer Jobs, Fewer Hours
Minimum wage laws have proven detrimental by reducing job creation and the total hours worked for low-skilled workers, who are primarily paid the minimum wage and have less than a high school diploma or little work experience. And the laws raise prices for everyone — thus widening income inequality.
A labor market without government impediments functions like any other market. Employers and workers negotiate a wage, benefits, hours worked, and other measures of compensation until there’s mutual benefit. If they don’t agree, the worker isn’t hired. This is the same kind of mutually beneficial exchange that occurs when you go to the farmer’s market or department store, and it shouldn’t be any different in the labor market.
When this unhampered negotiation is restricted by government barriers such as an arbitrary minimum wage law, there is a misallocation of resources that hurts employers and workers.
For example, no matter what the minimum wage is, $15 or $150, the market will correct itself through higher prices and fewer jobs. In other words, the poor will stay poor, as they see their hard-earned dollars able to buy less and find fewer job opportunities.
Vulnerable Low-Skill Workers
Lower-skilled workers are especially vulnerable to the proven job losses caused by federal minimum wage increases because employers who can’t afford the increases in the cost of production simply close up shop, reduce employee hours, or even switch to automation.
A recent study on the effects of minimum wage raises in California using data from 1990 to 2016 showed that a 10% increase in the minimum wage could contribute to a 3.4% reduction in employment. Key industries hit hardest are restaurants and retail stores that typically operate on razor-thin profit margins and often hire low-skilled workers and those new to the workforce.
And minimum wage laws actually make income inequality worse.
As noted from research by the American Action Forum, a large share of the added wage value from minimum wage hikes goes to workers already paid well.
For example, McDonald’s has been replacing cashiers with kiosks in many of their locations nationwide. The kiosks are designed, built, and maintained by high-skilled, high-wage workers while cashiers are typically low-skilled, low-wage workers.
In other words, jobs are created for computer programmers and robotics experts, while jobs are destroyed for those with fewer skills and less workplace experience. The result is an increase in income inequality.
Minimum Wage Mistake
So why would Amazon lobby for a policy that has such broad negative effects on the economy?
Maybe because Amazon is a mammoth corporation that has seen tremendous success in recent years. A higher federal minimum wage would probably not hurt its bottom line much. But Amazon’s competitors might not be so lucky, particularly if they are small businesses just starting out. A higher federal minimum wage could create artificial barriers of entry that would make it easier for Amazon to stay at the top while making it harder for its competitors to succeed.
When it comes to wages, what works for one employer doesn’t necessarily work for another. We can applaud Amazon for giving its own workers raises; that doesn’t mean Amazon should be lobbying to demand raises for everyone else’s workers, too.
By strengthening the employee-employer relationship through economic freedom — not minimum wage laws — to let people freely negotiate, employees and employers can prosper.
- Ginn, Ph.D., is director of the Center for Economic Prosperity and senior economist at the Texas Public Policy Foundation. Research associate Alesondra Cruz provided research for this article.