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  • Amazon at $15

    Posted by David Foster on October 2nd, 2018 (All posts by )

    Amazon is raising the minimum hourly wage for its workers to $15…this includes Whole Foods, it’s not totally clear whether or not it includes contract employees, though I’d assume it does.  Jeff Bezos has also encouraged his competitors to do the same, and indicated that Amazon will lobby for an increase in the Federal minimum wage.

    For discussion:  What will be the impact of this Amazon decision on the retail industry, on American business generally, and on American consumers?

     

    35 Responses to “Amazon at $15”

    1. Brian Says:

      1. Amazon needs to be broken up. Is there any more glaring contemporary case of a monopoly using its power and size to crush all competition?

      2. $15 minimum wage means the complete and final death of rural America. Small businesses can’t hire people and compete paying that in low-density areas, no jobs or stores means more people leaving, which means no businesses, which means more people leaving, etc.

    2. Jonathan Says:

      The impact will be neutral to marginally negative for Amazon, and significantly negative for Amazon’s competitors. Otherwise Amazon would not have done it.

    3. David Foster Says:

      One advantage Amazon has over its (retail) competitors: its investors are, at least for now, willing to accept lower profit margins in the retail business than are theirs because (a) they believe the overall Amazon story, and (b) Amazon also has a profit source in the Amazon Web Services segment.

    4. Assistant Village Idiot Says:

      The clerk at Whole Foods will be smarter or more industrious than she needs to be, so they can get by with fewer of them.

    5. David Foster Says:

      Moreover: at least in areas where Amazon warehouses are located, there will also be economic pressure on non-retail businesses, such as manufacturers.

      One could draw an analogy with Henry Ford and the $5/day, which really did help drive higher wage rates in the US…higher wage rates which were sustainable because of the availability of new productivity technologies. Maybe it will work out that way now, IF the better tax climate and improving economy enable sharply-increased productivity across a wide variety of companies. But, as noted above, it’s hard to tell how much of Amazon’s ability to carry these higher wage rates is really due to the better productivity rather than to the lower profitability requirements for Amazon retail.

      The other possible outcome is a significant increase in inflation.

    6. Gavin Longmuir Says:

      The biggest employer is Government — and Government already pays better than all but a small segment of private industry. Is there a consensus that Government employees are more able and harder working than those in private industry?

      Most likely outcome is that Amazon will move its main distribution facilities to Canada and Mexico — and will accelerate automation of the facilities it has to keep in the US. All of this will eventually lead to anti-trust action against Amazon.

    7. David Foster Says:

      “Most likely outcome is that Amazon will move its main distribution facilities to Canada and Mexico — and will accelerate automation of the facilities it has to keep in the US.” Hard to move to either place while still maintaining very rapid delivery, I would think. Regarding automation, they have certainly already been automating to the extent the technology is available and can be deployed with a good return on investment. But the ROI equation changes considerably when paying people more: an investment that makes no sense when the labor cost is $9/hour may well make a whole lot of sense when the cost is $15/hour.

    8. Gavin Longmuir Says:

      An additional thought about Mr. Bezos — What if he really wanted to make a difference? Versus what if he is merely trying to raise the barriers against competition by making entry to the market more expensive?

      CEO salaries are not set competitively, as they would be if the job was bid out in the same way as any standard contract and awarded to the lowest qualified bidder. Instead, management advisors survey CEO pay in comparable companies and present the results to Compensation Committees of the Board. Most Committees agree they want their CEO to be paid in the top quartile, which of course changes the distribution. (Like Lake Woebegone, “All the children are above average”). Year after year, chasing after the top quartile has driven CEO pay to levels which may not be good for companies or for the country.

      Supposing as a highly visible CEO, Bezos announced that his pay would henceforth be 10 times what he wants as the minimum wage — about $300K per year? or even 20 times his targeted minimum wage — about $600K per year? Bezos would of course continue to reap the benefits of his shareholding, but that would be as an investor in Amazon, not as an officer of the company. That action by Bezos would certainly give the Compensation Committees of other companies good grounds for reconsidering the appropriate pay level for their own CEOs.

    9. David Foster Says:

      Bezos’ compensation in 2017 was $81,000 in salary and $1.6 million in “other”…the “other” being mainly the cost of company-paid security arrangements.

      https://www.sec.gov/Archives/edgar/data/1018724/000119312518121077/d514607ddef14a.htm

      From the filing, it appears that he has never received any stock-based compensation, such as stock options or restricted stock grants. So his wealth is entirely due to his founding of the company and his initial investment in it.

      This site idiotically cited his compensation as $1.6 BILLION

      https://www.racked.com/2018/4/24/17277416/jeff-bezos-salary-amazon-ceo

      …I guess they assumed the numbers in the proxy were in thousands and didn’t bother to check, since that assumption fit their narrative so well.

