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When a Minimum Wage is Not a Minimum Wage

September 23, 2014 3 minute Read by Ike Brannon

Recently NPR (which I enjoy listening to) has run a number of pieces praising IKEA, the Swedish furniture company with a big and growing presence in the United States, for raising the wages it pays to its entry-level retail workers, or what NPR calls their “minimum wage.”  It is not alone -- the Washington Post uses the same nomenclature for Ikea, as well as numerous other publications.

These stories all conclude that if it makes sense for IKEA to raise its “minimum wage”, it must similarly make sense for the federal government to increase its minimum wage as well.

That’s not the case.

Let’s use the language of economics the way economists do. For us, a minimum wage is a legal requirement, set by a government, mandating that all contractual arrangements between an employer and employee specify a wage above some floor.  IKEA’s “minimum wage” is the wage they choose to set for their entry level workers in their stores.  These are not remotely the same thing, even if IKEA does choose to call it a “minimum wage.”  People can and do use the same words in a different way.

When IKEA says it is raising its “minimum wage” it is making an economic, presumably profit-maximizing decision. There may be good reasons for this, as you point out in your story: companies that pay higher wages tend to see reduced absenteeism and turnover, since they’ve increased the opportunity cost of losing a job, and it can help attract better and more productive entry-level workers as well. Economists have observed this phenomenon for years, and refer to this as the “efficiency wage” argument.

However, the efficiency wage argument does not work for an entire economy. If every firm has to raise wages in concert, workers would not collectively become more productive.

Every employer cannot attract better workers, and if wages go up in concert it means that the opportunity cost of losing a job--in the wages foregone--hasn’t changed in the slightest. Some arguments work at the micro level fall apart completely at the macro level, and the minimum wage is best understood as a “macro” solution, at least in the context it’s being discussed here.

Kudos to the IKEA PR person who thought to call their wage increase for entry workers a “minimum wage” to seize on a key economic issue of the day to get his company some decent press, but news outlets should avoid conflating the notion of a company raising its own wages with a government-mandated minimum wage.

Ike Brannon is an economics fellow at the George W. Bush Institute.


Author

Ike Brannon
Ike Brannon

Ike Brannon served as an Economic Growth Fellow of the George W. Bush Institute from 2012 to 2015. He has a Ph.D. in economics from Indiana University and a B.A. in math, Spanish, and economics from Augustana College. View his full bio

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