Oops! One Company’s Efforts to Combat “Income Inequality” Backfires

NOTE: Though I am referencing an article on a conservative website, this is NOT a political post. It’s an ECONOMICS post.

I read this article this morning. In case you’re not familiar, Dan Price, CEO of Gravity Payments announced recently that he was going to set his company’s minimum wage at $70,000 per year. A noble goal, according to some. The media went nuts. Everyone was singing this guy’s praises.

Well, it turns out it wasn’t such a great idea.

Actions meet (unintended) consequences:

What few outsiders realized, however, was how much turmoil all the hoopla was causing at the company itself. To begin with, Gravity was simply unprepared for the onslaught of emails, Facebook posts and phone calls. The attention was thrilling, but it was also exhausting and distracting. And with so many eyes focused on the firm, some hoping to witness failure, the pressure has been intense.

More troubling, a few customers, dismayed by what they viewed as a political statement, withdrew their business. Others, anticipating a fee increase — despite repeated assurances to the contrary — also left. While dozens of new clients, inspired by Mr. Price’s announcement, were signing up, those accounts will not start paying off for at least another year. To handle the flood, he has already had to hire a dozen additional employees — now at a significantly higher cost — and is struggling to figure out whether more are needed without knowing for certain how long the bonanza will last.

Two of Mr. Price’s most valued employees quit, spurred in part by their view that it was unfair to double the pay of some new hires while the longest-serving staff members got small or no raises. Some friends and associates in Seattle’s close-knit entrepreneurial network were also piqued that Mr. Price’s action made them look stingy in front of their own employees.

Then potentially the worst blow of all: Less than two weeks after the announcement, Mr. Price’s older brother and Gravity co-founder, Lucas Price, citing longstanding differences, filed a lawsuit that potentially threatened the company’s very existence. With legal bills quickly mounting and most of his own paycheck and last year’s $2.2 million in profits plowed into the salary increases, Dan Price said, “We don’t have a margin of error to pay those legal fees.”

The author of the article sums it up nicely:

It didn’t work for two reasons. First, a business can’t survive when employees can’t generate enough value to give you a big enough return on what you pay them. And if they can’t do that because you paid them too much, that’s not on them. It’s on you. Second, people don’t appreciate what they haven’t really earned. You think they’re going to be grateful and loyal to you because you were so good to them. It doesn’t work that way.

It’s Stuff Like This That Makes Me Fear For Our Country’s Future

This morning I saw a link to an online petition to “make the ‘minimum wage’ a ‘living wage.'”

Their living wage? $13.36 per hour.

ALL of the comments (except for mine) following this petition are in favor of this idea.

What these petition signers fail to realize is what happens to the price of goods and services at the higher wage level? They go up! They have to go up. There’s no other way. If you take a minimum wage job (usually in the services or retail sector) and increase wages dramatically (roughly doubling them from the current minimum wage), prices have to go up in order to pay them. If prices rise to pay higher wages, then the minimum wage earners are right back where they started and then we’re right back to signing another petition demanding a new “living wage.”

I have said this many times but I’ll say it again: not all jobs are created equal. Therefore, you don’t pay all jobs the same. Jobs like retail, that can be performed by most people, don’t deserve a high pay rate. These jobs are also normally done by kids and young people. It’s rare that a person makes a career doing a minimum wage job.

I suggest this petition signers pick up an economics book.