Amazon’s $15 Minimum Wage: What’s the End Game?

warehouse-2

mic Listen to the podcast:

Wharton's Matthew Bidwell and Marshall W. Meyer and Duke's Matt Johnson discuss Amazon's decision to raise its minimum wage for employees.

In a move that reflects the changing labor market and increasing political power of chief executive Jeff Bezos, Amazon announced last week that it will raise its minimum wage to $15 an hour, which is nearly double the federal minimum wage of $7.25.

The wage increase begins Nov. 1 and applies to 250,000 employees and another 100,000 temporary employees the company plans to hire over the holidays. But there is a trade-off with the extra cash — hourly workers will no longer earn bonuses or stock awards. In a statement, Amazon said the wage increase “more than compensates” for the loss.

“We listened to our critics, thought hard about what we wanted to do and decided we want to lead,” Bezos said in a statement. “We’re excited about this change and encourage our competitors and other large employers to join us.”

Amazon is not the first retailer to raise its hourly wage. Target recently announced that it was going to increase wages to $15 an hour by 2020, and Walmart in January said it’s raising its hourly wage to $11 an hour.

Amazon’s decision has led to increased scrutiny of the company and its often-inscrutable CEO, with analysts trying to figure out what Bezos could be planning next. Amazon has joined Apple in reaching $1 trillion in market capitalization, and Bezos has topped the Bloomberg list of billionaires as the richest man in the world, with a net worth of $165 billion.

Matthew Bidwell, management professor at Wharton; Marshall W. Meyer, emeritus management professor at Wharton, and Matt Johnson, research scientist at the Sanford School of Public Policy at Duke University, joined the Knowledge@Wharton radio show on SiriusXM to discuss Amazon’s wage increase and what it means for workers.

This Is Not Charity

The decision to increase pay was a tactical move by Bezos at a time when his company is facing increased attention for its massive size and profits. President Donald Trump has openly criticized the company, using Twitter to complain that Amazon doesn’t pay enough in taxes and cheats the U.S. Postal Service.

“One thing for us to keep in mind is that when a company like Amazon raises its minimum wage, it is not doing it out of the goodness of its heart,” Johnson said. “It is doing it because it probably makes economic and maybe political sense.”

Bidwell pointed out that Walmart, which has long been the target of ire for its treatment of workers, has been out of the crosshairs recently. The bullseye has shifted to Amazon, especially in light of Bezos’s dazzling wealth.

“The juxtaposition between not necessarily the profits, but how much they are worth as a company versus [being] a large employer of low-wage workers has made them a very tempting political target,” he said. “You’ve seen people go after them, and this is likely in some part also a response to that.”

“Never underestimate Jeff Bezos. He will never tell you which way he is going.”–Marshall W. Meyer

While Bezos sits atop the billionaires list, there have been numerous media reports about Amazon workers needing government assistance to survive. Sen. Bernie Sanders of Vermont has been a vocal critic of the company. A month before the wage increase, Sanders and Rep. Ro Khanna, D-Calif., introduced legislation titled the Stop BEZOS Act, which would tax large corporations for every dollar their employees received in federal assistance.

Johnson thinks Amazon may be trying to avoid the same kind of grassroots movement that pressured Walmart improve its working conditions. “Amazon has been getting a lot of bad publicity because its owner is the richest man in history in terms of his net worth, but his workers are having to rely on food stamps, and warehouses are some of the most dangerous places in the country to work,” he said. “I think this publicity, even above and beyond the labor market impacts, might be seen as something that can have an economic consequence for Amazon if customers start getting upset about this.”

Pushback on Amazon’s Pricing Model

Amazon’s business model has been described as predatory pricing. It offers very low pricing on a large assortment of products, creating thin profit margins that grow through high volume and low wages.

“What is interesting is that whereas this would have drawn the attention of antitrust authorities in past years, current antitrust doctrine leaves [companies] alone on the theory that this has to be a rational move, and that at some point they will recover from the predatory pricing,” Meyer said.

Meyer referenced a 2017 Yale Law Journal article that raises questions about the pricing model, adding that it’s possible the company recognizes that there are limits. That’s why it is branching out. For example, Amazon is looking into creating its own delivery fleet or providing in-home electronics installation. However, those are services, rather than products, that will cost the company more to offer. “The question is, can you do this with a low-wage structure? I think that is a question lots of folks are going to have to face,” he said.

According to Bidwell, there is a growing national conversation about companies such as Amazon that employ a large number of workers in one sector. Monopoly and antitrust are among the chief concerns. Many believe that Amazon will simply drive its competitors out of business, then raise its prices. If that happens, workers won’t have much recourse.

