Friday, August 12, 2016

Gravity Payments and the $70,000 Minimum Wage Experiment

You may recall that more than a year ago Dan Price, the CEO and founder of Gravity Payments, decided to cut his own salary and raise the minimum wage for all his employees to $70,000 a year. This may have been largely a publicity stunt, but hey, if companies want to get publicity with this kind of stunt, that's fine with me.

Since then, the company has remained profitable and turnover among employees is down. According to surveys, the employees are more satisfied with their jobs. Their commuting times are also down by an average of 6 minutes, apparently because some used the new money to get new digs closer to where they work. One of the weirder effects is a small baby boom: in previous years no more than two Gravity Payments employees have had babies, but this year it is ten.

The baby boom is I would guess a product of a windfall effect. In general terms salaries have little impact on fertility rates, and the effect they have is negative. Of course it is hard to disentangle wages from age and other confounders, but as best we can tell people on higher salary tracks don't have more children than people on lower tracks. But maybe giving people an extra $25,000 a year all at once makes them feel so flush that they look around and ask what else they want in life.

The conundrum about money and babies is interesting. If you ask Americans why they don't have more children, many say because it is so expensive. Economics professors whose essays I have read on this subject say their students all offer this reasoning, suggesting that if childcare and college were free people would have more children. But the overall data do not bear this out, since poor people have more kids. (Or at least no fewer; again, the statistics are complicated.) Middle class people think children are expensive because they have ideas about what children ought to have (their own bedrooms, new clothes, violin lessons, math camp) that cost money. It is perfectly possible to raise children without any of these expenses, and the experience of first-generation immigrants shows that lacking those things doesn't keep smart kids from getting ahead. A better way to look at the numbers is to say that people have ideas about what life is supposed to be like, which depend on their social class, and those include ideas about what children's lives should be like. So the higher your social class, the more it costs to raise children in a way that seems right to you. Ergo, just a slow rise in salary doesn't make child raising more affordable, since it also raises your ideas about what your family's life should be like. But a sudden, dramatic rise in your income might lead to a different calculus.

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