Earlier this year, Dan Price, the founder of Gravity Payments, made headlines when he decided to raise the “minimum wage” for his workers to $70,000. Price’s thought process was simple, albeit simplistic. He read an article on happiness that found that a person’s emotional well-being, defined as “the emotional quality of an individual’s everyday experience, the frequency and intensity of experiences of joy, stress, sadness, anger and affection that make one’s life pleasant or unpleasant,” rises with income until they hit $75,000, after which the impact is severely dampened.
Price immediately began cogitating on a way to make it work. At first the plan “made [him] really nervous” because he wanted to do it without raising prices or cutting back on customer service, two things that were foundational to his brand identity. Instead, he decided to pay for the dramatic wage increase by cutting his salary from nearly $1 million to $70,000 and using 75 to 80 percent of the company’s profit this year. What he would do in future years was less certain. The wage increase would be phased in over three years, meaning that business would have to grow quickly in order to be able to live up to next year’s promises. But still, he pressed on.
Or at least he tried to.
The plan almost immediately went sideways. More senior, skilled employees began to wonder why entry-level positions were suddenly earning the same thing for less investment and less work. The raises left the company cash-strapped and unable to deal with certain costs of doing business, like lawsuits. And local small businesses, who could not afford to implement the salary structure Price was advocating, began to look elsewhere for their credit card processing needs.
“I’m working as hard as I ever worked to make it work,” Price said in a video taken by the New York Times, which shows the CEO sitting on a plastic bucket in a garage. “I’m renting out my house right now to try to make ends meet myself.
Perhaps the biggest challenge, according to the attendant Times’ article, was that Price’s decision cost him two of his “most valued” employees, who quit because, well, they didn’t feel valued.
“He gave raises to people who have the least skills are the least equipped to do the job, and the ones who were taking on the most didn’t get much of a bump,” the company’s financial manager, Maisey McMaster, who worked her way up the company ladder by sacrificing her family and putting in long hours for five years, told the paper.
Grant Moran, the company’s web developer shared a similar sentiment.
“Now the people who were just clocking in and out were making the same as me,” he complained to the Times. “It shackles high performers to less motivated team members.”
Sadly, Price, like many progressive policy makers, who seem to have made raising the minimum wage a central piece of their agenda, rarely think about the downstream effects of their decision. They simply think that raising wages has to be a good thing because it will put more money into the pockets of relatively poor workers.
What they don’t seem to consider is the tradeoff that the higher wages flow into fewer pockets. Take, for instance, a recent study by David Neumark, which finds that the disemployment effects of a minimum wage hike on low-skill workers may actually be “substantially stronger” than previously thought. Or a study by Michael Wither and Jeffrey Clemons, which looked a data from the last federal minimum-wage hike that happened in 2007 and found that it reduced the national employment-to-population ratio by 0.7 percent.
What they also seem to forget is that a minimum wage increase is very poorly targeted towards poor workers. A study by Joseph Sabia and Richard Burkhauser found that a minimum wage hike to $9.50 per hour would only help 11.3 percent of workers who come from poor households.
And, perhaps worst of all, they fail to account for the increased cost to consumers, which are often lower-income families. A recent study by Stanford’s Thomas MaCurdy found that minimum wage workers tend to work at places that serve people of lower incomes. That means a minimum wage increase that results in higher prices is actually functioning as a regressive consumption tax on the poor.
These, and countless other unintended consequences, are inevitable in any government attempt to set an arbitrary wage that is unrelated in any way to skill or productivity. If you don’t believe the economics, just ask Dan Price.