Dan Price, CEO of Seattle-based payment processing company Gravity Payments, last week announced that he was taking a 90% pay cut to raise the minimum wage of his employees to $70,000 a year. Salaries more than doubled for some of the firm’s lowest-paid employees and the story went viral.
$70,000 is significantly higher than the US national minimum wage of $17,000 a year, but the episode highlights a broader unease about wages for the low paid.
The post-financial-crisis world has been tough for regular wage earners. US wage growth has been weak and the UK has seen the longest and sharpest squeeze in real incomes in over 100 years. In the peripheral nations of the euro area incomes have declined sharply.
In many countries the share of economic output accounted for by wages has seen a sharp fall since the crisis. In the US wages’ share of GDP is close to a 65-year low. In the UK it is near a 15-year low and runs below its long-term average.
As wages have been squeezed so the share of output accounted for by company profits has risen steadily, particularly in the US where it is close to the highest level since the 1950s.
This shift has focussed attention on income and wealth inequality. A surprising arrival on Amazon’s best sellers list last year was a learned, 700 page tome by the French economist, Thomas Piketty, on inequality. Earlier this year Greece elected the left-wing Syriza party which had pledged a rise in the minimum wage. Last week, American workers, many from fast-food and retail chains, marched out in 200 cities calling for a rise in the federal minimum wage to $15 an hour. US presidential candidate Hillary Clinton has also voiced her concerns, saying that “fast-food and child-care workers shouldn’t have to march in the streets for living wages”.
Some argue that, as well as raising inequality, low wages boost corporate profits at taxpayers’ expense. When workers earn too little to provide for their families they are forced to rely on benefits. A study by the University of California at Berkeley shows that nearly three-quarters of US benefit seekers come from families with at least one employed member. Another study estimates the cost to the US government of in-work benefits at $153bn a year.
Wages are starting to edge up. Several US cities have already raised their minimum wages. Seattle pays workers at least $15 per hour and San Francisco has announced a gradual rise to $15 in a few years. A number of major US retailers, including Walmart, Gap and Ikea, have raised their minimum wage to $9 per hour. McDonald’s has also announced a rise.
In the UK Prime Minister David Cameron recently urged businesses to “give Britain a pay rise”. All three main UK national parties have promised a rise in the minimum wage after May’s General Election.
The rationale for raising pay varies. For Mr. Price at Gravity Payments the decision to slash his own pay and increase that of his employees was heavily influenced by a study by Nobel Prize-winning psychologist Daniel Kahneman and Scottish economist Angus Deaton. Their analysis of polling data on more than 450,000 Americans showed that peoples’ everyday happiness continued to improve as incomes rose to around $75,000. Beyond that threshold further income increases had little or no effect on happiness.
But for many US and UK companies a tightening labour market is the key factor driving up wages. As growth accelerates employers in the UK and US are facing increasing difficulties recruiting the staff they need. So a normal cyclical process of stronger growth driving wages seems to be underway.
Yet this time broader issues also seem to be in play. In announcing his own pay cut Mr Price said he did not think it was right for him to draw a salary that was almost one hundred times more than most of his staff.
Such judgements are far more subjective than setting wages according to what is needed to recruit, retain and motivate staff. Nonetheless, the mood music from politicians and policymakers suggest that the issue of “fairness” is likely to loom larger in discussions about pay in many countries.