Amazon’s $15 Minimum Wage Should Be Just the Start

(Bloomberg Opinion) -- Inc.’s decision to raise wages to $15 an hour for all of its U.S. workers is good news. It will mean more money in the pockets of thousands of hard-working Americans struggling to make ends meet. Even more importantly, Amazon’s example may start a trend, encouraging other companies to raise wages as well, and prompting workers to demand more.

This victory comes with several caveats. Amazon’s move comes after the company became the focus of rhetorical attacks from Senator Bernie Sanders on the left and Fox News talk-show host Tucker Carlson on the right, as well as a legislative effort from Sanders that singled out Amazon’s founder and chief executive officer Jeff Bezos by name. Such jawboning is an inconsistent and unreliable way to make policy, especially when accompanied by legislation of dubious value as in this case.

It’s also possible that these efforts will produce more in the way of public relations than real changes in the distribution of income within corporations -- note that even as Amazon increased wages, it eliminated bonuses and stock awards for its warehouse workers and other hourly employees. Since the median annual compensation at Amazon was already $34,123 before the change -- not that different from the $31,200 that a fulltime worker earning $15 an hour would make in wages -- it’s likely that Amazon’s move won’t involve a big increase in labor costs, especially with the bonus cuts factored in.

Still, it’s a very positive development. And beyond the real material gains to workers, Amazon’s $15 wage gives us two important pieces of information about the state of the U.S. economy -- information that can potentially be used to secure even more gains for American workers.

First, that Amazon could raise wages so easily is a big hint that $15 really isn’t too high in the modern economy, and that a national $15 minimum wage isn’t as bold an experiment as some worry. Activists such as Nick Hanauer have long been campaigning for a national $15 minimum wage, and some leaders like Sanders have joined the fight. Opponents of the measure warn that $15 is too high, and could lead to significant job loss.

Evidence shows that most minimum wage hikes don’t cause a lot of unemployment. But they also tend to be modest in scale. In principle, it’s clear that setting a wage floor of $15,000 an hour would force businesses to close, cost jobs and lead companies to pay workers under the table. Furthermore, some regions can bear higher minimum wages than others -- workers in a big city like Seattle or Los Angeles have much higher productivity than those in rural Kansas, simply because of their proximity to a concentrated customer base.

But Amazon’s fulfillment centers are scattered throughout the country, including many rural areas and small towns. And the workers in those warehouses tend not to be highly skilled. So the fact that Amazon can afford to pay all of these workers $15 or more indicates that even in the weakest markets, $15 is a reasonable wage. That in turn bolsters the arguments of Hanauer, Sanders and others calling for a $15 national minimum.

And if $15 works in rural America, an even higher minimum wage is probably safe for big, highly productive cities. “Fight for $20” might not make a catchy slogan, but Amazon’s move should encourage cities like Seattle to experiment with a higher floor. If one of these experiments goes too far and causes unemployment to rise, the change can quickly be reversed, so the risk is real but limited.

A second lesson of Amazon’s move is that big companies in the U.S. have considerable market power. In a competitive market, companies’ ability to raise wages is limited -- if they boost pay too much, their profits will shrink and risk going out of business. That Amazon can afford to quickly raise wages in response to political pressure suggests that its profit cushion from operations is large enough to give it wide discretion in how much it pays its workers.

Of course, not all companies share Amazon’s economies of scale, technological prowess and nationwide scope. Many smaller retailers probably have their backs to the wall thanks to Amazon’s ubiquitous, crushing competition. This illustrates a potential dark side of forcing up wages -- it can harm or even kill smaller companies. If only behemoths like Amazon are profitable enough to afford paying workers higher wages, increased minimum wages will help drive the behemoths’ smaller competitors out of the market. That could still work out well for wages, but it would give the giant survivors too much power to raise consumer prices and wield political clout.

So Amazon’s move suggests another idea -- a higher minimum wage for larger companies. In fact, many minimum wage laws already have partial exemptions for small businesses. But the case of Amazon suggests that laws could incorporate even more tiers -- very high minimum wages for the titans of industry, with more moderate requirements for medium-sized players.

Targeting of specific companies isn't a great way to make policy. But in this case, it worked. Now policy makers activists, and economists need to use the information from this experiment to push the boundaries of policies to help American workers.

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

Noah Smith is a Bloomberg Opinion columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.

©2018 Bloomberg L.P.