How to raise wages for hourly workers
When you order something online, a small army of people gets to work. Warehouse pickers, kitchen hands, customer service agents, delivery drivers and bike couriers: these are the invisible workers of ecommerce.
One of the lasting consequences of the pandemic will be a massive expansion of the ecommerce industry. And it follows that this invisible workforce will expand massively, too.
Another consequence of the pandemic is an increase in inequality as the rich get richer and the poor get poorer, the so-called K-shaped recovery.
These two phenomena are, of course, related. People like me who work in ecommerce see this storyline up-close: the entrepreneurs and executives who innovate are rewarded generously, while the invisible workers in logistics remain stuck in poverty.
I employ about fifty people in those logistics jobs through the companies we are co-creating at Imagination Machine, and we plan to hire aggressively in the coming months to support expansion. As a shareholder of Good Eggs, I’m indirectly responsible for hundreds more. What’s an idealistic entrepreneur to do?
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Amazon, the minimum wage & the living wage
Last week, the New York Times ran an exposé about the chaotic and inhumane working conditions at an Amazon warehouse during the pandemic, the latest in a series. In France, Le Monde frequently runs similar kinds of stories about Amazon.
Amazon demands an insane level of hourly productivity from its invisible workers, a level that is basically impossible for most people to maintain. As a result, turnover is 150% per year, meaning that the average employee only lasts a few months before quitting.
But people continue to take jobs there because Amazon pays $18/hour, which is significantly higher than other jobs. Workers make the calculation that the extra dollars per hour that they can earn – for a few months – is worth the extreme stress, physical strain and degrading HR system.
This all seems crazy to me in the context of the debate, in the US, about raising the minimum wage to $15 per hour. If people are willing to sacrifice dignity and health for an extra $3 per hour, what does that say about $15?
There is fantastic work that has been done by professor Amy Glasmeier at MIT to calculate the “living wage” in America. She defines the living wage as a salary that allows someone to meet their basic needs: food to eat, a place to live, childcare, insurance. The wage varies based on where you live, of course, whether you are single or living with another wage-earner, how many children you have. The rate does not include any money for restaurants, entertainment, or savings. It is just enough to allow someone to live with dignity.
In Richmond County in New York, where the Amazon warehouse from the New York Times article is located, the MIT calculator shows the living wage for a single adult with no children is $21.77 per hour. For a working couple with two children, the living wage for each adult is $25.52 per hour.
I am not aware of a similar calculator in France (maybe someone reading this can tell me about one). But it is apparent that the minimum wage in France, which is standardized everywhere in the country, is too low. It is impossible to live a life with dignity for most people in most places.
In the US, the campaign to raise the minimum wage to $15 per hour is effective as a campaign tool, as a communication talking point. But the reality is that the income necessary to live a life with dignity is different based on where you live and what your family looks like. In most population centers, $15 is too low.
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Macro answers and micro answers
Many people in the tech industry talk about inequality and propose society-wide, “macro” fixes, like Universal Basic Income.
I do not know the macro answer for inequality. My intuition is that there is no one big fix, that it will require a concerted effort by thousands of smart people in many domains: reforms to labor laws and social safety nets, innovations in worker productivity and training, investments in education.
There is a more pressing question for me, which is the “micro” fix: how can I, in the businesses that I run and in which I am a shareholder, pay a living wage to my employees? How can I decrease inequality in the tiny slice of society where I have the most influence?
The answer is, surprisingly, not obvious. As Ezra Klein pointed out in this great essay last week, our entire system of convenience and low prices is premised on low wages. “One man’s misery is another man’s quick and affordable at-home lunch delivery.”
We hear a lot about wage inequality in the media, and we hear about the ideas for macro answers. But we rarely talk about the micro answers: how can individual businesses pay better wages?
There is a kind of game-theory problem that presents itself. If minimum wages were enforced by the government, then all my competitors will have to raise prices just like me. But I do not want to wait for new minimum wages that may never come. If I raise prices unilaterally in order to pay higher wages, and my competitors do not, I will lose business.
