According to an article at Huffington Post this morning, Craig Jelinek, the CEO of big-box warehouse store Costco, has openly expressed support for the Fair Minimum Wage Act of 2013. The act, if passed, will raise the federal minimum wage to $10.10 per hour, then tie it to price inflation. The nobility of Mr. Jelinek's intentions are questionable, however, for a number of reasons.
During November of 2012, Costco received much praise for its high wages and superb working conditions. Costco is known for paying its workers high wages, high enough for a $10.10 minimum wage to have no effect on Costco's human resources. However, while Costco's business model works well for Costco and the customers to whom it caters, an adoption of that model by all businesses would not be economical.
Costco is able to pay the high wages that it does by hiring proportionally fewer workers, which it is able to do since their customer base is made up of relatively few, dues-paying members who buy in bulk from a relatively narrow (compared to other big-box stores) variety of products. Other stores, such as Walmart, which sell wider varieties of products to a much larger number of customers, require more staff. It is a fact of economics that the number of employees a business hires is inversely proportional to the wage it pays them, so businesses face a trade-off between hiring more workers and paying high wages. A $10.10 minimum wage, if enacted, would force Walmart to lay off many workers and, consequently, restructure its business to accommodate fewer workers, probably at the expense of their lower-income customers. For this reason, Costco's support for the minimum wage increase should be suspect, since the policy would act as economic protectionism for Costco.
While Mr. Jelinek's support for the minimum wage increase to $10.10 can be easily explained as pandering, his support for the tying of minimum wage to price inflation is puzzling, as the protectionist benefits of such policy for Costco would eventually run out and become harmful, even for Costco. Since a $10.10 minimum wage would be a binding price floor for many businesses, the minimum wage increase would cause an increase in unemployment, and consequently, an increase in government assistance. This unemployment would cause the production of consumer goods to slow, reducing the supply of such goods. The wage increases for those low-income workers who are not laid off, coupled with an increase in the number of people receiving government assistance, would prevent a decline in demand, and possibly cause demand to increase.
The result of all this would be the inflation of consumer prices. If this inflation is followed by further increases in the minimum wage, then the result would be a positive feedback loop of unemployment, government assistance, and price inflation. If the policy is maintained, the minimum wage will eventually surpass the starting wage of Costco employees, so Mr. Jelinek may want to think twice about supporting this policy.
A $10.10 minimum wage would benefit Costco, at the expense of Costco's competitors, so it is easy to see why their CEO might support such an increase, but Mr. Jelinek's support for the tying of minimum wage to inflation suggests either short-sightedness or a lack of understanding of economics. The proposed Fair Minimum Wage Act of 2013, if passed, would have the dual effect of causing price inflation and tying minimum wage to price inflation, creating a destructive feedback loop. While Costco's business model itself is praiseworthy for the way it fills its niche in the market, it is not one that would be universally successful. It should be understood that, as current market conditions prevail, the need for stores that hire larger numbers of workers at lower wages, ugly as it may be, is a real need, especially for lower-income consumers who cannot afford to shop at Costco.