Thursday, July 16, 2015

Efficiency Wages

Over the last few years (especially in the Seattle area) the discussion on minimum wages has been rather heated. I've always argued that Wal-Mart holds the answers to this debate. Wal-Mart has observed the impact of different minimum wages and changes to minimum wages across a range of states. Recently, the company has endorsed increasing the minimum wage and is paying workers slightly higher wages. Why? Well one of the arguments in favor of increasing the minimum wage is a reduction in worker turnover. If you pay workers a wage above what they could get someplace else, they are going to work harder, knowing they can easily be replaced. Wal-Mart won't release their numbers but it looks like paying workers a higher wages could actually be saving the company some money. Is it enough to offset the wage increase? Hard to say. 


  1. There are many things that I like about raising the minimum wage. For one, someone who makes federal minimum wage and works for 2000 hours a year would only make $14,500 per year before taxes. It is a struggle to live on. However, I think it must be a very gradual process. Using Walmart as an example is wonderful to use from the employees' standpoint because it perfectly showcases how morale can change and productivity can increase. The downside is that a faster hike in the minimum wage could destroy many small businesses. Look at the restaurant industry for example. On average, a restaurant will make in between $0.04 and $0.06 on the dollar. A sudden minimum wage increase would be traumatic to small restaurants and businesses alike. There must be time to adjust and allow these businesses to evaluate their economic situations.

  2. I completely agree with what Carter has said about this notion of raising minimum wages. I think that slowly increasing wages for employees in order to decrease the worker turnover rate is very useful and profitable for a company, especially for smaller companies. I believe this to be true because for every new employee that is hired, there is usually a minimal amount of training and processes that the employer must go through in order to get the new employee up to speed with how things are done. If employers can simply raise the minimum wage and entice their employees to stay with them and not leave to go do another job for just a little bit more money, then I believe this would really benefit small companies. It would allow the company to spend less time, which inevitably equates to money in the long-run, on new employees and allow them to focus on more vital aspects of the company to become more profitable.

  3. While raising the minimum wage is good on paper, I would argue that expanding the Earned-Income Tax Credit would be more effective. It serves as an excellent incentive for people to climb out of poverty instead of incentivizing advancement. It can really help a family turn around their luck and economic standing. Another benefit, it avoids placing a stigma on the poor. Many are too proud to receive food stamps or other government aid, so this allows the poor to change their psychological outlook on their situation. This would also avoid placing an unnecessary onus on businesses to pay their workers more by federal mandate.

    Planet Money on NPR has a wonderful podcast on this that explains the EITC well.

  4. I completely agree that higher minimum wage will create less turn over in the market. I know from experience that I stayed with a job rather than leaving because the pay was higher than other places I was looking. I agree that raising minimum wage should be a gradual thing. If you do it extremely fast it will backfire because smaller companies will not be able to keep up. I think there are going to be huge changes in this area in the next few years which will be very interesting to watch.


    I'm happy to see that Wal-Mart is taking action to help their employees climb up the socioeconomic ladder, but I'm disappointed that it took them so long and there had to be so much negative press to get them to this point. (for example:

    I know there has been controversy over the statistics shared by President Obama about the demographics of the minimum-wage earners in the nation, but by and large, the low-income population (at or near minimum wage earners) are individuals who are over age 20 and trying to support themselves and their families. This is a cost of living issue.

    Of course we can see that inflation has outpaced the minimum wage in its rate of increase over the past decade, but goods and services are not the only prices that have outpaced wage increases. Generally speaking the largest portion of the average household’s income in the US today will be paying for housing costs. Even though the rental prices appear to have peaked in 2009, the rate at which rents have increased far exceeds the rate of increase of Area Median Incomes (AMI) across the country. Hardest hit are households only earning minimum wage as the shortage of affordable housing remains an enormous problem.

    According to the National Low Income Housing Coalition Out of Reach Report 2014, a person living in Spokane County has to earn an hourly wage of $14.21 to afford to pay the rent and utilities for a modest two-bedroom home (Fair Market Rent in Spokane for a 2-bedroom unit was $739/month in 2014 according to HUD).

