When Amazon raises wages, nearby firms follow suit

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WHEN AMAZON warehouse workers in Bessemer, Alabama began organising to form a union last summer, they hoped their effort would lead to higher wages for the fulfilment centre’s 5,800 staff. The unionisation drive failed—this month Bessemer’s stockers, pickers and packers voted overwhelmingly against setting up a union, by 1,798 votes to 738. But workers are getting a pay rise anyway. On April 28th the e-commerce giant said that it would be raising wages for more than 500,000 of its 1.3m employees. The increases, which will range from 50 cents to $3 an hour, are due to take effect in May and June.

This is good news for Amazon’s workers. But employees at other firms have reason to cheer, too. A recent paper by Ellora Derenoncourt of the University of California, Berkeley and Clemens Noelke and David Weil of Brandeis University finds that when big American firms increase wages for their hourly workers, the change tends to spill over to other local employers. Using a database of online job adverts from Burning Glass Technologies, a labour-market analytics firm, and surveys from Glassdoor, an employer-review website, Ms Derenoncourt and her colleagues found that when Amazon raised its minimum wage to $15 in October 2018 (see chart), an increase of roughly 20%, nearby employers increased their advertised hourly wages by 4.7%, on average. The authors observed similar spillovers in response to wage increases at Walmart, Target and Costco.

These correlations suggest that labour markets are not working as they should. In a competitive market determined by supply and demand, wages would be governed by the marginal productivity of labour, or the additional output generated by an additional worker. Any deviation from this market wage, by Amazon or any other employer, would not affect the wages of anyone else. The fact that other firms respond to the wage policies of Amazon and Walmart suggests that these big employers have monopsony power that allows them to set local wages.

This week that power may have been wielded to employees’ liking, but such wage-setting clout can be used to pay workers below the competitive-market rate. Its sources include market frictions such as the cost of finding a new job; barriers to labour mobility; and labour-market concentration. Monopsony power is profitable—and Amazon is certainly in rude financial health. On April 29th Amazon reported $108bn in revenue for the first quarter and $8.1bn in profit, smashing analysts’ expectations. Profit for the 12 months ending March was $26.9bn, more than the previous three years combined.