WASHINGTON, Aug. 3, 2015 − Four months ago, Gravity Payments CEO Dan Price decided to pay every one of his employees at least $70,000 per year. The move was widely hailed in the media as an idea whose time has come. But the actual results for this credit card processing company have been that experienced employees are quitting and customers are leaving, likely forcing Gravity Payments either to change the policy or go out of business.
The results were easy to predict.
One employee who quit was Maisey McMaster, who initially was a big supporter of the plan. She began working for Gravity Payments about five years ago. She started at a salary much below $70,000 per year. After years of working hard and putting in long hours that “left little time for her husband and extended familym” she worked her way up to financial manager.
Under the new plan, unskilled workers with no experience were paid almost as much as Ms. McMaster. “He gave raises to people who have the least skills …and the ones who are taking on the most didn’t get much of a bump,” she told a Forbes writer.
The $70,000 per year salary calculates to almost $34 per hour. Not only is this unsustainable for Gravity Payments, it is a policy that will lead to the company’s becoming uncompetitive in the market, forcing it to raise prices substantially, which will result in a loss of customers who can purchase a similar service at a lower price. Already some customers have left in anticipation of higher prices.
Stockholders of the company will also loudly protest. Price’s older brother Lucas, who co-founded the company, has filed a lawsuit noting that the $2.2 million annual profit will be completely eliminated by this new policy. Worse, when Gravity Payments looks to raise new capital to potentially expand or become more efficient, no investor will be willing to provide capital to a company that, because of its wage policy, will be unable to generate profits and provide a return to investors.
Unless the policy is changed, which may be difficult at this point, the company will fold.
This case should serve as a clear example demonstrating the outcome of a policy of paying people more than the value of their output. An unskilled worker is simply not contributing enough to justify a $70,000 annual salary. The problem is not just the initial high cost for the firm and the resulting higher prices this incurs, but also the ripple effect on all salaries.
There is currently a movement in the U.S. to raise the minimum wage to $15 per hour, more than double the current level. Some cities have already adopted this policy. That means any unskilled worker will be paid a minimum of about $30,000 per year, up from the current level of just under $15,000 per year.
Currently the average recent college graduate earns about $45,000 per year or three times the wage of an unskilled worker. If the minimum wage is increased to $30,000 per year, would a recent college graduate have to be paid $90,000? And how about the employee who has been working for a number of years and now earns $75,000 per year, which is five times the minimum wage. Would that person expect to earn $150,000 per year if the minimum is raised to $30,000?
While only about 2 percent of workers are paid the minimum wage, it has been estimated that the ripple effect of raising the minimum wage will have an impact on the salaries of up to 59 million workers, which is about 40 percent of the workforce. This would cause runaway inflation and result in numerous companies going out of business, leading to declining output. The result would be severe stagflation.
The basis for the argument between those in favor of raising the minimum wage and those opposed, lies in a misunderstanding of our economic system. In our system, workers are paid according to the value of their output and not according to their perceived need. This serves as an incentive for people to work smarter and contribute more output.
The more individuals contribute, the more they are paid. It is really quite simple to understand. If a worker is paid more, but doesn’t produce more, he will continue not to produce more. If a worker is paid more only when he produces more, he will continue to produce more.
Raising the minimum wage to ridiculously high levels may benefit a few but will be disastrous for the majority of Americans.