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home : most recent : economy October 21, 2018


10/8/2018 5:43:00 PM
OPINION: Amazon and some harsh facts about pay and labor shortages

Michael J. Hicks, PhD, is the director of the Center for Business and Economic Research and the George and Frances Ball distinguished professor of economics in the Miller College of Business at Ball State University.  His column appears in Indiana newspapers.

Amazon announced last week that it would be raising its entry wage to $15 an hour and would lobby for a higher minimum wage at federal, state and municipal governments. Other companies have announced this in recent months, including Walmart, who bumped their starting wages to $10 an hour. These are interesting developments that merit a bit of discussion. 

I’ll begin with a cynical view. Amazon is about to choose a headquarters location, and in the process will likely extract well over one billion dollars in incentives from some American city. For this, the company and its chosen city will receive significant criticism, and much of it will be well-founded. So, Amazon is likely trying to insulate itself from some of that criticism with some well-timed do-gooderism. 

To be honest, I’d rather see businesses be a bit more proudly self-sufficient in this regard. American business has caused the largest and most enduring period of wealth creation in history. Business leaders should be neither shy nor quiet about that fact, nor about the opportunity that free markets afford workers. This is especially true for the poorest among us, who most desperately need the opportunity of a job. 

Of course, this calculus of reason changes entirely once a business comes running to the government for help. That is precisely what Amazon is about to do with its headquarters announcement. Once a business asks for special tax breaks or other favors, it becomes a part of the favor granting political machine. That is why it will lobby for a higher minimum wage, because it makes it easier for a governor and mayor to shell out a billion or two dollars for its new headquarters. For some time, progressives, libertarians and constitutional conservatives have argued strongly against this new business paradigm. The rest of us should listen more fulsomely to their arguments. 

The non-cynical view of Amazon’s announcement also has merit, and offers a strong lesson for business and policy leaders across the country. The $15-per-hour move might well be a way for Amazon to reduce labor costs. Let me explain.

Labor markets are tight, and every business is now complaining about finding workers. The studies I have read peg job turnover costs from between $3,000 and $6,000 per job for entry-level positions. Here in Indiana, annual turnover in the warehousing industry is 38 percent, which would add between $6 and $12 an hour to labor costs. New hires in this industry make $12.60 per hour, so reducing turnover by 50 percent would be worth at least $3 an hour, maybe $6 an hour. Viewed in that light, this is a purely profit maximizing business decision. That’s good for Amazon, good for their workers, good for their suppliers, good for their consumers and good for taxpayers. There’s also a lesson for every other business struggling to find workers. 

Across the Midwest, and indeed most of the nation, business appear frantic about the supply of available workers. Almost daily, I read of shortages in truck drivers and warehouse workers. A very good story even highlighted the RV industry’s efforts to convince schoolchildren in Elkhart that their industry offered good employment options. But do they?

Wage data say otherwise. Nationally, by the end of 2017, truck drivers’ salaries haven’t returned to the inflation-adjusted rate of 2002. In inflation-adjusted terms, warehousing workers earn 81 cents for every dollar they earned in 1998, and new hires earn 30 percent less each than they did two decades ago. In the red-hot labor market of Elkhart, Indiana, motor vehicle manufacturing workers earn less than they did back in 2003. 

This is an endlessly repeating story that requires some plain speaking. We don’t have a labor shortage in America. We have instead businesses who are unwilling or unable to pay market wages for the workers they want. To be clear, I’m an economist who respects markets, so am not saddened to see these businesses fail. A business that cannot muster a business plan that enables it to hire the workers it needs should relinquish those workers, capital and industry to business who can do so. The technical word for this is economic growth. 

What does sadden me is that instead of paying market wages, far too many businesses turn to the government for help. The most egregious abuse are the pressures on schools, workforce development and community college officials to push young people into occupations where wages are lower than they were a generation ago. It is time for businesses and state government alike to re-educate themselves on one of the fundamental aspects of labor markets; like businesses, workers also have a choice. Amazon has clearly figured that out.

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Editor, John C. DePrez Jr.; Executive Editor, Carol Rogers; Publishers: IBRC and IAR


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