Amazon’s $15 Minimum Wage Might Cost Some Workers

(Bloomberg Opinion) -- Last week, Amazon.com Inc. announced a pledge to increase its employees’ minimum wage to $15 an hour to much fanfare from the left, and at least some from the right. But those raises aren’t coming for free; to help pay for them, Amazon has said it will eliminate its hourly workers’ monthly bonuses and stock awards.

I don’t have a view on what’s the right minimum wage for Amazon. But the fact that Amazon is raising base wages while eliminating performance pay should give us pause.

The new policy will reduce wage inequality among Amazon’s hourly workers. That’s probably a good thing, because  there’s solid evidence that inequality among even low-level workers can be bad for business. The change will also reduce individual workers’ wage variability; this should make those workers more able to plan and save for the future. And it sounds as if the new policy may put more cash in workers’ pockets overall; Bloomberg News reported that Amazon expects total compensation for hourly operations and customer-service workers to increase.

But there’s another angle to consider. At $15, Amazon is paying wages higher than its workers can get on the outside -- what economists call efficiency wages. This will help Amazon attract and retain skilled and motivated hourly workers. But at the same time, it means that everyone who falls below the level of productivity that merits the higher wage will be at risk of losing their jobs.

How much should this worry us? Let’s think about Amazon’s workers who were previously making just minimum wage, and not getting any performance bonuses. If those workers were already performing at a level worth $15 an hour, then the new policy is a boon -- the workers just get paid more for the work they were already doing. This could easily be the case if Amazon were keeping wages low because its workers didn’t have many other options.

But suppose instead that those minimum-wage employees were really doing work worth less than $15 an hour. If they can’t increase their output to the $15 an hour level, then they may well be on the way out.

Of course if those workers can increase their output, then maybe they’ll do that. They’ll make more money, and the company’s productivity will increase -- a win for everyone. But is that possible? We know that workers respond to performance incentives. And Amazon is famously maniacal (and perhaps a bit creepy) about monitoring worker performance. So it’s likely that if the company’s lowest-paid workers were able to be more productive, Amazon would have already tried to induce that productivity through its existing bonus scheme.

Political pressure notwithstanding, that Amazon made this move at all means the company can’t be expecting a substantial reduction in employee output following the change in wage policy. Amazon must anticipate that average performance under the $15 minimum wage will be at least roughly on par with performance under the old compensation scheme.

As a result, the new policy could end up looking a lot like a sort of inverted performance-pay system, under which the reward for good performance is that you get to keep your job. The workers who continue to work for Amazon will indeed have higher base compensation, less wage variability and less inequality. But those at the bottom of the wage scale -- presumably, the workers that some had hoped would benefit most from a higher minimum wage -- might not see the same gains. Indeed, they could even be out of a job.

To contact the editor responsible for this story: James Greiff at jgreiff@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Scott Duke Kominers is the MBA Class of 1960 Associate Professor of Business Administration at Harvard Business School, and a faculty affiliate of the Harvard Department of Economics. Previously, he was a junior fellow at the Harvard Society of Fellows and the inaugural research scholar at the Becker Friedman Institute for Research in Economics at the University of Chicago.

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