How Amazon’s Higher Wages Could Increase Productivity

How Amazon’s Higher Wages Could Increase Productivity
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Amazon recently made headlines by announcing that it would voluntarily increase its minimum hourly wage to $15. With a federal minimum wage of only $7.25, this pledge might seem like a curious decision — especially for a company as laser-focused on cost containment as Amazon. But thinking only about the costs involved in raising wages misses a key issue: pay hikes can also boost workplace productivity.

Given Amazon’s well-deserved reputation as a data-driven (and long-term oriented) company, you can bet that Amazon’s management team has done the analysis and figured out that paying employees more is, from a business perspective, more benefit than cost. They’re not the first company to make a decision like this — most notably, Walmart set a minimum wage of $11 earlier in 2018 — and we hope others come to realize that paying workers more can be a matter of enlightened self-interest.

In fact, the company has been accused of being too self-serving in its minimum wage hike — concerns arose nearly immediately after its announcement that the increase might be financed by cuts to bonuses and benefits that would leave workers no better off than before.

In our own research, we’ve explored the impact that minimum wages can have on businesses, as well as the ways in which higher wages can motivate employees and spur productivity. We’re fascinated by companies’ motivations to do prosocial (and also antisocial) things. And looking at Amazon’s recent announcement, there’s reason to think that a pay hike would be good both for Amazon’s employees and its bottom line.

Ultimately, Amazon may very well benefit from increasing its minimum wage, even if it does end up paying its workers more. Here’s why:

First, higher wages allow firms to attract and retain better employees (assuming competitors don’t follow suit and raise their wages as well). But there is an important — and often overlooked — second effect. Paying wages that are above the market rate (known within economics as “efficiency wages”) can also be an important motivating force for your existing employee base. The intuition is straightforward: higher wages makes a job more desirable. This leads to a larger applicant pool waiting to take over when openings occur, and makes it easier to replace a slacker employee. It also means that workers have more to lose by slacking off — who cares if you’re fired from a $7.25 an hour job, but where else will you find somewhere that pays $15 per hour?

The concept of efficiency wages is an old idea, dating back at least to Henry Ford’s introduction of the “five dollar day” in 1914, at a time when the daily wage at manufacturing plants near his Highland Park factory was $2.30. Ford himself called it his finest cost-cutting move, because of the boost to productivity that came as a result.

There’s good reason to think that Jeff Bezos’s $15 per hour will be as successful as Ford’s $5 a day.

The manner in which Amazon announced its $15 wages is likely to boost the productivity gains coming from the wage hikes. How so? Beyond the classic notion of efficiency wages — I work harder because I fear losing a better-paying job — above-market wages can lead to a second productivity gain driven by employees’ innate sense of reciprocity. Research (including our own work) has found that when a company gives unexpected pay increases, workers often reciprocate by working harder than is required (even if they don’t worry about getting fired). And, what better way to signal your good intentions and concern for workers than through a flamboyant public announcement of a substantial pay raise.

Finally, some of Amazon’s high wage PR may be directed at government officials. With a president who has taken to bashing the company and its leader, it can’t hurt to look like the good guy once in a while. And if governments at the state and city-level make good on their pledges to raise the minimum wage locally, Amazon will be paying $15 an hour sometime soon anyway — so why not get out in front of the issue now?

Of course, there remain open questions about the implementation of Amazon’s new plan: Will employee benefits (like annual bonuses) be rolled back to finance the wage increase? Will some contract workers be excluded from it? We hope not, and we hope that Amazon is sincere about meaningfully improving wages for their lower wage workers. Furthermore, the law of unintended consequences being what it is, we’re sure that not even Amazon will anticipate all of the effects of higher wages — one story that followed close on the heels of the announcement described brewing resentment among incumbent Amazon workers that newbies would get the same high wage as more senior employees.

And, to be clear, if increasing wages turns out to be a profitable decision that does not take away from our support for Amazon’s decision. We applaud cases in which companies do right by their employees, the environment, and society in general. And if Amazon ends up making more money as a result, that’s all to the greater good.

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