Workers getting higher wages is to be celebrated — this is the entire point of our having an economy. Namely, that people become better off.
So, East Fork Pottery raising its minimum wage to $22 an hour? Well done. This is also what Henry Ford did with his “$5 a day” deal. It wasn’t so that the workers could buy the cars, nor here the hand-crafted mugs and plates. Instead, this is what economists call “efficiency wages.” If you pay higher wages than others around you, then your skilled folk don’t leave, and all the good workers want the opportunity to work for you. Your hiring and training (and possibly cake for the leaving parties) costs decline, potentially by more than what your higher wages cost you.
The problem is that it’s only a maybe that the efficiency gains will cover your costs. Which, apparently, they don’t with East Fork.
After all, East Fork has also raised the price, by $2 each, of its two bestselling items. This is to help pay for the higher wages. So, there we get another economics lesson: When wages are pushed up above that efficiency level, it’s the consumer who pays them (as many minimum wage studies, like those by Jeffrey Clemens, keep showing).
We have the added factor of expressed preferences. Some people will be so happy about the increased wages that they’ll buy more pottery at the higher price. Revealed preferences is what people actually do, buy or don’t buy, as a result of the higher price. The point economists want to make with this is that it’s what people do that matters, not what they say. Talk is cheap.
It might be that this gambit works for East Fork and its staff. I hope it does. But it’s no sure thing.