    10. Mrs. Davis Says:

      Amazon will automate and eliminate jobs. Then their less automated competitors will be saddled with a $15 minimum wage to compete against the behemoth. Watch for the Washington Post to start lobbying for a national minimum wage of $15 to cripple the competition. If that happens, look for more and more low skilled jobs to be automated, fewer and fewer opportunities for high schoolers to get that important first job.

    11. David Foster Says:

      re CEO salaries….is it really unreasonable for the person leading an important business to be making $10 or $20 million per year…especially when you consider the vast amounts of money being obtained by actors, athletes, lawyers, etc? A couple of million per year is not uncommon among college football coaches.

      I don’t think we should want a society in which substantial wealth is a monopoly of entertainers and lawyers, with the Merchant Class being kept firmly in its place.

    12. Anonymous Says:

      He needs the minimum wage increase to make this work. This does raise the barriers to entry as it requires large scale, capital intensive operation to increase labor productivity to cover the higher wage rate. Smaller entrants are prevented from substituting lower wage labor for scale and capital in order to compete. The only way Amazon increases or maintains its labor force is to increase market by driving out the competition.

      Since the technology for increasing labor productivity must increase to support a higher wage rate and this process is not yet reflective of a $15 wage rate for unskilled labor, employment in net in that labor category will decrease. As Mrs. Davis has so rightly observed, the effect of new entrants will be concentrated with less opportunity for upward mobility.

      The Seattle experience is a pretty good indicator to these effects. Thinking it will work if enforced nationally is still just basic economic ignorance. Bezo is unlikely ignorant, but he does get paid to grow market share even at the “short term” cost of profit margin. All of the large corporate managers are highly attuned to how to use the regulatary state to create barriers to competition and cripple competitors. This is what crony capitalism looks like. The progressive narative is so adaptable.

      Death6

    13. David Foster Says:

      “Since the technology for increasing labor productivity must increase to support a higher wage rate and this process is not yet reflective of a $15 wage rate for unskilled labor, employment in net in that labor category will decrease.”

      Although most of these Amazon jobs don’t require a high skill level, they *do* require the ability to work intensively and under pressure: such things are not for everybody. There are surely a lot of people who would prefer a slightly more relaxed environment, with more opportunity for social interaction, even if it meant getting paid, say, $11/hr instead of $15/hr.

      Remember, Henry Ford didn’t establish the $5 day out of the goodness of his heart; he did it because his turnover was way too high. People really hated the work.

      Anonymous letter to Ford from a worker’s wife:

      “The chain system you have is a slave driver! My God! Mr Ford. My husband has come home & thrown himself down and won’t eat his supper–so done out! Can’t it be remedied?…That $5 a day is a blessing–a bigger one than you know, but oh they earn it.”

      Maybe Amazon warehouses are the present-day equivalent of a Ford assembly line. (Although even the obnoxious Amazon labor practices that have been reported are pretty mild compared to the Harry Bennett era at Ford)

    14. David Foster Says:

      One other point: low-end wages in the US have been held down by (1) illegal immigration, and to some extent legal immigration, and (2) imports of goods & components made in countries where prevailing wages are much lower. Absent these factors, it’s possible that the wage for AMZN workers would have already been driven to $15/hr.

    15. Mike K Says:

      accelerate automation of the facilities it has to keep in the US.

      I recently saw an article about their robotics. Large areas of their centers are “No Go zones” for humans.

      I give Bezos credit, along with whoever is his brain trust, in doing something that Sears should have done.

      Amazon began selling books almost the same year that Sears shut down its catalog operations.

      I can think of no better example of corporate idiocy.

    16. David Foster Says:

      “I can think of no better example of corporate idiocy”….I’ve long thought that an interesting book could be written, titled something like “Ten Who Blew It Big-Time,” about companies that were well positioned and then messed up. Sears is certainly a key one. Western Union would have to be included TWICE, for failing to take advantage of the telephone when it was offered to them and then, much later, failing to properly exploit the data communications opportunity. Westinghouse is a sad story, and I’m afraid GE may need to be added to the list.

    17. Gavin Longmuir Says:

      David Foster wrote: “re CEO salaries….is it really unreasonable for the person leading an important business to be making $10 or $20 million per year …”

      The only way to find out if the pay for a CEO (or anyone else) is reasonable is to put the job up for competitive bidding. The current guy might be getting $10 Million a year — but is there someone equally good who would do the job for $9 Million a year?

      It is so strange that Board Members and business leaders who are happy to preach the doctrine of free markets and competition resolutely refuse to have any competition on price when it comes to their own salaries.

