Unveiling the Illusion: The Minimal Impact of Wages on Prices

Published on 16 July 2023 at 15:03

I would like to present a slightly different approach in this entry, focusing on a topic within my area of expertise: business. With my MBA and a minor in economics during my undergraduate studies, coupled with my experience in successfully managing a multimillion-dollar business for the past sixteen years, I believe I can offer valuable insights. The motivation behind this write-up, as well as an upcoming entry, stems from my observation of the abundance of misinformation surrounding specific business practices. It is crucial to rectify these inaccuracies and provide accurate information to the business community. The topic I intend to explore is the correlation between the minimum wage, the cost of doing business, and potential price hikes. It is crucial to debunk the common misconception that higher wages invariably lead to increased prices. In reality, within the framework of free-market capitalism, this notion couldn't be further from the truth.


To illustrate this concept, let's examine an example of a fair and equitable environment, specifically in terms of wages. We will consider a hypothetical comparison between two discount stores, Store A and Store B. Both Store A and Store B are situated in Business County, where the minimum wage recently underwent a year-long legislative process and increased from ten to fourteen dollars per hour. Consequently, both stores were aware of this potential change and had time to prepare accordingly.


Store A adopted a prudent approach and proactively began adjusting their business operations to accommodate the forthcoming wage increase. They wisely allocated funds towards technology investments that enhance overall efficiency and automate critical processes like logistics and point of sale (POS). As part of their strategic preparations, Store A made the decision to invest in a highly capable order management software (OMS), such as Bright Order from Deposco or Manhattan Active Order Management system. This strategic move empowers them to exercise greater control over their business costs, optimizing their operations more effectively.


By leveraging the OMS, Store A successfully eliminated unnecessary inventory by implementing minimum and maximum order parameters set by the business owner. As a result, their cost of goods decreased, while simultaneously ensuring they maintain adequate stock levels to fulfill their customers' requirements. This automated system significantly reduces the labor-intensive task of manually ordering thousands of items on a weekly basis, streamlining their operations and enhancing overall efficiency.


In addition to their proactive measures, Store A implemented an inventory management system to mitigate shrinkage, which refers to the loss of money due to missing products. This automated system enables them to accurately track inventory levels, eliminating the need for manual tracking. Furthermore, Store A adopted security measures such as locking high-value or frequently stolen items in cases, effectively reducing theft and safeguarding their profits. These strategic initiatives align with their objective of enhancing operational efficiency and profitability without compromising the mark-up margins on their products.


 Under the assumption that Store A's business remained relatively stable or experienced a marginal weekly growth rate of 0.01 percent, it would take approximately three months for them to recoup their initial investment in technology and streamlined processes. As a result, Store A has achieved their highest operating profits to date, as the cost of running their operations has significantly reduced. This favorable outcome underscores the effectiveness of their strategic decisions and highlights the long-term financial benefits they are reaping from these improvements.


As a result of their proactive measures, Store A had the ability to make a strategic decision before the wage increase came into effect. They not only expanded their labor force but also offered wages one dollar above the anticipated increase, enabling them to attract top talent ahead of their competitors. While this decision may have a marginal impact on their profits, Store A now faces a choice. They can either raise the prices of their goods to maintain their desired mark-up numbers or accept a slightly lower profit per item sold. This decision requires careful consideration of various factors, including market dynamics, customer demand, and competition, in order to strike a balance between maintaining profitability and remaining competitive in the industry.


It is wise to observe the strategies employed by major players like Walmart and Kroger in the industry. Walmart, for example, operates on a smaller margin to keep prices competitive, which ultimately drives higher sales volumes. This approach leads to exponential profit growth. Given this context, Store A should carefully consider this decision and evaluate the potential impact on their business. Indeed, it is worth noting that Walmart has taken a notable step by leading the way in offering competitive wages and benefits to their employees within the traditional retail sector. Despite this investment in their workforce, Walmart has continued to achieve record-breaking profits. This showcases the potential for a successful business model that prioritizes employee well-being while maintaining strong financial performance. Store A can draw inspiration from such examples as they consider their own approach to wages and profits. Now, let's shift our focus to Store B and examine their actions within the same time frame.


