• When minimum wage goes wrong

    Ben D. Kritz

    Ben D. Kritz

    AN interesting, although not at all surprising, story picked up last week by news outlets such as The Wall Street Journal, Business Insider, and the conservative Daily Caller was that of the Seattle-based credit card payment processor Gravity Payments, whose CEO and co-founder Dan Price made himself a darling of progressives and labor advocates by setting a minimum wage of $70,000 per year for all employees, cutting his own $930,000 annual salary to help raise the funds.

    Three months later, Gravity Payments is virtually underwater. Virtually all of the company’s profits, including its $2.2 million net from last year, have been sequestered to cover the payroll; Price himself has been reduced to renting out rooms in his house in order to make ends meet. While the $70,000 base is being kept, for now, no one knows how long that will be possible, or if the otherwise successful company can even survive.

    One serious unforeseen consequence of Price’s largesse was the heavy blow to company morale the new pay scale caused. Several key employees, including the company’s finance manager, have quit, in large part because of what they saw as unfairness in giving newer, less experienced employees enormous pay raises, while more experienced staff received smaller raises or none at all. The New York Times also reported that while Price’s move did attract dozens of new customers—small accounts, whose transaction activity will not begin to pay off for Gravity for at least a year—many established accounts withdrew their business, concerned about the possibility of higher fees and the company’s stability.

    This is the sort of thing that happens in Seattle, the most clueless, well-meaning city on the Pacific Rim. For every good idea someone in Seattle has, like Soundgarden, or Starbucks, there is at least one dud, like Audioslave, or Gravity Payments’ wage scale.

    Minimum wages are a hot-button issue in the US as the country hurtles toward another national election, and they are from time to time a source of contention here in the Philippines as well.

    It is fairly easy to present a purely theoretical argument that minimum wages should not exist at all; in an otherwise interference-free labor market, supply and demand will keep wages within a functional range: Too low, and companies will not be able to fill open jobs; too high, and their costs become uncompetitive.

    In the real world, however, things become a little more complicated. Minimum wages are a relatively robust tool to prevent labor exploitation, and provide for calculable savings in other social services. In an advanced economy like the US, minimum wages probably have less importance than they do in third-world—sorry, I meant to say “emerging”—economies such as the Philippines, where exploitation is more widespread and more difficult to control. Without a minimum wage framework (notwithstanding the sad fact that it is comprehensively violated across the country), many workers in the Philippines would be likely reduced to near-slavery conditions.

    But there is a difference between “protecting against gross abuse” and “being completely unreasonable,” and minimum wage advocates, particularly those with the generosity of someone like Dan Price, run into trouble because their perspective on minimum wages is based on a flawed premise: the “living wage.” Logically, the wages for a particular job are a function, an operational cost, of that job’s contribution to revenue creation or capture.

    The precise relationship between wages and revenue generation (whether the latter is direct or indirect is not particularly important) most likely depends on the specific attributes of the business and the market in which it operates. In some cases, a ‘fair’ minimum wage—based on value of the work—would indeed be at least a “living wage” and possibly more. But for many jobs that would not be the case, nor would it make any mathematical or management sense to force their wages to a level the position’s output cannot actually support.

    Dan Price knows how that works now, and for him, because he seems like a nice guy, we may hope that the fundamentals of supply and demand would sink in enough to help him save his company. For everyone else, it’s a lesson not to let hearts make decisions brains with a basic grasp of economics should be handling.



    Please follow our commenting guidelines.

    1 Comment