Big companies raising wages could boost pay for workers at nearby businesses

Walmart

In recent years, big companies like Amazon have publicly increased the minimum wage they pay workers. And it turns out those moves can lead to nearby businesses also bumping up their pay, according to a recent working paper.

“If a bunch of large employers in the labor market raise pay, other employers are going to be compelled to raise pay a little bit too in order to make sure that they can recruit and retain their workforce,” Ben Zipperer, an economist at the left-leaning Economic Policy Institute, told Insider in March.

Small businesses in those areas will probably feel those spillover effects, and will likely feel compelled to respond, Zipperer said.

Amazon has already pushed for a federal hike to $15 an hour, the rate that it pays, and outgoing Amazon CEO Jeff Bezos recently cited this research in his final letter to shareholders.

However, a federal increase to $15 was struck from reconciliation for the American Rescue Plan, and Sens. Mitt Romney and Kyrsten Sinema are working on a bipartisan proposal that could call for an $11 rate.

Walmart said in February that it was raising wages for 425,000 workers. However, as Insider’s Kate Taylor reported, the largest US private employer will still maintain a $11 per hour minimum wage, a lower wage compared to Amazon, Costco, and Target.

Those three companies have raised their minimum wages to at least $15 in the past few years; Costco also recently increased its minimum wage to $16 per hour.

Minimum wage raises at big firms may have bumped pay in nearby companies

The working paper, as first reported by The New York Times, looks at what voluntary minimum wage increases from four major companies in recent years means for other companies with businesses in the same local areas. The paper examines the impact from Amazon/Whole Foods, Target, Walmart, and Costco.

“A wage increase by a major employer can ripple across to other firms as they seek to stem the flow of their workers to the larger firm,” the researchers wrote in the paper. “Our findings to date provide evidence on this first front, of strategic wage responses among low-wage employers.”

The paper was authored by researchers Ellora Derenoncourt from the Department of Economics and the Goldman School of Public Policy at University of California, Berkeley, and Clemens Noelke and David Weil from The Heller School for Social Policy and Management at Brandeis University.

Data from job analytics company Burning Glass Technologies and career site Glassdoor allowed the researchers to look at previous wage data at companies located in the same areas where these large retailers that announced pay increases operate. The Census Bureau’s Current Population Survey was also used to look at employment changes and to validate findings about wage changes.

The researchers found that some firms in the same areas as a large company announcing a wage increase also increased their wages, even matching that of the announced wage. They look at companies that were most affected by these increases, or employers in the same labor market where a large share of wages before the announcements were at rates below the new voluntary wages of these major companies.

Amazon prime driver

The more affected companies went from having similar wages as the less affected companies before the big company announcements to then raising their advertised wages significantly afterward, according to the research brief.

The researchers found that a nearly 20% increase in Amazon wages translated to a 4.7% increase in average hourly wages among other local employers. Bezos referenced this figure in his final shareholders letter as CEO. He said that Amazon raised their wages because they wanted to “lead on wages” and because they believed it was the right thing to do.

A $15 hour minimum wage would translate to around $30,000 per year, assuming a 40 hour work week and two weeks off. Amazon’s median wage in 2020 – which includes full-time and part-time temporary and permanent workers – was $29,007; full-time employees were paid a median $37,930.

Amazon wasn’t alone in affecting wages at nearby companies. Derenoncourt told Insider in an email that “a 10% increase in Target’s advertised hourly wage after their $13 [minimum wage in April 2019] led to an average increase of 2.5% among other employers in the same commuting zone.”

Arguments against increasing the minimum wage

Ken Jacobs, the chair of the UC Berkeley Labor Center, told Insider in March that one of the main attacks from opponents of a minimum wage is that it could help large businesses at the expense of small businesses.

“I don’t think in reality it plays out that way,” he said. Instead, “high road businesses” – those that already have better pay and focus on reducing turnover – tend to do better. “Low road businesses” with higher turnover do need to adapt and change their strategy.

“Most of them do so successfully and adapt,” Jacobs said. “It is not a clear cut between large and small businesses.”

Another concern from businesses about raising the minimum wage is whether that means job cuts and reduced hours for workers. Previous research has found that there is little effect on job losses, and the working paper also finds similar results.