Store B, unfortunately, can be characterized by poor management practices and a lack of preparation for the impending wage increase. Consequently, they experienced talent loss to Store A, which offered higher wages and was better prepared for the change. Store B found themselves blindsided by the wage increase when it eventually took effect, exacerbating their challenges and potentially hindering their ability to attract and retain skilled employees.



Store B, faced with the unfavorable circumstances of talent loss and financial pressures, is compelled to lay off employees and raise prices in order to sustain their operations. The combination of talent scarcity and increased prices creates a significant competitive advantage for Store A in the market. Store A seizes this advantage and strategically increases their markup, but only by a marginal amount, ensuring that prices remain competitive. As a result, Store A thrives while Store B faces ongoing struggles and even the possibility of closure. It is important to note that this analysis aligns with fundamental principles of management theory, which have been repeatedly validated by prominent business players. The significance of talent management, pricing strategies, and maintaining a competitive edge are key factors that determine the success or failure of businesses in various industries.


 In the realm of business, it is crucial to acknowledge that pricing for products or services is influenced by a multitude of factors that extend far beyond the wages of the average worker. It is a fallacy to oversimplify the intricate workings of a business by reducing them to a single element. The determination of consumer prices involves a complex interplay of various components, wherein the cost of goods assumes a significant role. Under its broad umbrella, factors such as raw materials, manufacturing processes, and distribution logistics exert a substantial influence on the final price of a product. Additionally, considerations like transportation costs, supply chain management, and overhead expenses are pivotal in shaping the overall pricing strategy.


It is imperative to understand that the pricing decisions made by businesses are not isolated from market dynamics, competition, and consumer demand. Achieving profitability and sustainability necessitates striking a delicate balance between different cost factors, including wages, cost of goods, and operational expenses. By adopting a comprehensive and holistic approach, we gain a more accurate understanding of the intricate nature of pricing decisions within the dynamic business landscape. This acknowledgement empowers businesses to make informed choices that optimize their operations, cater to consumer expectations, and foster long-term success. All without substantially increasing prices for the consumer.


When I embarked on my journey in the business industry back in 2007, our services were priced at a minimum of $16.97, and the starting wage stood at $8 per hour. Fast forward to 2023, encompassing two economic recessions, fluctuating market conditions, and the profound impact of a global pandemic, we find that the lowest price for our services has increased to $19.98, while the minimum hourly wage now sits at $17.


Examining these developments, it becomes apparent that the cost of our services has risen by 16.29 percent, while wages have experienced a significant growth of 72 percent. It is crucial to challenge the simplistic notion that increased wages inevitably lead to higher prices. Such a claim demonstrates either naivety or a deceptive intention. This example underscores the intricate interplay of various factors in shaping pricing dynamics. While wage increases are a notable aspect, they are only one piece of the puzzle, influenced by market conditions, economic stability, competition, and operational efficiencies. Despite these changes, it is noteworthy that our business continues to thrive, maintaining an average monthly profit of $45,000. This demonstrates that prudent management and a comprehensive understanding of the intricate relationships between wages, prices, and other factors can lead to sustained profitability. In conclusion, discussions on wage and price dynamics necessitate a nuanced understanding of the multifaceted elements at play. By recognizing the complexity of these relationships, we can foster informed dialogue and make sound decisions that benefit both businesses and their employees.



In this analysis, we explored the relationship between wages and prices in the business landscape. Through a comprehensive examination of market forces, operational efficiencies, and various factors at play, it becomes evident that wages have only a minimal impact on prices. We considered the example of a business that experienced wage increases outpacing the growth in service prices over time. This demonstrates that the simplistic notion that increased wages automatically lead to price hikes is misleading. Instead, multiple complex elements contribute to pricing decisions. The assertion that increased wages have a substantial impact on prices is oversimplified. While wages are an important consideration, numerous other factors, such as market conditions, competition, and operational efficiencies, influence pricing decisions. Our analysis showcases that even in a scenario where wages have increased significantly, service prices can experience modest changes. Therefore, it is crucial to adopt a holistic perspective when evaluating the relationship between wages and prices. By understanding the intricate dynamics at play, businesses can make informed decisions that balance the well-being of employees and sustainable pricing strategies, ultimately leading to a thriving and competitive marketplace.

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