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Still Worried About Inflation? Keep an Eye on Amazon

Still Worried About Inflation? Keep an Eye on Amazon

Tuesday, 18 May, 2021 - 04:15

For the past generation, Amazon.com Inc. has been the centerpiece of a prevailing view that the growth of the internet has had a deflationary impact. Online shopping brought transparency to every aspect of the economy, increasing competition and taking pricing power away from companies that used to have it.


Now Amazon may be leading the marketplace in a new direction with its growing emphasis on employee pay, shifting away from its deflationary role to add some upward pressure on inflation.


The latest data point on this shift came on Wednesday, when Amazon announced it was giving raises of up to $3 an hour to 500,000 of its workers.


Amazon's been under scrutiny for its labor practices over the past several years as it's become a larger employer at the same time society became more focused on worker treatment and pay. As Amazon founder and Chief Executive Officer Jeff Bezos noted in his letter to shareholders this month, the company raised its minimum wage to $15 an hour two and a half years ago, and now seeks to become "Earth's best employer."


It's natural to be a little cynical about the new tone. The closely watched recent unionization vote by company employees in Alabama shows there's a push for workers to have their voices heard. Democrats, now controlling both the White House and Congress, are seeking to increase the national minimum wage and strengthen unions while questioning the power of big technology companies. All of this impacts Amazon, so it makes sense that the company would seek to play nice while it's in the spotlight.


But there are other strategic reasons for Amazon to suddenly be more employee-centric. Bezos is known for the comment, "Your margin is my opportunity" -- implying that Amazon can grow sales and market share by charging less than its peers. Retailers' business viability requires charging more for a product than it costs to acquire it. When a competitor like Amazon manages to charge less -- either by being more efficient or by simply accepting a lower profit margin -- it threatens that business.


The growth of Amazon's e-commerce business can be seen in two phases. First came expanding its product offerings and growing sales by undercutting its competitors on price. Next, the company invested in logistics, operations and fulfillment; building warehouses, buying trucks and getting orders to customers faster and cheaper than other e-retailers.


Having made huge strides on pricing and logistics, labor could be Amazon's next target for crushing the competition. Historically, one might argue that Amazon squeezed its own employees by being a demanding employer and paying low wages, taking advantage of the loose labor markets of the 2000s and 2010s. But over the past few years, and particularly now, there's been a growing competition for workers needed to process and fill orders, and then speedily deliver them to customers.


By achieving greater efficiency or accepting a lower profit, Amazon could pressure competitors through higher wages rather than low prices. Such an intentional strategy by an employer of more than 1 million people would be a significant break from how large companies have traditionally operated, and would have implications for the economy as a whole.


The national minimum wage remains at $7.25 an hour, and Congress might succeed in raising it to around $11 later in the year if legislators can strike a compromise. But to the extent Amazon, already at $15 an hour, decides to set the pace among large employers, it would establish a sort of private-sector benchmark that other companies would have to keep up with. Walmart Inc.'s minimum wage is now at $11 per hour. If Amazon went to $17, maybe Walmart would have to move to $13 to get the workers it needs.


This might not lead to the kind of inflationary spiral the US experienced in the 1970's, but it could represent the start of a new trend that bears watching: a game of one-upmanship between large employers raising wages for competitive and political reasons.


Bloomberg


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