Let’s say there is a grocery store called Whole Foods that wishes to pay its employees a decent wage of $12 per hour while other grocery stores in the area pay $8 per hour.
Is Whole Foods’ compassion rational? Why would it pay 50 percent more than its competitors for the same worker?
Economically, it can make a good argument that paying higher wages than its competition promotes loyalty and hard work while decreasing its turnover and training costs. (Where are the employees going to work if they get laid off for slacking?)
We all applaud Whole Foods’ decision to pay a “decent” or “living wage,” but what happens if applaud is all we do? If we do not shop at Whole Foods, it will shut down.
And why might we not shop there? Because Whole Foods’ higher wage costs make their strawberries — the exact same strawberries you can get elsewhere — more expensive.
Now let’s say there is a company called Carrier that makes air conditioning units, and it decides to keep decent, high-paying jobs in the United States rather than produce the units in Mexico. We applaud its corporate citizenship and its desire to create American jobs for American workers. But again, what happens if that is all we do?
If we do not buy AC units from Carrier, it will shut down. And why might we not buy a Carrier? Because its AC units are more expensive than ones imported from Mexico, where labor costs are lower. If Carrier shuts down, no American jobs have been saved!
So what is the difference between the Whole Foods and Carrier examples? Perhaps it has something to do with international trade and American vs. Mexican jobs. Maybe the laid-off Whole Foods worker can take the $8-an-hour job at another grocery store in a way that Carrier employees would not be able to. But I think the bigger picture is that sentiment – without willingness to pay the price – will only get us so far.
We may say we want to keep Carrier in the United States. We may say we don’t want Whole Foods to leave. And we may wish toy production would come back from China. But if we’re unwilling to pay the price, we will not have gained anything.
I’ve heard similar comments about Augusta failing to attract decent music acts. Yet when popular performers come to town we often balk at the ticket price.
In economics we talk about revealed preference: We say we want a Whole Foods store but have actions that reveal we prefer shopping elsewhere. Economics is about choices, and choices have consequences.
What tradeoffs are we willing to make individually and as a society?
Simon Medcalfe is an associate finance professor and the Cree Walker Chair at Augusta University’s Hull College of Business.