Message to My Fellow Execs: Raise Wages!
If we do we’ll all be richer in the end.
TONY JAMES | October 29, 2015 | Politico Magazine | http://www.politico.com/magazine/story/2015/10/message-to-my-fellow-execs-raise-wages-213308#ixzz3py2459ky
In early 2014, President Barack Obama paid a visit to a local Costco. He wasn’t there to get a good deal on tires or a big-screen TV but to use Costco as a platform to advocate a higher minimum wage. That’s because the retail giant (where I am lead director) has proved that businesses can perform better by paying more. Costco pays some of the highest wages in retail—almost twice the minimum wage.
And guess what, it’s doing great. At a time when debate over raising the minimum wage is front and center, I have a message for my colleagues in business: We are missing the boat. Knee-jerk opposition is wrong, because as I have seen at Costco and other companies, raising wages will be good for business.
There are three key reasons. First, it will accelerate growth of the economy. Second, it will increase labor productivity. And third, it will reduce government support payments and the pressure to raise taxes on business.
For the past 50 years, the U.S. has allowed its minimum wage to plummet, to the point where in real terms our minimum wage today is back where it was in the late 1930s. We have squeezed consumer demand and sapped economic growth.
Many businesses and their advocates argue that higher labor costs from an increased minimum wage would hurt jobs. But in fact, higher wages on a national scale will accelerate growth by triggering higher demand for the very sectors that pay low wages, more than offsetting the higher costs. This is why many studies show higher wages do not cost jobs.
When you raise the minimum wage, you give more money to the people with the highest propensity to spend. If you give consumers a one-dollar tax rebate or other one-time break, they spend only about 50 cents. If you increase their incomes by a dollar, however, they actually spend more than that dollar, because they also use more credit. This direct spending increase from higher wages then has an additional 1.5-times multiplier effect that ripples through the entire economy.
If the federal minimum wage were raised to $12 per hour, that would raise wages either directly or indirectly for over 20 percent of American workers. It would raise incomes by over $80 billion and add $200 billion of economic activity as the multiplier effect cascades throughout the economy. And that’s just the beginning, because a higher minimum wage would actually trickle up, causing other incomes to rise, too. All told, this would drive a 1 to 2 percent near-term jump in gross domestic product.
If a rise in wages is instituted nationally, a level playing field is maintained that avoids artificially legislating winners and losers. Businesses will adjust to constraints uniformly applied, and each business will still try to find a way to win from innovation, improved productivity or price increases. Rather than continually driving down real wages and demand, we will benefit our entire economy.
It is also important to note that jobs that pay minimum wage are heavily concentrated in non-tradable services with restaurants and retailers. These jobs are hard to replace by imports or automation—and the low-wage workers in these places tend to spend locally—so their added income would recycle into the local economy, benefiting the very businesses affected by higher wages.
The second reason business should embrace a higher minimum wage is productivity. Higher wages make businesses stronger because they can find savings and more effective workforces through lower turnover, reduced training costs and more responsive and committed employees. This is precisely what we have seen at Costco—and what many of my colleagues at other well-paying companies have discovered as well. I think we can all agree that no one can actually live on $7.25 an hour, so it makes perfect sense that people who earn that will spend most of their energies trying to find something else to do.
And finally, businesses will benefit from a higher minimum wage because it reduces required government support payments and encourages people to work, ultimately reducing pressure to raise taxes.
Think about an unemployed or underemployed worker today. It’s likely that this person is receiving substantial government support. If that person gets a job, they forfeit much of this government assistance—and with the current $7.25 minimum wage, there’s little incentive to do that. In many cases, they would be working simply to offset the loss of government assistance.
A higher minimum wage would empower people to support themselves and significantly reduce government welfare spending. And unlike many other social programs, it rewards people for working.
It’s time for all business leaders to see what’s become increasingly clear. Our economy has been stalled for more than a decade. We must ignite growth. Zero real interest rates and trillions of dollars of corporate cash shows that we have enough savings. We need more demand!
At a time of rising income inequality, let’s not just hope for prosperity to trickle down. Let’s put resources where they are needed most and lift the entire economy with them.
Tony James is president and chief operating officer of Blackstone.