      As an aside — Personally, I think it is great for someone like Bill Gates to start his own company and make billions as an investor in the company he built. All power to him! Sadly, a lot of CEOs are merely proficient greasy-pole climbers, taking over the reins of businesses built by better men — which is why so many companies that had commanding positions at one time (like Sears and Westinghouse, as David mentions) later collapse. Not every CEO is worth the high salary his Board pays him on behalf of the shareholders. Competition! — It would be good for everyone!

    18. Jonathan Says:

      The current guy might be getting $10 Million a year — but is there someone equally good who would do the job for $9 Million a year?

      Many people would take the job at < $10M but there is no way to know in advance if they are up to it. It probably makes more sense for a company to keep its current CEO as long as he is doing a good job. Any apparent salary premium the company pays him might best be seen as insurance.

    19. JaimeRoberto Says:

      If it’s just a voluntary reaction to a tight labor market and a crackdown on the influx of low skilled labor at the border, then this is a good thing. If it becomes a statutory requirement, then it’s a barrier to entry to new competitors and smaller businesses.

    20. Christopher B Says:

      Interesting article by Kevin Williamson on working at an Amazon Fulfillment Center

      https://www.nationalreview.com/magazine/2018/09/10/fulfillment/

    21. Mike K Says:

      The current guy might be getting $10 Million a year — but is there someone equally good who would do the job for $9 Million a year?

      I did some reading about this a few years ago and the issue seemed to be finding a CEO who could do the job and there were not that many.

      Look at GE since Jack Welch left.

      It doesn’t seem easy.

      Immelt tried the crony capitalism thing.

      It didn’t work too well.

      Welch was not happy.

      But in private, Welch’s assessment of Immelt’s tenure has been much more scathing, according to several former GE executives and others who know Welch. In fact, these people say, Welch has privately conceded that one of the biggest mistakes he made in his often illustrious career as chief executive of one of the nation’s largest companies was appointing Immelt as his successor. Welch’s private hostility toward Immelt has grown more acute in recent months as shares of GE have hit recent historic lows and Wall Street questions the direction of the company, these people add.

      Then we had “Chainsaw Al Dunlap

      But to other people, namely industry insiders, the turnaround was a little too good to be true. For example, it seemed odd that barbecues were selling so well in the winter, when most Americans are splurging on firewood, not charcoal. Auditors and the SEC started digging and found a whole host of shady sales and financial practices that proved Sunbeam’s massive turnaround was actually just a series of cynical accounting sleights-of-hand. Dunlap was fired, sued, and sued some more. Old success stories were debunked. Sunbeam went bankrupt. And Al Dunlap never worked as a CEO again.

      A sad story.

    22. David Foster Says:

      It now looks as if, while Amazon is giving these pay raises to people, they are also cutting incentive bonuses and stock grants for the same group of people. Some people will make *less* than they are making now.

      Of course, the hourly payments sound better when you’re talking to people like Bernie Sanders and Elizabeth Warren.

    23. Gavin Longmuir Says:

      Mike K: “… the issue seemed to be finding a CEO who could do the job and there were not that many.”

      Indeed! Think about the number of companies that have gone out of business or been merged over the last few decades. The implication is that a lot of CEOs are not doing a great job — even if their Board wants to pay them in the top Quartile. Then there are other businesses that are so innately profitable they can survive even monumental CEO incompetence — Tony Hayward, the BP CEO whose job performance created the circumstances for BP’s Gulf of Mexico blowout, is just one of several examples.

      Maybe the situation is not so different from that faced by President Lincoln in the Civil War — it can be tough to find a winning general. Lincoln turned his generals over quite quickly until he found ones with the required abilities. We generally don’t see that kind of turnover among major company CEOs — probably because company Boards too often become well-paid rubber stamps for the CEO.

    24. David Foster Says:

      Dangerous to trade the leadership out too quickly, though…there are a lot of things that have long cycle times, and you sometime can’t assess performance for years or maybe even decades. For example, one of GE’s problems now is that the long-term care insurance business, which they entered some time back, had under-reserved…policies are now having to pay out a lot more than was planned for.

      While there’s always a lot of focus on CEO performance, a great deal of the success or failure of a large company is a result of decisions which happen a level or two…or even more…down form the top. The fact that this guy:

      https://chicagoboyz.net/archives/39199.html

      was running the GE jet engine business, in its early days, surely has a lot to do with the company’s present strong position in that market.

    25. Anonymous Says:

      I don’t want to drift too far from the topic of whether Mr. Bezos is being sincere or devious with his $15/hour policy — but it has to be said that company Boards of Directors are actually the weakest link in US industry. Chelsea Clinton picks up a fat check for sitting on the Board of Expedia! — Need I say more?