    Here’s a Spokane Low-Income Household example for 2015:

    A single parent of one child renting a two-bedroom apartment in a decent, but not affluent, Spokane neighborhood who makes the current minimum wage of $9.47/hour (2015 WA State Min. Wage) and works 40 hours/week:

    ~Approx. Gross Monthly Wages: $1,629 (38% of the AMI – meeting HUD’s “Low-Income” criteria)
    ~Approx. Payroll Deductions: $ 202
    Approx. Net Monthly Income: $1,427

    ~Rent: $ 773 (2015 Fair Market Rent – 47% of gross wages)
    ~Utilities (Elec., Heat, Phone): $ 120
    Basic Housing Costs: $ 893 (a staggering 55% of gross wages & 63% of net income!)

    Other Monthly Expenses:
    ~transportation costs: $ 75 (for 2 bus passes)
    ~child-care costs: $ 65 (co-pay after state assistance)
    ~food: $ 200 *
    ~toiletries, clothing, &
    school-related expenses**: $ 90
    Total Other Monthly Exp.: $ 430***

    Funds Remaining: $104
    (if there are no emergencies and no days when the wage-earner is too ill to go to work)

    *2-person household at this income level is eligible for only $165 in food assistance because of recent cuts to the food assistance programs, so about $200 will be out of pocket. Don’t let the falling numbers of families on assistance fool you! Not all families are not working their way up and out of poverty, many are getting cut from programs and are just not being counted in the public assistance statistics. The past few years have seen lowering of the household income limits to receive food assistance along with a reduction in the amount of food assistance received; cuts to childcare funding via the same income limit lowering mechanism; cuts to tax-credit programs that previously helped increase the numbers of low-income housing units; and cuts to post-secondary education funding to name a few.

    **public education is not 100% without cost to families

    ***check out the Family Budget Calculator posted by the Economic Policy Institute to see what other typical expenses would add up to without state assistance.

  6. I agree with what Alyssa said about the minimum wage possibly backfiring. My family used to own two small pizza restaurants until the minimum wage in Oakland was increased to $12.25. In order to cut the costs of operating two restaurants, my Dad decided to close one store and just operate the other location. Raising minimum wage must be a gradual thing because small businesses face much adversity when costs are increased all at once. In terms of the Wal-Mart example, it's great to hear that the corporate giant is increasing wages. Hopefully there will be a reduction in worker turnover as a result of increasing the minimum wage.

  7. I wonder if the reason that Walmart is having succes with paying their employees above minimum wage is the fact that it is above minimum rather then the actual wage it self. If the minimum wage were to go up, yes people are making more money but are they really going to work harder if it is still minimum. Raising minimum wages I don't think will help the small businesses have more productive employees, I think what Walmart is doing has to do more with the fact that it is above minimum rather than the actual dollar amount they are paying out.

  8. Over the course of the past few years, I have heard a lot of negative press about Walmart so it is interesting that they are one of the national corporations that are choosing to lead the way on increasing wages. It does seem obvious, however, that raising the hourly wage to slightly above minimum would create incentive for employees to stay with a company versus leaving to get paid less elsewhere. I agree with the other students that raising the minimum wage needs to be a process in order to avoid causing economic stress for small businesses. I also found Bonnie's analysis to be thought provoking. It would be interesting to compare that same life style/situation to various cities across the country (especially as most of them have various minimum wages).

    1. Anna, I think that's a great point. Wal-Mart provides an interesting base for this discussion because it is available all over the country in many diverse cities/towns/regions/etc. In addition, I think the scale of Wal-Mart as a business is something we need to take into account. I think it's easier for a multi-billion dollar company to raise their minimum wage a few cents above what it is in a majority of states than it would be for a smaller business. Wal-Mart can afford to do things that would shatter some small businesses. If the small, local business that I work at paid all of it's employees $10 we would have to lay off a good portion of our staff. Because of this, I don't think we can compare Wal-Mart to all businesses across the country.

  9. Whenever I think of Walmart I think of some evil tyrant... Even though the company is starting to pay workers slightly above minimum wage I think this is just to keep them working even though they have poor morale. Employees at Walmart are not treated well, by increasing their hourly wage they are just trapping them to stay at a company that does not care about them. However, I do appreciate that they are trying to create less turnover. I think everyone needs to pick a place to improve on and that is what Walmart is doing.