Today, I encountered what I would consider to be a rather misguided article by Business Insider writer and CEO Henry Blodget. Blodget’s writes: “Dear Wal-Mart, Starbucks, and McDonald’s: How Do You Feel About Paying Your Employees So Little that Most of them are Poor?” He argues that the firms are wildly profitable and can afford to “share the wealth” by paying their employees more.
There’s an emotional appeal to Blodgett’s argument. Unfortunately, we know from the science of economics that it’s not that simple in reality. In fact, such a scheme would not achieve its objectives.
Let’s start with Starbucks. I have no idea how much a Starbucks barista is paid, but let’s say for simplicity’s sake it’s $10 per hour (and no tips). Starbucks decided to graciously raise the wage to $20 per hour. Baristas become wealthier as a result, right? Well, the answer is, “it depends.”
Actually, the most notable result of this wage increase is that the demand for jobs at Starbucks increases dramatically. This is simple to understand — people are more likely to want a higher-paying job. Now that Starbucks is willing to pay $20 per hour instead of $10, a data entry worker making $12 per hour, or a secretary making $18 per hour might suddenly become interested in the Starbucks job.