How is the value of an employee’s time determined and who sets that value? In a classic capitalist marketplace, driven by purely rational economic forces, the law of supply and demand sets the price of labor. Specifically, the higher the demand for people with a certain skill set, and the lower the supply of people who have those skills; consequently, the higher the wages are for that population. Employers, in response, have a choice: pay higher wages to obtain the skills they value, or look for other ways to conduct business. Astute employers are most likely to pursue a strategy to remain competitive that also avoids increasing costs and reduced profits. Other options include hiring employees with sub-optimal but adequate skills, innovating to improve labor efficiency, and leveraging technology to displace labor.
This model presumes a free flow of information. In other words, employers and employees both have access to information about the value of labor and thus respond in a rational manner. This model places no value on social goods, politics, or other agendas. For example, child labor and discriminatory pay practices are not addressed by this model.
Does this supply and demand rule apply equally across the board at all levels of employees in organizations? Is society well served by using it as the preferred way to manage the labor market?
At the lowest end of the labor wage spectrum are individuals who lack valued job skills, are often ill-informed about labor opportunities, and lack resources to develop new higher-value skills. Most employers do not have a high demand for employees with low skill levels; thus, low skilled workers may be in high supply, but are in low demand and thus are awarded low wages. The supply and demand principal accurately predicts wage levels for low skilled individuals. In other words, unless the low skilled workers develop new, higher-level skills that are in demand in the marketplace, they will continue to earn low wages.
At the very top of the earnings scale, CEOs of publicly traded companies earn the most. Boards govern the compensation for top-level employees in publicly traded corporations. They evaluate what a CEO is worth and approve compensation plans. Board members, typically C-Suite employees themselves, are well informed about the expectations placed on people in those positions. Shareholders, the largest of whom are usually Board members or affiliates, must approve the compensation package. Given the influence of this small group who assess the value of a CEO’s labor, it is not clear this method of setting compensation follows the classical economic model of an “invisible hand” guiding the marketplace through supply and demand. In a series of articles in the Harvard Business Review, Finance Professor Alex Edmans with the London Business School asserts legitimate market-driven forces set CEO compensation. The market is very competitive for CEO talent, yet the available pool is shallow with eligible candidates. In other words, the law of supply and demand is at work and his research predicts that an effective CEO will increase the economic value of a company, which benefits all employees within the organization.
There is growing debate about the nature of wages in American society. Fueled by the economic fallout from the Recession of 2008, critics of the capitalist system are advocating for more equitable methods of income distribution and wage determination. Employers must be aware of these changes in order to successfully plan for whatever wage challenges they face.
A major component of the Fair Labor Standards Act (FLSA) of 1938, the federal minimum wage has been controversial from the start. Originally set at $0.25 hourly only for companies that engaged in interstate commerce with sales above a certain level, the idea of a wage floor was intended to end the perceived exploitation of laborers by “greedy capitalists,” reduce poverty, and strengthen the overall economy by driving money into the hands of more working Americans. Opponents charged it would distort the marketplace and create a disincentive for employers to hire and expand their businesses. Rigorous political debate about the minimum wage has occurred each of the 22 times it has increased since, with many of the same, recurring “pro and con” arguments. Despite the lack of consensus, the law has expanded in scope and today virtually all employers must comply.
The current federal minimum wage was set in 2009 at $7.25 hourly, with a sub-minimum wage allowed for “tipped workers” ($2.13 hourly) and youths and disabled workers ($4.25 hourly). In addition, many states have set their own minimum wage levels, and most of these state and local rates are well above the federal rate. Increasingly, local municipalities are imposing higher minimum wage levels to respond to higher costs of living in urban areas and resort towns. More than anywhere, California is a hot bed of minimum wage activity and has become a patchwork quilt of minimum wage rates, especially in the San Francisco Bay Area. Some states seek to avoid this fate by drafting laws to negate municipal minimum wage levels that conflict with state or federal levels. Missouri has already passed such a law, nullifying the higher minimum wage rate passed by the City of Saint Louis, allowing employers to roll back wages.
Labor unions and anti-poverty advocacy groups seek to increase the minimum wage to $15 hourly, focusing their efforts at the municipal level in economically vibrant areas with a high cost of living. Advocates claim this will provide employees with a truly livable wage, reduce levels of public assistance, and increase economic activity. Opponents point out that this wage level does not account for local economic conditions; for example, booming urban areas have vastly different needs than struggling rural communities. In addition, they claim it will force employers to reduce staffing levels, compress wage scales, stifle employers’ ability to grow their business, and even force many out of business. National fast food chains indicate this wage rate will speed up the adoption of technology (e.g., automation, robots, and Artificial Intelligence) to replace human labor, which is already evident by kiosks in many popular fast food restaurants. All parties point to various studies produced by academics and economists to support their conflicting perspectives.
In 2014, Seattle became the first city to adopt a minimum wage standard of $15 hourly, which is already in effect for large employers. The impacts of this socio-economic experiment are being closely monitored by various third parties. A recent study showed a drop in hours worked and take home pay, supporting the objections of opponents. Critics of the study question the methodology and point to other factors that impact the outcomes. Despite the controversy and uncertain results, San Francisco as well as New York City employers with 11 or more employees currently have a$15 hourly minimum wage standard with other prominent cities like Washington D.C. phasing in an increase to $15 hourly by July 2020. Other cities appear poised to follow.
Some of the most vehement opponents of raising the minimum wage may surprise you. They include employees who rely on tips. Such employees feared that raising the sub-minimum tip wage would reduce their take-home pay by angering employers who would react by cutting hours and jobs. Some even feared that customers would react to this wage hike with less generous tipping. In Maine, a cadre of organized service industry hourly workers successfully lobbied their elected officials to roll back the increase to their minimum wage. Similar efforts may pop up in other areas with workers who benefit from customers who are generous tippers.
A relatively new wrinkle in this wage conversation is the Universal Basic Income (UBI). The UBI is based on the concept that every person in a wealthy, humane society, whether employed or not, should be provided a basic nominal income to survive. High profile business leaders from the tech world like Elon Musk (CEO of Space X and Tesla) and Mark Zuckerberg (CEO and Founder of Facebook) also warn that a UBI will be necessary as millions of Americans lose their jobs to increasingly sophisticated technology. Like the minimum wage debate, UBI activity has gained traction at the state level. Alaska already has a de facto UBI (namely, the Permanent Fund Dividend) thanks to oil revenue sharing, and Hawaii is actively taking steps to evaluate the impact of providing a UBI for state residents.
The minimum wage debate will continue in 2019 and raises many questions, including:
- How should the value of labor be determined? Free market capitalism? Government action? Algorithms?
- Who should make the decisions? Powerful, unelected individuals? Ivy League Economists? Non-profit advocacy groups? Elected politicians?
- What should drive the decision? Data? Political agenda? Market forces? Social justice goals? Humanitarian interests?
At this time and for the foreseeable future, a complex combination of the above forces seems most likely to continue driving the decisions on the value of employee labor. The net result for employers is an operational headache to remain compliant, especially for multi-state employers. Your Employers Council membership helps you stay compliant with legally mandated wage requirements, as well as identify the other forces that must be considered for competitive compensation at all levels of your organization. For on-the-spot information on competitive wages, consult our various and numerous compensation and benefits surveys. For information on state and local laws related to minimum wage, contact your assigned staff representative or our legal and human resources departments.