Amazon: wolf in sheep’s clothing?

Amazon receives praise for raising its minimum wage. Is the decision politically motivated or is it simply good business?

Last week Amazon had the unlikeliest of cheerleaders.

Firebrand socialist Bernie Sanders showered praise on the e-commerce giant. He had to give “credit where credit is due”:

“What Mr Bezos has done today is not only enormously important for Amazon’s hundreds of thousands of employees, it could well be, and I think it will be, a shot heard around the world.”

Sanders is one of the most fanatic critics of Amazon and its CEO, Jeff Bezos.

Bezos sees his wealth grow by $275 million every day while his workers need food stamps to get by, the Senator recently pointed out.

Why has Sanders changed his tune so dramatically?

It’s because Bezos finally caved. After pestering the Amazon boss for months about his low wages, US and UK employees are getting a pay rise from the 1st of November.

On the surface that’s what it looks like: big business caving to political pressure. But with Bezos things are never that easy.

There’s a political angle and a business angle behind Amazon raising the minimum wage for workers.

The political angle

Amazon CEO Jeff Bezos will be pleased about the truce with Senator Bernie Sanders.

The socialist from Vermont is like a dog with a bone. Only last month he proposed a “Stop Bad Employers by Zeroing Out Subsidies Act” (Stop BEZOS Act).

Sanders wants to tax big companies like Amazon for the public benefits (food stamps, public housing, Medicaid) that their low-paid workers receive.

Now that he’s raised the minimum wage for his workers to $15 in the States and £9.50 in the UK (£10.50 in London), that particular gadfly is finally off his back.

The employees of the online shopping giant get better wages, Sanders can claim a scalp in his fight against big business, and for the company it’s a PR success. Everybody wins.

No doubt politics has something to do with Amazon topping up wages.

Sanders has badgered the company for months about low pay and poor working conditions. It’s an easy target.

As the Economist aptly puts it:

“The Dickensian juxtaposition of modern history’s wealthiest man atop an empire of terrified workers is politically compelling.”

Amazon is still a consumer company. Though low prices often help lower consumers’ moral standards (see Sports Direct, Primark, etc.), it can’t afford to see public sentiment sour if it wants to keep growing.

Besides, Bezos already managed to make President Donald Trump’s list of arch-enemies for owning the Washington Post, a Trump-critical newspaper.

He hardly needs the whole political class going after him. If Amazon were to become the whipping boy of both Republicans and Democrats, the company could soon be broken up by antitrust law.

Maybe that’s why the statement announcing higher wages for workers sounded remarkably contrite:

“We listened to our critics, thought hard about what we wanted to do, and decided we want to lead,” Bezos said.

“We’re excited about this change and encourage our competitors and other large employers to join us.”

In an interesting turn of events, Bezos further promised to lobby for a higher federal minimum wage.

All of a sudden, Sanders has an ally in the Amazon CEO! Maybe his next legislative proposal will be called the “Go BEZOS Act”.

But Bezos didn’t become the wealthiest man by giving in to pressure without getting something in return.

The business angle

Amazon’s minimum wage increase has the appearance of an olive branch offered to his political critics and the rest of the world.

You wouldn’t immediately think it since its labour costs are going up, but Amazon could be the biggest winner here.

Wait, how can that be?

The wage increase will apply to over 250,000 employees as well as over 100,000 seasonal workers. It’ll cost the company about $1.5 billion and reduce earnings per share by $2.33 (8%), US investment bank Jefferies estimates.

That doesn’t sound like a win at all. But, as always, Bezos is playing the long game.

Amazon upping its wages is likely to have a ripple effect on the wider market. If such a big employer starts paying more, competitors will have to follow to keep attracting personnel.

And if traditional market forces don’t create higher wages, Amazon’s lobbyists might.

Given the sheer size of its online sales and its highly successful cloud-computing business, Amazon is in a much better position than most to give employees a pay rise.

Its competition may not be able to afford such generosity.

Then there’s the issue of tight labour markets, which means employers have to go the extra mile to attract workers.

The UK unemployment rate stands at 4.0%, a level that was last seen in the mid-1970s. Meanwhile US unemployment is at 3.7% – the lowest rate in nearly five decades.

With the holiday season around the corner, it’s crucial the company can recruit enough staff to fulfil orders in time.

At the same time Bezos may be dealing with something before it becomes a problem.

He’s doing what Ryanair boss Michael O’Leary failed to do – increase wages on his own terms before facing strikes or getting into bruising union talks.

If you can look past the politically pleasing language of Amazon’s press release, you’ll see the wage increase was just good business.

For a brief moment in time, Jeff Bezos and Bernie Sanders stand shoulder to shoulder. Bezos, however, might be a wolf in sheep’s clothing.

If a higher minimum wage is putting even more competitors out of business, Amazon could turn into a monopsony with free rein to depress wages once again.

In that case, we can expect Sanders to bring more bills with clever acronyms to the Senate floor.

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