Raising wages is the right thing to do, and doesn’t have to be bad for your bottom line – Zeynep Ton

MIT Sloan Adjunct Associate Professor Zeynep Ton

MIT Sloan Adjunct Associate Professor Zeynep Ton

From Harvard Business Review 

The “working poor” are a growing problem in America — one that is increasingly embarrassing to the corporate elite. Business leaders who are morally inclined to do the right thing should and can play a stronger role in solving this problem by raising wages to a level where their employees’ earnings cover the cost of living.

Jamie Dimon, CEO of JPMorgan Chase, was recently stumped in a U.S. House Financial Services Committee hearing when California Congresswoman Katie Porter asked him what advice he could give to a constituent — one of his own bank’s tellers, who makes $2,425 a month and lives with her daughter in a one-bedroom apartment with a $1,600 rent in Irvine. Food, utilities, childcare, and commuting cost about another $1,400, leaving her $567 short every month. Dimon had no good answer.

Yet Dimon is one of a number of corporate leaders — others include Warren Buffett, Ray Dalio, and Paul Tudor Jones — who have expressed public concern that the version of capitalism that has allowed them to be so successful is not sustainable for our society. The data are daunting. Between 1980 and 2014, while the pre-tax income doubled for the top 1% and tripled for the top 0.1%, there was little change for the bottom 50%. In 2017, more than 45 million Americans worked in occupations whose median wage was below $15 an hour. Although wages increases have finally been accelerating, 40% of Americans are living so close to the edge that they cannot absorb an unexpected $400 expense—not much, as car repairs or dental work go.

For business leaders operating in settings like that of JPMorgan Chase, where profit margins are high and low-wage employees are a small driver of overall costs, doing the right thing morally is not even that risky. Some wage increases would even pay themselves by increasing productivity and reducing turnover — employees would be more motivated, less distracted with life problems, and less eager to find a better job. For those leaders compelled by the same moral argument but operating in businesses with low profit margins and a high percentage of low-wage employees, doing the right thing morally is still possible. But it requires a lot more work.

When Doing the Right Thing Has Little Business Risk

During the last few years, several business leaders have substantially increased the minimum wages for their employees, citing both a moral imperative and a “business case.” In 2015, Mark Bertolini, CEO of Aetna Insurance, announced a minimum wage hike from $12 an hour to $16 an hour. It wasn’t right, he said, for a thriving Fortune 100 company to have employees on public assistance with their kids on Medicaid. Furthermore, he could justify “doing the right thing” economically: “Let’s look at all the potential benefits we can drive, hard and soft, as a result of this investment, put some numbers on them and stand back and say, ‘Is this a risk we are willing to take?’” He thought so.

And in 2016, Jamie Dimon himself announced that JPMorgan Chase would increase the minimum wage for 16,000 of its employees from $10.15 an hour to anywhere from $12 to $16 an hour, depending on where they worked. “It is the right thing to do,” he said, and it would also benefit the company by attracting and retaining talent. The wage increase was significant, although it clearly didn’t lift up everyone, including Rep. Porter’s constituent, to a living wage.

What these examples have in common, however, is that the company could already afford the raise. JPMorgan Chase’s increase affected only about 7% of its employees and the company had more than enough profit margin to afford it. So did Aetna.

Read the full post at Harvard Business Review.

Zeynep Ton is an Adjunct Associate Professor of Operations Management at the MIT Sloan School of Management.

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