Facebook’s Misleading Minimum-Wage Pledge

By Reihan Salam

Thursday, May 14, 2015

This week, Facebook delighted advocates for a higher federal minimum wage, up to and including the Obama White House, by announcing that it will require its contractors and vendors to pay their workers no less than a $15 hourly minimum wage. Actually, that’s just the tip of the iceberg. Facebook will also require, among other things, that its partners give their employees at least 15 days of paid time off and a new child benefit of $4,000 for new parents who don’t receive paid parental leave. So should we celebrate Facebook for being an enlightened employer, and for pointing the way forward for every other business in America, and perhaps even Congress? Not quite.

In announcing the new policy, Sheryl Sandberg, Facebook’s very well-known COO, makes no explicit reference to how this decision bears on the national minimum-wage debate. She does say that “taking these steps is the right thing to do for our business and our community,” which I’m sure is true, and she touts the benefits for women, who “comprise about two-thirds of minimum wage workers nationally.” And she observes that “research also shows that providing adequate benefits contributes to a happier and ultimately more productive workforce.”

Yet Sandberg is a politically savvy executive who has hired numerous former government officials to staff Facebook’s upper echelons. It is often rumored that she intends to seek elected office in the future, and she cut her teeth as an aide to Larry Summers in the Clinton White House long before joining Google and later Facebook. Though her book Lean In is not exactly political, it’s not a stretch to see her effort to craft a more uplifting, market-friendly feminism as part and parcel of building her brand in anticipation of a political future. And most of all, Sandberg knows very well that her polarizing company, which is growing rapidly as it extends its dominance on the mobile web, could use a PR boost. The real mystery is not why Sandberg has made this announcement. Rather, it’s why she hasn’t done it sooner.

The really interesting and important question about minimum wages is whether they are binding. If Sandberg had announced that Facebook would require its contractors and vendors to pay no less than 15 cents an hour, I doubt any of us would be impressed. But if she had announced a $1,500 hourly minimum wage, we might question her sanity, as we can safely assume that the service workers who keep Facebook’s offices clean and its employees well fed are earning much less than that. So the really interesting question is where exactly a wage floor becomes binding, as the wage a firm is required to pay starts to surpass the productivity of a given employee. Raising a worker’s hourly wage from $14 to $15 might make her somewhat more productive, and so it could be that the increase won’t cost her employer anything at all. But would the same be true if we instead raised this worker’s hourly wage from $14 to $30 in one fell swoop? I don’t think we have strong evidence to that effect.

One of the most powerful illustrations of the effect of a truly binding minimum wage is Puerto Rico’s labor market in the years after 1983, when Puerto Rico adopted the federal minimum wage then prevailing on the mainland. In the early 1990s, the labor economists Alida J. Castillo-Freeman and Richard B. Freeman found that the “U.S.-level minimum altered the distribution of earnings in Puerto Rico to an extraordinary extent,” and that “imposing a U.S.-level minimum reduced total island employment by 8–10 percent compared to the level that would have prevailed had the minimum been the same proportion of average wages as in the United States.” The result of this massive shock to employment levels was, according to Castillo-Freeman and Freeman, a massive wave of migration from Puerto Rico to the mainland that drew largely on “persons jobless on the island, with characteristics that make them liable to have been disemployed by the minimum wage.”

Will Facebook’s decision to impose a $15 hourly minimum wage prove as devastating as Puerto Rico’s adoption of the mainland minimum wage? Of course not. I can’t definitively say if Facebook’s new minimum-wage policy will prove binding or not, but let’s just say I’m pretty confident that it won’t. Though Facebook has offices in many different U.S. cities, its domestic employment base is concentrated in high-wage, high-cost regions. This is actually very important for understanding Facebook’s new policy.

Instead of relying on scholars who make the case against higher minimum wages, let’s rely on a scholar who does exactly the opposite, just to demonstrate that we’re being as fair-minded as possible. Arindrajit Dube of the University of Massachusetts, Amherst, one of the chief intellectual proponents of higher minimum wages in the U.S., has explicitly argued that the U.S. ought to establish a federal wage standard that reflects wages and prices in a given region. Why should the wage floor be sensitive to wages and prices? Because unless higher wages translate into higher productivity, the cost of paying higher wages will tend to lead to higher prices in sectors that employ large numbers of low-wage workers. Raising prices in low-wage regions will tend to reduce purchasing power. If firms decide that they don’t want to raise prices, as doing so will lose them too many customers, they will feel pressure to economize on labor by, for example, hiring fewer, more skilled workers they can augment with technology. If the minimum wage had been set at half of the median wage in the Bay Area in 2012, it would have been $13.37 (in 2014 dollars). In Miami, it would have been $8.55.

Basically, the issues that affect low-wage employers nationally have almost nothing to do with the requirements Facebook is imposing on its contractors and vendors. Keep in mind that Facebook is headquartered in Menlo Park, Calif. Menlo Park is in the San Francisco Bay area, a high-wage, high-cost metropolitan area. This means that a truly binding wage floor for workers in Menlo Park would probably be higher than $15 per hour.

Moreover, for Facebook’s contractors and vendors, a truly binding minimum wage might be even higher, as these contractors and vendors don’t have to worry about losing low-income customers, the way a quick-service restaurant in a poor region might. Many of the low-wage workers serving Facebook provide services that Facebook offers to its employees as a form of compensation. Facebook might pay you a certain salary, but you’ll also be able to eat meals, do your laundry, and much else at low or no cost, conveniences that effectively increase your compensation without also increasing your tax bill. This is not the competitive landscape facing low-wage employers in most of the country — their customers aren’t generally people who are getting stuff for free, and are thus not super-attuned to how much things cost.

So Facebook is doing very, very little here. If Facebook’s contractors and vendors were paying their employees much less than $15 per hour, they would have a hard time competing for reliable workers in the Bay Area, given its relatively high wages. PR is the best explanation for why Facebook is crowing about taking a step that makes perfect economic sense for Facebook. That’s not a terrible thing in itself. What is terrible is that at least some people will assume that because Facebook is requiring that its contractors and vendors pay higher wages, quick-service restaurants in Pueblo, Colo., and Tupelo, Miss. (where Facebook does not have large numbers of employees, in case you were wondering), ought to be required to offer the same wages and benefits.

There is something that Facebook could do to better the lives of ordinary people. Working Partnerships USA, a left-wing group in the Bay Area, maintains that a $19.06 living wage would allow workers to maintain a decent standard of living. This number is so high primarily because housing costs in Silicon Valley are obscenely high. To its credit, Facebook has invested in building denser housing in the region. But if Sandberg used her platform to call for loosening zoning restrictions across the board, she could do a great deal of good. One recent paper, by Chang-Tai Hsieh and Enrico Moretti, found that if New York, San Francisco, and San Jose — Facebook’s backyard, essentially — lowered their regulatory constraints on new housing to the level found in the median U.S. city, these cities would expand their workforce and economic output by enough to increase U.S. GDP by 9.5 percent. Suffice it to say, this would be a much bigger deal than asking Facebook’s contractors and vendors to do what labor-market competition in high-wage markets (and the demands of their employees) already ensures that they’ll do one way or another.