So what’s the answer?
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Five Steps to paying a Living Wage
I came up with this simple five-step guide to answer the question. It is the playbook I follow in my businesses, and I believe it is applicable to any business that wants to pay a living wage.
1. Officially decide that you want to pay a living wage
This seems obvious, but it is perhaps the most important step. An “official” decision means one that is shared by the board and the executive team.
As a board member or a CEO, it is easy to initiate this conversation. As an executive or a shareholder it is harder, but I think still possible. Advocate for it. Educate your peers about what a living wage means and why it is important.
Once a company officially decides to pay a living wage, and communicates about it, the full company can begin to find creative solutions about how to make it work.
2. Set the right wage
The leadership of the company needs to set a number, as well, a range of target wages for the different roles. This frequently takes the form of a starting wage per role, and then increments higher for seniority and performance.
In the US it is straightforward to use MIT’s Living Wage calculator to set the starting wage. In France it requires more work.
The wage numbers need to be clear to everyone before the company can start figuring out how to pay for it.
3. Share the profits
One obvious way to raise wages without raising prices is to share the profits of a company. Many retail and ecommerce businesses have very slim profit margins; but even slim profits can be shared. In a country with weak labor unions, you can ask the hypothetical question: what wages would be paid if my company had a strong labor union, or if hourly workers had a seat on the board of directors as they do in many European countries?
Walmart has about two million hourly workers in retail and logistics. They make an average of $14.26 per hour. Last year, Walmart made $14 billion in profit, after all investments and productive use of capital. The board of directors decided that they had too much cash on hand, so they used $10 billion for “share buy-backs”, which is a way of returning the money to shareholders without tax consequences (in addition to the $6 billion in dividend payments). Keep in mind that 50% of shares are held by the Walton family.
Had half of that amount, $5 billion, been used to pay better wages to hourly workers, it would equate to a raise of about $1.25 per hour for two million people. That won’t get to a living wage in most parts of the country, but it’s a big step.
For startups that are not yet profitable and funded by VC dollars in the meantime, they can share some of the theoretical profit margin they plan to gain at scale with hourly workers now.
4. Get creative with pricing
Pricing is not simple or rational. It is irrational how well “charm pricing” works (the strategy of charging $4.99 instead of $5). It is irrational how strongly shoppers react to delivery fees.
So the strategic ecommerce players all get creative to be competitive. The goal is to provide a perception of low cost while maintaining a maximum revenue. Things like minimums for free delivery, surcharges, tips, and loyalty programs are the tools of the trade.
It is possible to raise prices in order to pay higher wages without alienating customers. At Good Eggs the team came up with the following brilliant strategy (I take zero credit, it happened after I left!): prices on each individual item remain competitive, but at checkout there is a “Good Jobs Fee” added to each order, right next to the sales tax. It is the surcharge that allows Good Eggs to pay a living wage to every employee.
The strategy works! It provides enough extra revenue to cover living wages, salaries above the market rates. And it actually improves customer perception, because it makes customers realize that Good Eggs is committed to good jobs.
Some companies in the food-delivery sector are experimenting with “tips” that are filled in by default. Customer can change them to zero if they want, but most do not.
Perhaps there is a startup to build that powers these kinds of pricing innovations “as a service” for online retailers, and closes the loop by paying bonuses to the invisible workforce behind the scenes.
5. Give every employee equity in addition to a living wage
Making all employees shareholders is something that has become common in the startup world (via stock options), but rarely extends to hourly workers. It should, because it is fair, it aligns incentives, and it can reduce inequality in the long-term. It is not a replacement for a living wage, but it is a great addition.
In my experience, company lawyers typically advise against this. It’s complicated, they say, it presents risk, it is costly to manage so many shareholders. Do not listen to them. All of these reasons may be true, but they do not outweigh the benefits.
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I hope this simple guide is helpful to you.
Unleashing the creativity of your company on this problem is noble, productive, and it works.
As always I am grateful for your feedback and comments.
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