Should Amazon pay their staff more

By Cathy T. - Year 13

The outbreak of the novel coronavirus had a severe impact on numerous sectors in different industries and regions, affecting the whole economy. However, the e-commerce industry runs in counter direction against the general trend of the economy. The revenue of Amazon – giant of online industry – rose to $108.5 billion in the three months to the end of March 2021, up from $75 billion in the previous quarter, and profit soared by an additional $5.6 billion, up from $2.5 to $ 8.1 billion. This increase reflects greater consumption of Amazon’s goods and, therefore, increased demand for labour at Amazon. The law of demand and supply suggests that increase in the demand for labour will automatically raise salaries, in order to avoid labour shortages. However, Richard E. Just and David Zilberman have argued that risk aversion in the real world may cause the law of supply to fail. This essay will analyze the advantages and disadvantages of salary increases, and the impact of a substantial increase in Amazon’s wages, seeking to establish the balance point between the highest efficiency and the largest profit margin.

Amazon’s CFO Brian Olsavsky has claimed that, in 2020, the capacity constraint was labour, not storage space or fulfillment capacity. Raising wages would undoubtedly attract many employees and overcome the labour shortage, or at least minimise it. In 2018, Amazon reported that it had raised rates to $15 per hour in the US and £9.50 in the UK, after criticism about pay; this was at least 21% higher than the national minimum wage of £7.83 in the UK that year. The company has hired more than 500,000 new employees up to 2020 since the pay rise, almost as many as it has recruited in the last 10 years, proving that the proposition that increasing wages attracts more employees is not only theoretically valid. Amazon CFO Brian Olsavsky said that in the third quarter of 2020 it even brought on 248,500 new full-time and part-time permanent employees. It also proves that Amazon's potential employees are an elastic labour supply, with a small wage increase creating a larger quantity of labour supply.

However, Amazon's reputation as an employer has performed poorly in recent years. It dropped 43 places from No. 42 in 2020 to No. 85 in 2022 in the Global RepTrack 100 rankings. Excessive workload is a problem: investigations of Chinese factories producing products like the Echo and Alexa have uncovered illegal practices, including underpayment of wages. This has caused dissatisfaction among employees, leading to some resistance. On Black Friday 2018, Amazon workers in the UK and other EU countries went on strike in protest against working conditions in the company's warehouses. The union taking part in the strike, UNI Global, said that more than 20,000 of its members demonstrated across Europe. The large number of striking employees meant that Amazon was facing a shortage of labour supply, and managers had to take on the work of warehouse workers and pack items.

Raising wages can avert extreme strikes and protests from stagnation of production. Neoclassical economists imagined strikes as the unintended result of bargaining between rational actors – mainly about pay and working conditions. Wage increases may make many frustrated employees feel better about the company and feel that they are being paid in proportion to their workload, thereby reducing resentment and protests. According to a study by Zippia, 65% of employees are dissatisfied with their jobs and decide to leave because of their pay. This suggests pay is the most important employment consideration for most people, and increases in salary may help to curb employee dissatisfaction with excessive workloads.

In addition, pay increases may change consumers’ views about a company’s practices, leading to a reduction of the number of consumers who boycott. Rondova Chun has suggested that a good reputation has a significant impact on a company's ability to reduce costs, set higher prices, and increase profits. J.T. Brown also supports the position that a positive corporate reputation increases consumers' willingness to buy, improves their attitudes toward the company and its products and strengthens brand loyalty.

However, the law of diminishing marginal returns does not seem to support the argument for increased productivity. When the idea that more employees can be recruited has been proven, the increase in the number of employees reaches a zero threshold and productivity stops. The US and UK company wage rises increased pay for about 500,000 employees, and resulted in the recruitment of another 500,000 employees in a year. It is worth considering that new employees do not increase productivity in proportion to the number of employees, which makes the increase in productivity insignificant in comparison to the increase in employees.

Amazon's wage increase is necessary at this time due to intense competition and poor reputation, but the negative effects of an excessive increase far outweigh the benefits. It is sufficient for the company to increase wages above the market average (around 5%). This works to avoid the "spillover effect" of huge wage increases – a 10% raise in Amazon's hourly wages led other employers to offer an average increase of 2.6% in the same commuting zone. Secondly, the elasticity of labour supply in Amazon is supported by the fact that Amazon does not need to implement excessive increases. In addition to higher wages, it is also important to improve employee loyalty through engagement and shared achievement in the company's development. Amazon should allocate some of the extra profits made during the pandemic to employee welfare and internal reorganization, so that employees have a better work experience and increased commitment to the company.