Government intervention not necessary to raise wages
Published: Wednesday, February 12, 2014
Updated: Wednesday, February 12, 2014 21:02
During President Barack Obama’s State of the Union address last month, the president mentioned Punch Pizza, a restaurant with eight locations in Minnesota’s Twin Cities. Obama commended Punch Pizza founder and co-owner John Soranno for raising the minimum wage for all employees at his stores to $10.10 per hour. Soranno attended the event with Nick Chute, a dough maker at of the restaurant who benefited from the increased wages. As President Obama explained, “he makes dough, and now he’s making a lot more of it.” Soranno made his decision to increase his staff’s wages in early December, shortly after President Obama announced his support of a bill that would raise minimum wage to $10 per hour nationally. The President naturally seized upon this opportunity to again call for Congress to raise the minimum wage.
However, the reality of the situation paints a different story. Government intervention is not necessary to get businesses to pay their workers fair salaries. According to an interview with Edgar Linares of WCCO radio, Soranno’s decision had nothing to do with President Obama’s statements on minimum wage. According to John Puckett, the other owner of Punch Pizza, “My business partner [Soranno] and I decided to invest in our people because we are growing our company in the Twin Cities. We really believe to have the best quality product and service. It’s the right thing to do.” The owners of Punch Pizza recognize that happy workers make good workers, and good workers have good customer service. This good customer service will keep customers happy and encourage them to come back in the future. This in turn makes the restaurant more money and more than compensates the increased expense of the higher wages.
There is a concept in economics called the efficiency wage. This theory states that employers have an incentive to pay their workers higher wages because it will increase their productivity and efficiency. Higher wages will also reduce the risk of high turnover, which is important in businesses where it is expensive to search for and hire new employees.
Additionally, by paying wages higher than the minimum required by law, companies are more likely to attract better employees. These better employees produce better products, thus driving business to the company. This means that companies have an incentive to compete with each other by offering higher wages to attract the better workers. All other things equal, any pizza chef would rather work for $10.10 an hour at Punch Pizza than $7.25 somewhere else. This means that the best pizza makers will wind up working for Punch Pizza, while the other restaurants get whoever is left. This allows Punch Pizza to produce a better product and generate more sales.
About a month after raising its employees’ wages, the magazine Food & Wine ranked Punch Pizza at number 15 on its list of top pizza restaurants in the country. Celebrity chef Andrew Zimmern, a contributing editor to the magazine, went a step further by saying he thought it should be ranked in the top five. Punch Pizza is clearly managing to attract the best staff in the Twin Cities area to produce one of the best pizzas in America. In order to maintain the staff quality needed to do that, it is necessary to pay a high wage relative to the competitors. If Punch Pizza’s competitors were to raise their wages to $10 per hour, either voluntarily or because the minimum wage was raised, they would be able to attract employees of the same quality as Punch Pizza’s. Furthermore, if Punch Pizza wanted to be able to produce the same quality food and customer service, they would be forced to raise their wages again. Businesses have an incentive not only to provide a fair wage to employees, but to provide a wage higher than their competitor.
Punch Pizza’s decision to voluntarily raise the wage of all its employees shows that businesses do have incentives to pay their workers more than the bare minimum required. As more companies start doing this, they will compete with each other for the best workers. However, suddenly raising the minimum wage for everyone to $10 per hour will be like hitting the reset button. We will be back where we started with everyone making only minimum wage. Both businesses and employees will benefit in the long term if the government takes no action and instead lets the free market take its course.