HOW FREE MARKET CAPITALISM REALLY DOESN'T WORK
The $70,000 Minimum Wage Experiment Reveals A Dark Truth
You might remember a couple of months ago when the founder and CEO of Gravity Payments made the news by announcing that he was raising everyone’s salary to $70,000 a year for anyone who made less. This included secretaries, receptionists, office cleaners, in fact, everyone. Well, as predictable as the shrinking ice caps, economists, sociologists, and radio talk show pundits weighed in on this anti-Free Market maneuver as somehow so egregious and anti-American as to defy common sense. I’ve included links to a few of the articles below. (There are many, many more.)
“No matter how altruistic Price’s intentions, nor how unexpected the media attention was, the departure of long-tenured and more valuable employees was actually predictable. In Price’s plan to raise salaries, lower paid employees saw their incomes almost double while higher paid employees saw just a modest bump. The higher paid employees’ frustration would have been predicted by J. Stacey Adams, the organizational psychologist who, in the 1960s, laid the foundation for the .”
“Wheeler isn’t as positive about Gravity Payments. Instead of being lauded as a visionary, Wheeler notes how Price became the victim of backlash when Fox Business's Stuart Varney asked if he was a socialist, and Rush Limbaugh proceeded to do a takedown. "Some customers left, either unhappy with what they saw as Price’s political agenda or worried that the added costs would be passed on to them. Heads of other tech companies complained that he has made them look bad by comparison," Wheeler writes.”
“A Seattle CEO who received widespread recognition after announcing plans to raise his credit-card-processing company’s minimum salary to $70,000 is being sued by his brother, King County Superior Court documents show.”
All of which begs a basic question: What are you supposed to do, as a founder, if your quest to make your organization more fair and just necessarily means subverting the incumbent compensation policies you helped to establish in the first place?
But the real deal, you know, in the real world and not Rush Limbaugh’s “Obama is amassing troops to take over the country" and "anyone that hinders the march towards American worker serfdom is Communist traitor,” is quite a different story as the following article shows:
The $70,000 Minimum Wage Experiment Reveals A Dark Truth
October 9, 2015
Earlier this year, a small Seattle-based payment processing company made headlines when its 31-year-old CEO made a rather jarring change to the company’s pay structure: Gravity Payments would pay all employees, at a bare minimum, $70,000 annually. It was met with a variety of reactions, ranging from those who said CEO Dan Price was establishing himself as a working-class hero, to those who thought he was actively destroying the fabric of society as we know it.
The truth is, Price had read a study that said the optimal level of happiness can be achieved with an income at around $70,000, and decided that he was in a position to make a difference. So he acted on it — by cutting his own salary by 90%.
Now, with several months having passed, we’re beginning to see the fallout. Recently, a slew of articles and media attention has returned to Price’s company. But this time, it hasn’t been quite as positive.
“A Company Copes With Backlash Against the Raise That Roared,” reads a New York Times headline. “CEO counting cost of £45,000 minimum wage decision,” says another, from The Telegraph. Many others are circulating as well, all spelling doom for Gravity Payments, with Price’s minimum wage policy as the chief reason for the company’s issues. As these articles explain, the company did lose business — from clients anticipating fee increases, and others who didn’t want to be associated with what they felt was a political statement.
But lost in a whirlwind of “I told you so” is the fact that Price’s experiment hasn’t really failed. In fact, Gravity Payments is still chugging along. If you were to actually dig into the meat of the doomsayers’ arguments, it turns out that even though the company has lost a handful of clients, it’s signed on even more — so many more that it’s had to go on a hiring spree.
The other unintended side effect of Price’s minimum wage policy has come from within the company. According to reports, Gravity Payments lost two of their rock star , both who evidently thought it was unfair that other employees were getting big pay bumps, while not necessarily contributing as much to the company’s success. Essentially, it rubbed them the wrong way that a receptionist was getting a huge raise, while not working harder than they were. They felt that the value of their skills had been diminished.
It’s easy to sympathize with that point of view — we’re seeing similar sentiments pop up all over the country as calls for $15 minimum wages for fast food and others start to gain momentum. Basically, people don’t feel like someone who simply cooks fries, serves drinks, or parks cars should be paid that much. It diminishes their own wages as a result, and drives down their purchasing power as adjust prices to absorb the increased labor costs.
And this is the dark truth at the heart of the matter. For the employees who left Gravity Payments, and the others who feel the need to criticize minimum wage bumps, there’s something else at play. The Gravity Payments employees who quit didn’t see their pay go down, or see a negative externality as a result of their coworkers’ wages going up (perhaps their workload increased with an influx of new clients, but we can’t be sure). Yet, they were unhappy that their coworkers were better off.
That’s not to say that Gravity Payments isn’t going to experience some troubled times, and have to deal with some turbulent cash-flow situations and legal problems. And if the individuals who resigned weren’t happy, then by all means, they should have left. Assuming these individuals are as skilled as is being , they shouldn’t have trouble finding other work.
But it speaks to a certain psychological element that we see in many aspects of society — lots of people are only happy with success when it means that others around them are worse-off. It’s “crab mentality” at its finest — the view that the world is a zero-sum game, and that instead of everyone being better off, we need to have some losers.
That mentality will continue to boil up as inequality and minimum wage issues remain at the forefront of American minds. There’s no obvious or evident solution, but writing off Price’s Gravity Payments experiment as a loss doesn’t make much sense, at least at this point.
For Gravity Payments, it comes down to a simple trade-off: is losing two valued employees worth gaining a ton of exposure, clients, and applicants? Time may prove Price wrong, but at this time, it’s too early to tell.
And there you have it folks. How one businessman defied the very basic tenets of Free Market Economics and had to hire a slew of additional people to take care of his raft of new clients who apparently really, really liked what he did.
Isn't it fun when the so-called experts are proven to be just plain WRONG?