• Do you see any conflict between your desire to be as profitable as possible and your desire to pay employees a living wage?
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    Just by basic accounting, there seems to be a tension here. A certain amount of revenue comes in R. A certain amount is paid out in expenses E. A certain amount is paid out in wages W. What's left is profit P.

    P = R - E - W

    It would seem at first glance, therefore, that paying higher wages necessarily means making lower profits. And many managers appear to think so, and will do whatever they can to cut wages or lay off workers in order to raise their profit margins.

    But we economists know better. Economics is not just accounting.

    Many companies have failed because their managers were too short-sighted to see why paying higher wages can be a good idea in the long run.

    Think about why we pay wages in the first place. Is it out of the goodness of our hearts? Are wages an altruistic act, a form of donation? In general, no. We intentionally distinguish between wages and donations both ethically, legally, and economically.

    As was first noted by Adam Smith in the late 18th century, wages are paid out of long-term self-interest. Wise business managers know that higher wages will attract better workers, and retain them longer. They know that paying a fair market wage will prevent their workers from leaving for better jobs.

    In a perfectly-competitive market, in fact, you'd have no choice but to pay whatever wage the market will bear. Any less and all your workers would leave. Any more and you'd be overrun with applicants you had no way to hire.

    Of course, in the real world markets are not perfectly competitive, so companies do have some power to set higher or lower wages. One strategy would be to intentionally pay the lowest wage you can, and accept the turnover; this might make sense if you know that it is easy to find and train new workers. Another strategy would be to intentionally pay higher wages, in order to ensure that your workers stick around; this might make sense if you know that workers with the necessary skills are rare and training is costly. Different strategies can persist in the same industry, which is likely part of why we see significant dispersion of wages (or significant variation in wage rate) across different companies within the same industry. Reducing your profits to raise wages need not be altruistic; it could simply be a long-term investment in the health of your company.

    There could also be some altruistic component; some employers may decide that they are willing to sacrifice some portion of their profits, even in the long run, in order to pay workers a higher wage. A market with monopolistic competition actually allows more such discretion than a perfectly-competitive market would. But this is not the only reason to raise wages, and some economists argue it would not even be a good reason; better to donate the extra profits to charity rather than raise wages above the market-clearing rate.

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