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Comment by GeoDeV | Hacker News Reader

Wages are subject to the law of supply and demand, just like every other aspect of economic life. Since the CEO seems to be paying well above the going market rate, I doubt that this is sustainable for the long run. Yes, he's partially compensated for the imbalance by cutting his own pay, but it won't be enough. Also, the rapid growth of the company will also buy him some time, but that can't go on forever. The article's author seems to know little about capitalist economics beyond the conventional wisdom, most of which is wrong or non-essential. And if Rush Limbaugh did in fact call the CEO a socialist, then Rush Limbaugh doesn't understand what socialism is. Having said all this, I would still like to see this company succeed, just like Henry Ford did many years ago with a similar tactic.

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The cost of your inputs has little to do with the price you can charge for your outputs. Those are two supply-demand curves, which have very little to do with each other. Note that there is an infinite number of business models where the inputs curves are way above the outputs curve, and those are the business models that never can possibly be profitable. Increase of minimum wage (albeit this extreme) only raises the cost of inputs, and makes the set of unprofitable business models larger; there is no qualitative difference to, say, raising the cost of oil 300%.

Wages in aggregate eat directly into your profits, so if you're happy with lower profits and lower wages for executives, you absolutely can raise wages. If you pay 70k/year in low-margin-per-employee industries, your will inevitably operate at a loss, but this company is not low-margin.

I would also love to see this succeed, but maybe giving employees non-voting stock would better stave off the possibility of running the business into the ground.

I'll have to think about it more, but I don't think your premise is valid, i.e. that there are 2 mostly unrelated supply demand curves. My first thought is that all prices in a dynamic economy are interrelated and are always moving towards a state of equilibrium. This company's actions are disruptive and will either fade or they will change the point of equilibrium. Another factor, mentioned in the article, is productivity. Henry Ford was able to raise his worker's wages because his manufacturing methods dramatically increased their productivity. I don't know if this company's productivity is high enough to support a raise to 70 G's.

In an economically idealized world, if someone pays above-market wages then you would expect a competitor to appear that will charge less to their customers while making the same profits, destroying the first business.

Of course, in that idealized world, there are no "excess profits" (profits not commensurable with risk), so it should be impossible for the company to raise wages like that anyway.

So the real question is: why is this company so profitable, and can that continue indefinitely? Or does this guy just have such a high tolerance for risk that "acceptable profits" for him are unacceptable for any possible competitors?

If we bring economics on the table, we can also turn it around: when you pay higher wages, you suddenly have a pool of better qualified employees to select from, increasing productivity / profits.

It seems really strange to argue that wages are too low because business owners aren't greedy enough (to raise wages to profit-maximizing levels).

It actually appears more likely that employers have on average already set wages slightly above the market-clearing level in order to improve productivity and maximize profits. This is the theory of "efficiency wages" [1], which tries to explain why unemployment persists when companies could cut wages and employ more people.

There is no free lunch.

[1] http://marginalrevolution.com/marginalrevolution/2015/04/the...

Employees are part of that market as well. If there are two companies, one paying market wages, and one paying more, the employees will move to the second company. The second company now has a larger pool (and potentially better pool) of candidates to choose from than the first.

The first company may do better on margins per sale, but the second will have better quality/productivity per employee.

This is a valid point, I think the effect will usually be small.

1. If a company is paying above-market wages, then by definition there are more people who want to work there than there are available spots, so the second company will get some of the overflow.

2. The market for a particular kind of labor (e.g. phone techs) is usually much larger than whatever market for outputs these two companies are involved in (e.g., credit-card processing), so one company paying above-market wages is unlikely to change the market wage level very much.

This could definitely break down for some very specialized jobs.

The employee retention is much higher than industry standard. Apparently the employees are happy.

The market seems to like their performance, since they are getting more business and making more profits.

If recruiting costs 10k, and training training 6 months + 20k. That's already 30k saved. Plus no opportunity cost loss because they had enough staff to do business could be easily more than the wage increase (according to the author). That's easily already over the 30k/year difference.

Assuming the company does not even grow, but just stays still... then this should be sustainable. Whilst they are growing, losing less staff than industry average will only increase their growth.

Note, that the company was slowed down because they had to hire more staff. Those slow downs would have been worse if they could not hire as quickly, or lost staff.

Is the employee retention solely because of increased wages? I'm not sure. But that alone could save the company a lot of money.

> Since the CEO seems to be paying well above the going market rate, I doubt that this is sustainable for the long run.

I doubt it too. But it's not completely impossible: if a doubling of your employees salary means they increase their productivity three-fold, it might even increase your total profits (of course this depends on what the surplus rate was to begin with). The point is, since profits come from the surplus rate, which depends on productivity, increased salaries can in some cases lead to higher profits.

Wages are set by the market, but two major market factors are revenue and how much money senior leadership want to keep in their own pockets. If he is okay making less and his company revenues are high enough to pay these salaries, then it will work indefinitely. The reason it wouldn't normally work is because management would never take a pay cut just to pay their employees more. All they'd do is increase personnel overhead across the board.

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