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\u2019t been controlled experiments that I am aware of that try to support this claim. \u00a0That is up until now.<\/p>\n
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.<\/p>\n
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.<\/p>\n
According to the article by Riley and Harlow entitled Gravity Payments CEO defends $70,000 minimum salary<\/a><\/em>, 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.\u00a0 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.\u00a0 To cover this expense, Price has cut his own salary from $1 million down to the minimum set by his own rule.<\/p>\n 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.<\/p>\n As cited in the Business Insider article by Rachel Sugar<\/a>, some employees are ecstatic about the raise.\u00a0 One member said that the extra money would allow him to fly his mom from Puerto Rico to Seattle for a visit \u2013 something he was never able to do before because of the relative relationship between his earnings and the price of air travel.\u00a0 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.<\/p>\n This kind of enthusiasm was no doubt anticipated by Price but other outcomes were no doubt unforeseen.\u00a0 In his article Why A $70,000 Minimum Salary Isn't Enough For Gravity Payments<\/a><\/em>, 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.\u00a0 In addition, they\u2019ve been flooded with job application from people seeking employment in this brave new world.<\/p>\n But all of this is overshadowed by the strong, negative elements that resulted.\u00a0 The New York Times had a lengthy article entitled A Company Copes With Backlash Against the Raise That Roared<\/a><\/em> in which its author, Patricia Cohen, presents the responses of two key employees who quit over Price\u2019s move.<\/p>\n One such employee is Grant Moran, a webdeveloper, who left Gravity Payments saying<\/p>\n <\/p>\n More troubling is the story of Maisey McMaster, who Cohen describes as \u2018one of the believers\u2019 in Price\u2019s business approach.\u00a0 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.\u00a0 Originally onboard with the raises, she began to have her doubts.\u00a0 When she approached Price about her concerns she said he accused her of being selfish.\u00a0 She eventually quit Gravity Payments saying<\/p>\n <\/p>\n 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.\u00a0 In addition, Price has alienated segments of the Seattle entrepreneur set who see this move as setting a dangerous precedent.\u00a0 Steve Duffield, the chief executive of the DACO Corporation, is quoted as saying<\/p>\n <\/p>\n Those are the facts.\u00a0 But what to make of them.\u00a0 As Riley and Harlow note, Price thinks any company can match his model but does that really make sense?<\/p>\n First, let\u2019s take a look at that ecstatic employee with the mother living in Puerto Rico?\u00a0 Would he really be able to fly his mother into Seattle if everyone in the United States had a $70K minimum salary?\u00a0 Of course not!\u00a0 The cost of plane travel would also have to increase to cover the higher labor associated with pilots, mechanics, flight attendants, and service workers.<\/p>\n How about the large marginal increase in happiness as a result of the higher salaries.\u00a0 Here there are two sides to examine.\u00a0 For the employees who receive a huge bump up it isn\u2019t at all clear that happiness will follow.\u00a0 As Sugar points out, many have begun to worry that their performance doesn\u2019t merit the extra money.\u00a0 They will obviously split into two sets \u2013 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.\u00a0 Will the first set be happier?\u00a0 Maybe\u2026but it is likely that some of them will long for the days where they had less money and fewer responsibilities.\u00a0 Those in the second set will then antagonize those who are actually earning the money, especially those who didn\u2019t receive much of a bump in the first place.\u00a0 \u00a0In 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.\u00a0 Doesn\u2019t this minimum salary hurt their competitiveness in the labor market should they want or need to move to \u2018less progressive\u2019 companies?\u00a0 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\u2019s achievement \u2013 the realization that they were ahead of their peers through fruits of their efforts.\u00a0 Also to what hope of future success can the employee look if there is nowhere else to rise?<\/p>\n Burkus suggests that the way to understand this dynamic is through the equity theory of motivation<\/a> as proposed by the organizational psychologist J. Stacey Adam.\u00a0 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.\u00a0 This model fits the complaints leveled by Moran and McMasters that led to their departure from Gravity Payments.<\/p>\n So with all this negative outcome, why did Price do what he did?\u00a0 Steve Tobak grapples with this question in blog for Entrepreneur entitled The Sad Saga of the $70,000 Minimum Salary Company<\/a>.\u00a0 To summarize, Tobak thinks Price acted impulsively without considering he bad incentives he would be instilling.\u00a0 I, however, have a much more cynical interpretation. As discussed in the Times article, Lucas Price, Dan\u2019s brother, and co-owner of the business filed a suit prior to this minimum salary initiative citing that<\/p>\n <\/p>\n I can\u2019t help thinking that this whole episode really comes down to sibling rivalry \u2013 a chance for Dan to stick it to Lucas in a way that Dan look like some kind of folk hero.<\/p>\n","protected":false},"excerpt":{"rendered":"