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Amazon announced this month that it is raising the minimum wage it pays U.S. workers to $15 an hour. The pay increase takes effect next month and will benefit more than 350,000 Amazon employees. This decision comes on the heels of criticism—notably by Bernie Sanders—that Amazon does not pay workers a “living wage.” Amazon already appears to be benefiting from newfound goodwill, as Sanders commended Amazon CEO Jeff Bezos for doing "exactly the right thing." But does Amazon really deserve praise?
Amazon is not increasing its pay scale out of charity, but because market-wage rates are rising. The business cycle is at a peak, and firms need workers. But they can’t find workers to fill all the available jobs. Employers are reporting widespread shortages of high-skilled workers, such as construction workers, truck drivers and engineers. There are even shortages of lower-skill workers at restaurants, factories and retailers. Since the unemployment rate is already at an incredibly low 3.7 percent, employers are mainly bidding against each other for existing workers. Consequently, the average hourly earnings of workers are increasing at the fastest rate in almost a decade.
Amazon deserves no praise for raising pay in this environment. But Amazon deserved no criticism when it was paying less. Competition over workers in labor markets compels employers to pay workers what they contribute to the bottom line. In the terminology of economists, the going rate for any kind of labor equals the marginal value product of that labor. Amazon has no more choice about market rates than you or I have about the rates for accountants, masseuses or lawn-care providers.
Interestingly, Amazon is now pledging to support an increase in the federal minimum wage. This is also garnering praise from politicians. Minimum wage laws, however, don’t protect workers. Competition compels firms to pay workers their marginal value product—that’s why Amazon pays twice the minimum wage. And minimum wage laws can’t force firms to pay low-skilled workers more than they contribute. They just give employers an incentive to hire fewer low-skilled workers by automating and hiring high-skilled workers instead. We suspect the real reason Amazon wants to raise the minimum wage is that Amazon already pays above the minimum wage and sees this as a way to raise its competition’s costs.
Politicians aren’t the source of increasing pay for workers; the source is the capitalism that many politicians despise.•
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Bohanon and Curott are professors of economics at Ball State University. Send comments to ibjedit@ibj.com.
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