After months of constant criticism directed at Amazon for its strenuous labour practices, the e-commerce giant finally decided to mend its image early this month.
At the outset, the decision by Amazon to raise its employees' minimum wage to $15 per hour seems motivated by social welfare considerations. Estimated to impact more than 250,000 employees, both full-time as well as seasonal workers, the optics surely appear non-commercial.
However, such a major realignment can't be without a strategic rationale.
Amazon has in fact managed to kill two birds with one stone. This is because not only would an increment in minimum wage socially and economically benefit Amazon’s workforce, it will also have a direct positive impact on the company itself. A behavioral economics theory known as “Efficiency-Wage Theory” is perhaps at work.
The Efficiency-Wage Theory suggests that when a firm decides to set 'wage prices' above the 'equilibrium market price', in response, the productivity of its workers increases. This theory primarily rests upon a two-pronged argument:
By raising its minimum wage to $15, which is more than double the federal minimum wage (i.e. $7.25 per hour), Amazon has set its minimum wage well above the equilibrium rate. Even minimum wage of Washington D.C, the highest in the US, falls short of Amazon’s new benchmark. Amazon’s biggest competitor i.e. Walmart also fails to match up at $11 per hour.
Efficiency-wage theorists believe that such a move would incentivise Amazon’s employees to work harder. The workers under the fear of losing their job and having to work for lower wages will start working harder to protect their employment. The average productivity should also grow because of the increased wellbeing of workers.
Amazon is leading the industry by example. This is precisely why the minimum wage increment is a home run. It is simply a win-win situation for all.
Moreover, in the era of rising automation where low skilled jobs are increasingly getting 'under risk', most companies would more and more depend on a smaller but much productive / efficient workforce.
Amazon's progression post its wage revamp would hence serve as a useful case study to assess the impact of flexing labour metrics on productivity.
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