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What’s behind Amazon’s wage hike?

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Leapfrogging its competitors and some state governments, e-commerce and retail giant Amazon this week raised its minimum wage to $15 per hour for all U.S. employees — though not contract workers — effective Nov. 1.

The wage hike immediately places Amazon’s wages above competitors like Costco, which recently bumped its starting wage to $14 per hour, and Target, which is gradually raising its own minimum wage to $15 per hour by 2020. MIT Sloan experts say the company’s decision likely included a range of calculations.

Zeynep Ton, an associate professor of operations management and the founder of the Good Jobs Institute, said the move has both strategic and political business implications. 

“It’s a smart move, both competitively and politically,” Ton said. “In this tight labor market, a lot of retailers are finding it difficult to attract people, especially going into the holiday season. [Outlets like] Macy’s and Target are looking to hire tens of thousands, and it’s going to be harder for them now. They’ll have to up their game, not just for the holidays but in general.”

And it will be much harder for those businesses and others who haven’t designed their operations to leverage investment in their employees to keep up with a company as massive as Amazon. They often operate on thin margins and won’t immediately see big benefits by raising pay.

“The investors are very different, and their tolerance for low profitability is much lower for general retailers than for Amazon,” Ton said. “It’ll be challenging for other companies, and I hope they start to look for ways to make their people central to their success.”

The pay boost will also position Amazon as a worker-friendly company, Ton said, and could spur others to action.

"This is a great step that Amazon is taking, and I hope they will continue to take steps to increase the productivity, contribution, and motivation of their employees," Ton said.

Barbara Dyer, a senior lecturer at MIT Sloan and the executive director of the Good Companies, Good Jobs Initiative, said the immediacy of the move is bold and that speaks to Amazon’s confidence in its financial position.

“I think it’s momentous that they’ve decided to do it, and they’re not doing it in a phased-in way. That suggests that they can [do it], otherwise they’d have been more cautious about it,” she said.

Dyer said there are several possible reasons the company might have taken this step.

Labor politics could be a concern for the massive company, whose market value briefly passed $1 trillion last month. Raising wages could be one way to head off any potential backlash from unhappy employees. There have already been rumblings of such action among workers at Whole Foods, the grocery store chain Amazon recently acquired. 

“To get in front of that and to do something bold would satisfy a lot of interests and make it more difficult to take action,” she said. 

Or, Amazon may be making a strategic call to invest more in its workforce as a way to attract and retain workers and deliver higher quality services to its customers, Dyer said. 

The raises are accompanied by the elimination of bonuses and stock options for employees, but they’ll still see an overall increase in earnings.

“It's likely that the decision is a result of weighing all of these factors. I'd love to think that they want to create good jobs, but that they also eliminated bonuses and stock options gives me pause," Dyer said. "Whatever the motivation, it is really important that they've done this. It is an important step and should be applauded. But let's keep it in perspective: It is tough to make ends meet at $15 per hour."

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