Some economists have argued for a long time that the establishment of a minimum wage would have a negative impact select segments of the economy or on society as a whole but there haven’t been controlled experiments that I am aware of that try to support this claim. That is up until now.
As of April of 2015, we may finally have a Petri dish in which to examine the role of price fixing in the labor market and we have a man by the name of Dan Price to thank.
Dan Price is the CEO of Gravity Payments, a Seattle-based credit card processing company of about 120 employees [1] who has decided to set an-across-the-board minimum salary of $70,000 for each of his employees.
According to the article by Riley and Harlow entitled Gravity Payments CEO defends $70,000 minimum salary, Mr. Price had read a study that concluded that employees have substantial increases in their personal happiness until they reach a salary of $75K, after which the gains are less pronounced. Citing this study as motivation, Price then decided to unilaterally set the minimum salary resulting in significant raises for 70 employees, 30 of which will see their yearly earnings essentially double. To cover this expense, Price has cut his own salary from $1 million down to the minimum set by his own rule.
While the long-term results are yet unknown, the immediate results speak volumes about human nature, incentives, and the realities of the economy as Gravity Payments has seen some positive effects, some unintended consequences, and a heap of negative outcomes.
As cited in the Business Insider article by Rachel Sugar, some employees are ecstatic about the raise. One member said that the extra money would allow him to fly his mom from Puerto Rico to Seattle for a visit – something he was never able to do before because of the relative relationship between his earnings and the price of air travel. In addition, scores of new businesses have flocked to Gravity Payments due to what is viewed as their progressive stand. Sugar also notes that there may be some incentive for employees to work harder to justify their new, higher wages.
This kind of enthusiasm was no doubt anticipated by Price but other outcomes were no doubt unforeseen. In his article Why A $70,000 Minimum Salary Isn't Enough For Gravity Payments, David Burkus points out that the company was inundated with emails, phone calls, and social media posts that have proved a distraction to the day-to-day operations of the company. In addition, they’ve been flooded with job application from people seeking employment in this brave new world.
But all of this is overshadowed by the strong, negative elements that resulted. The New York Times had a lengthy article entitled A Company Copes With Backlash Against the Raise That Roared in which its author, Patricia Cohen, presents the responses of two key employees who quit over Price’s move.
One such employee is Grant Moran, a webdeveloper, who left Gravity Payments saying
More troubling is the story of Maisey McMaster, who Cohen describes as ‘one of the believers’ in Price’s business approach. McMaster join Gravity Payments when she was 21 and in her five years of employment had gain the position of financial manager by putting in long hours that left little time for her husband and her family. Originally onboard with the raises, she began to have her doubts. When she approached Price about her concerns she said he accused her of being selfish. She eventually quit Gravity Payments saying
Other negative side effects have included clients who left due to worries about the prospect of higher fees that they believe will be needed to cover the increased labor costs or because of the discomfort of the political statement they perceived. In addition, Price has alienated segments of the Seattle entrepreneur set who see this move as setting a dangerous precedent. Steve Duffield, the chief executive of the DACO Corporation, is quoted as saying
Those are the facts. But what to make of them. As Riley and Harlow note, Price thinks any company can match his model but does that really make sense?
First, let’s take a look at that ecstatic employee with the mother living in Puerto Rico? Would he really be able to fly his mother into Seattle if everyone in the United States had a $70K minimum salary? Of course not! The cost of plane travel would also have to increase to cover the higher labor associated with pilots, mechanics, flight attendants, and service workers.
How about the large marginal increase in happiness as a result of the higher salaries. Here there are two sides to examine. For the employees who receive a huge bump up it isn’t at all clear that happiness will follow. As Sugar points out, many have begun to worry that their performance doesn’t merit the extra money. They will obviously split into two sets – the first rising to the occasion and working even harder and the second taking their windfall as a gift and changing nothing associated with their work ethic. Will the first set be happier? Maybe…but it is likely that some of them will long for the days where they had less money and fewer responsibilities. Those in the second set will then antagonize those who are actually earning the money, especially those who didn’t receive much of a bump in the first place. In addition, it is a reasonable concern to wonder if the minimum salary is simply too much money too early in the careers as many of the employees are 30 and under. Doesn’t this minimum salary hurt their competitiveness in the labor market should they want or need to move to ‘less progressive’ companies? After all, it is reasonable to suppose that the gains in happiness that correlated with the rise in salary to $75k were as much a product of the employee’s achievement – the realization that they were ahead of their peers through fruits of their efforts. Also to what hope of future success can the employee look if there is nowhere else to rise?
Burkus suggests that the way to understand this dynamic is through the equity theory of motivation as proposed by the organizational psychologist J. Stacey Adam. According to equity theory every employee in an organization is always analyzing their outlay in effort against what they get in return in relation to what others are doing. This model fits the complaints leveled by Moran and McMasters that led to their departure from Gravity Payments.
So with all this negative outcome, why did Price do what he did? Steve Tobak grapples with this question in blog for Entrepreneur entitled The Sad Saga of the $70,000 Minimum Salary Company. To summarize, Tobak thinks Price acted impulsively without considering he bad incentives he would be instilling. I, however, have a much more cynical interpretation. As discussed in the Times article, Lucas Price, Dan’s brother, and co-owner of the business filed a suit prior to this minimum salary initiative citing that
I can’t help thinking that this whole episode really comes down to sibling rivalry – a chance for Dan to stick it to Lucas in a way that Dan look like some kind of folk hero.