      To return to entry level rates of pay, is it not interesting that politicians who love to posture about imposing and increasing minimum wages are generally much more reluctant to talk about controlling executive pay? It seems those hefty political contributions from highly paid executives do buy some immunity for the donors. This perhaps points to the topic that is almost never discussed, especially in Leftie circles — It is really all about Class.

      Not Class in the European sense of tracing descent from a distant rough ancestor who clawed & murdered his way to the top of the heap. Class in the modern US sense of being born to privileged parents who can afford to send the kid to the right college where she (so often these days, she) can link into the right network of similarly privileged people. Class in the sense that those arugula-munching, Prius-driving privileged people might as well live in a different country from most of their fellow citizens.

      If Bezos really cared about his fellow citizens at the bottom of the pole, he would be offering to fund the Wall (since Congressional Republicans seem to be incapable of doing that) and lobbying government to enforce its own existing immigration policies.

    26. Gavin Longmuir Says:

      Sorry — done it again. I am the above Anonymous.

    27. David Foster Says:

      “it has to be said that company Boards of Directors are actually the weakest link in US industry”…also true of “nonprofit” Boards and those of academic institutions. Many Directors are on way too many boards for them to be able to do a good job on any of them.

      Also, too many board members are chosen for mere reasons of Prestige…the Theranos board was an extreme example of this.

    28. PenGun Says:

      My favorite super rich guy. He does seem to really want to contribute. His space effort is just now beginning to unroll as his years of preparation become a mature set of projects. I think he will blow by Elon in a few years, and take the high ground. ;)

    29. ColoComment Says:

      David Foster: “I’ve long thought that an interesting book could be written, titled something like “Ten Who Blew It Big-Time,” about companies that were well positioned and then messed up.”

      An interesting book is “Business Adventures: Twelve Classic Tales from the World of Wall Street” by John Brooks. It’s quite dated, with the first printing in 1959, but the stories are wonderful lessons in the missteps that can trip up corporations and their leaders.
      Disclosure: I ordered my copy when I read [somewhere] that it’s one of Bill Gates’s favorite business books. Dunno if that’s true or false, but it’s a darned fun and interesting book to read.

    30. Christopher B Says:

      Forgot to mention – in the Williamson article I recall he mentions that the average hourly wage in the center is already north of $15. As David mentioned there’s probably some conversion of bonus and other compensation to hourly wages going on to make that the minimum.

    31. Mike K Says:

      <i.Chelsea Clinton picks up a fat check for sitting on the Board of Expedia! — Need I say more?

      If Hillary had been elected, as everyone assumed, it would have been a decent investment.

      Crony capitalism is why we got Trump, among a couple, of other things.

    32. Gavin Longmuir Says:

      The National Review article linked by Christopher B certainly is a wonderful example of how removed our journalists are from actual productive labor, and how genuinely uncomfortable they are away from their coastal enclaves and interacting with the people who actually make things work. Still, what can we expect? It is National Review.

      But it was really interesting to see the quote about the qualifications required for a particular Amazon job opening:
      “Bachelor’s degree or 2+ years Amazon experience”.
      That should give every prospective college student pause for thought. And it should make the Trustees of every university hang their heads in shame … and resolve to change their ways.

    33. Joe Wooten Says:

      ” Westinghouse is a sad story”

      Very, Very sad story. I was caught up in the bankruptcy train wreck in August 2017. Fortunately, I saw it coming and had already made plans for a layoff. I was laid off Tuesday morning and had a job by Tuesday afternoon. It is unfortunate but it was a cumulative decisions made by two CEOs that caused it to happen. They and other senior management ignored the facts on the ground to pursue a pie-in-the-sky vision of a nuclear renaissance, ignoring the sad fact that the biggest bottlenecks were 1) A severe lack of heavy construction craft labor, 2)very little nuclear component industrial production capacity, and 3)the HUGE natural gas strikes made in the shale fields of Texas, Pennsylvania, and North Dakota.

    34. Steve Adams Says:

      Amazon needs thousands on new employees for the Q4 retail rush. Unemployment is near zero for people that show up and do work. So they needed to raise rates just to fill the jobs -the announcement is just to milk some PR out of it. Amazing what incentives and limited immigration will do for wages.

    35. MCS Says:

      I suspect that the effect is that the lowest rungs of the wage ladder were collapsed up. This will mean that new hires will be under more pressure from the beginning with less opportunity to come up to speed and less tolerance for screw ups. It will probably also be longer before they qualify for their first raise; this will have an effect on motivation and morale.

      At the same time, it will probably widen the pool of prospective employees only slightly. They seem to already be paying competitive wages with decent advancement. The people attracted by higher wages will be a little different from the ones they attracted with more indirect benefits. Those that start with a route mapped out to VP won’t care at all.