Amazon to competitors: We’ve decided to overpay for labor; how about you do the same?

In rationally functioning markets, your competitors laugh at you and eat you for lunch when you do something like this. Unnecessarily inflating your costs is an invitation to smarter companies to undercut you on price, and that spells pilfered market share. In the modern tech world, I’m not sure the players are smart enough to put all that together. Still, by any rational definition of how markets work, what Amazon has done here is one of the dumbest gambits ever seen in business.

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Now let’s start with this: They’re welcome to pay their people whatever they like. It’s their money. There are those who believe paying people more is an investment in their loyalty and productivity, and you make it up by having low overhead. My own real-life experience tells me there are limits to that thinking. You have to pay people what they can give you back in value, and if you pay significantly more than that you can never make your investment in them work for you. That ultimately redounds to the detriment of both parties. But if Amazon wants to do it, that is obviously Amazon’s call and no one else’s. Where we cross into moron territory is when Amazon volunteers to overpay people to fall in line with a political movement, then asks its competitors not to take advantage of its decision to bloat its own costs. If Amazon’s competitors have half a brain, they’ll be smarter than to take this kind of bait:

Amazon.com Inc said on Tuesday it would raise its minimum wage to $15 per hour for U.S. employees from next month, seeking to head off criticism of working conditions at the world’s second most valuable company. The new minimum wage will benefit more than 250,000 Amazon employees in the United States, as well as over 100,000 seasonal employees who will be hired at sites across the country this holiday, the company said. “We listened to our critics, thought hard about what we wanted to do, and decided we want to lead,” founder and Chief Executive Jeff Bezos said in a statement.

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“We’re excited about this change and encourage our competitors and other large employers to join us.” Amazon, which became the second company after Apple to cross $1 trillion in market value last month, paid its U.S. employees on average $34,123 last year. Bezos is listed by Forbes as the world’s richest man with a net worth of nearly $150 billion. Amazon’s current minimum hourly wage starts at around $11 and analysts said the raise would cost it $1 billion or less annually and be offset by a recent $20 increase in the cost of Prime memberships.

Let’s break down what Amazon’s really done here. If the old minimum wage was $11, you’ve just increased your labor costs for those employees by more than one-third. And unless your more experienced employees are satisfied with being at entry level, you’re going to have to pay them more too. Note how the Reuters story minimizes the cost of this by pegging it at “$1 billion or less,” as if that’s not significant. Note as well how cavalierly they assume they can simply recoup the money by raising the price of Prime memberships. That defies basic economic logic. If you could make more money by charging $20 more for Prime memberships, Amazon would have already been doing. As with anything, there is a limit to how much you can charge for it before you start losing money because people aren’t willing to pay it.

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Successful businesses always charge the highest price they can before they start pricing too many people out of the market for the product. The current levels of Prime membership are $6.49 and $12.99 per month (we have one of the higher ones), so it’s hard to imagine Amazon arrived at those price points without careful consideration of the price point at which they could achieve maximum revenue. In other words, if they could have made an additional $1 billion by raising the price by around $2 per month, they would have already been doing so. But that’s Amazon’s business. Liberals don’t seem to understand you can’t “just raise your prices” to pay for higher wages, and it’s clearly liberals who run Amazon, so they can make their own bed and lie in it. If their competitors are really dumb enough to join them in unnecessarily bloating their labor costs – instead of taking advantage of the opportunity it presents to undercut Amazon on price – then there seriously needs to be some new entries into this market who understand basic economics.

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