“I think there’s also a concern on the other side, which is that workers have very little bargaining power, that [Amazon] is able to drive down wages because in a lot of the areas where they operate, there is a huge fulfillment center, and it is basically Amazon and nothing else,” Bidwell said. “I think this is in part a response to those criticisms, but it also reflects Amazon’s power. They get to make their own weather, right? They get to decide on this because they are the labor market in certain areas.”

“[Amazon gets] to make their own weather, right? They get to decide on this because they are the labor market in certain areas.”–Matthew Bidwell

The Brilliance of Bezos

Analysts can try to read the tea leaves when it comes to Amazon, but they still won’t be able to figure out what Bezos will brew next.

“Never underestimate Jeff Bezos,” Meyer said. “He will never tell you which way he is going. He may not know which way he is going. He is keeping his options open.”

The professor recalled listening to Bezos speak back in the early 1990s, when everybody thought he was just a book seller and wondered how he would ever turn a profit.

“We didn’t understand that he was in the business of accumulating customer information and really didn’t care about short-term profits because he, unlike the rest of us, understood platform economics,” Meyer said. “Today, more and more of us understand platform economics and some of the opportunities and some of the risks it poses, especially to wages.”

Meyer noted that Bezos could be thinking about political or legal headwinds, or he could be thinking about French economist Thomas Piketty’s observations on wealth distribution in his book, Capital in the Twenty-First Century.

“Remember, he owns The Washington Post. Amazon doesn’t, but Jeff Bezos does personally, right? He may be thinking that the system is unsustainable, and as a consequence may be seeking his own way to change it a little bit,” Meyer said. “I don’t know the answer to that, but I go back to what I said at the beginning of this comment — never underestimate Jeff Bezos and never try to second-guess him.”

The Rich Get Richer — and More Powerful

According to Bidwell, Bezos’s mysterious management style and unparalleled wealth also highlight a new problem: the increasing political influence of the rich.

“Amazon has been getting a lot of bad publicity because its owner is the richest man in history in terms of his net worth, but his workers are having to rely on food stamps.”–Matt Johnson

To illustrate the shift, Bidwell pointed to the labor movements of the last century, when unions were able to effect regulatory changes. Now, government is handing over much of its decision-making to deep-pocketed philanthropists.

“If we are going to have large, powerful corporations we would rather they were responsible,” he said. “But in the long run, some set of other powerful interests that represent other stakeholders in society would be even better.”

Johnson agreed, adding that Amazon has a stake in whether the U.S. economy is on solid footing because it represents such a large part of the economy. Bezos has vowed to push Washington for an increase in the federal minimum wage, which would force his competitors to follow his lead. “Given Marshall’s point about Piketty, Bezos could be looking at that as the long term and thinking that Amazon can actually be a driving force to get [minimum wage] on a more sustainable path,” Bidwell said.

But there is a bigger question.

“Even if Bezos has those good intentions, as a society we want to ask, do we want to be in a situation where a few powerful executives and other billionaire philanthropists are the ones who make these decisions? It is really at their disposal to turn the page and change direction,” Johnson said. “This is maybe a time for reflection to think about if that is a system that we want, and what other sorts of institutions can help align the balance of power.”

Bidwell and Johnson said there is something disturbing about the fact that large companies are leading the push for a federal wage increase at the same time that government is spending far less on domestic programs that provide help to citizens.

“Private charity will shortly exceed federal payments for health education, welfare, social support, etc. Those lines could easily cross,” Meyer said. “The scenario where corporate titans or corporate titans-turned-philanthropists have more to say about the shape of our society, the texture of our society, than our elected representatives poses a very important question. We have barely begun to face up to this.”

Citing Knowledge@Wharton

Close


For Personal use:

Please use the following citations to quote for personal use:

MLA

"Amazon’s $15 Minimum Wage: What’s the End Game?." Knowledge@Wharton. The Wharton School, University of Pennsylvania, 09 October, 2018. Web. 17 December, 2018 <http://knowledge.wharton.upenn.edu/article/will-other-companies-follow-amazon-in-raising-the-minimum-wage/>

APA

Amazon’s $15 Minimum Wage: What’s the End Game?. Knowledge@Wharton (2018, October 09). Retrieved from http://knowledge.wharton.upenn.edu/article/will-other-companies-follow-amazon-in-raising-the-minimum-wage/

Chicago

"Amazon’s $15 Minimum Wage: What’s the End Game?" Knowledge@Wharton, October 09, 2018,
accessed December 17, 2018. http://knowledge.wharton.upenn.edu/article/will-other-companies-follow-amazon-in-raising-the-minimum-wage/


For Educational/Business use:

Please contact us for repurposing articles, podcasts, or videos using our content licensing contact form.