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The Agenda

NRO’s domestic-policy blog, by Reihan Salam.

The Case of Amazon UK’s Rugely Facility



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Earlier this month, Sarah O’Connor, economics correspondent for the Financial Times, described the working conditions at a warehouse in Rugely, Staffordshire owned and operated by Amazon, the global online retailer that has expanding aggressively in Britain. Rugely is an economically depressed town that had been battered by the decline of the local coal industry, and the new Amazon UK facility has created a substantial number of jobs. Yet the number of jobs varies considerably over the year, and employees are divided between those on temporary contracts and those directly employed by Amazon, the latter of whom receive a pension and shares and higher status. The work is very physically demanding. (O’Connor conveys that many in the town are nostalgic about the coal-centered economy of the past, though of course work in the mines was physically demanding in its own right. But it was also considerably more stable.)

And wages are fairly low — the entry-level wage is £6.20, just above Britain’s statutory minimum wage of £6.19. This is the part I found particularly interesting. To translate this into US dollars, this wage floor is, as of today, worth $9.38, or $0.38 higher than the wage floor proposed by President Obama in his recent State of the Union address and considerably higher than the current federal minimum wage of $7.25. For context, US GDP per capita is $49,800 (2012). British GDP per capita (PPP) is $36,700 (2012). GDP per hour worked (2011), an estimate of labor productivity, was $60.60 in the U.S. and $46.8 in Britain. Given this substantial gap in GDP per hour worked, Britain’s relatively high wage floor is noteworthy.

As Jane Waldfogel observes in Britain’s War on Poverty, social transfers to low-income households sharply increased during the Blair-Brown years, including wage subsidies designed to increase labor force participation:

The first strand included the New Deal for Lone Parents, a primarily voluntary welfare-to-work scheme. It also included measures to make work pay, including Britain’s first national minimum wage, tax reductions for low-income workers and their employers, and a new tax credit, the working families tax credit (later replaced by the more generous working tax credit). Together, these reforms were successful in promoting work. Lone-parent employment increased by 12 percentage points – from 45 percent to 57 percent – between 1997 and 2008, with at least half of this increase attributable to the reforms. In addition, the incomes families could expect from work also increased. 

So Britain has pursued what we might describe as the EITC strategy in concert with a wage floor. But it also pursued redistribution that was not work-centric:

The second strand of the reforms was a set of measures to raise incomes for families with children, whether or not parents were in work. The value of the universal child benefit was raised substantially starting in 1999, with particularly large increases for families with young children. Means-tested income support benefits for low-income families with young children were also raised. The government also introduced a new children’s tax credit for low- and middle-income families with children (later replaced by the child tax credit). These measures raised family incomes substantially for those at the bottom of the income distribution and also reduced material hardship. 

In complicated ways, the British government tried to mitigate work disincentives (tax reductions for low-income workers), yet the creation of new means-tested transfers may have increased implicit marginal tax rates for at least some households. The creation of Britain;s first national minimum wage was presumably designed to protect the interests of low-income workers and to reduce the possibility that employers would “free-ride” on the creation of low-wage employment subsidies, yet it might have also priced out at least some workers from the labor force. 

This comes to mind because O’Connor focuses on the intensity of work in at Amazon UK’s Rugely fulfillment center, yet one wonders if this intensity is a byproduct of the wage floor. That is, were British workers subject to a somewhat lower wage floor, Amazon associates at the Rugely fulfillment center wouldn’t have to work quite as hard. From the perspective of an employer, Rugely presents a number of challenges: many workers in the region have suffered from long-term employment, which is why the difficult, demanding work of being a “picker” is seen as more attractive than the available alternatives. Yet there is no “on-ramp” of less-intense work — the kind of work for which Amazon UK might be willing to pay £5.00 per hour rather than £6.20. Assuming the British government would, via the working tax credit, etc., ensure that workers earning this lower market wage nevertheless have a reasonable effective wage, it seems at least possible that the number of workers Amazon UK could afford to retain would be somewhat higher — management wouldn’t let you go quite as quickly if you fell somewhere between £5.00 and £6.20 per hour in productivity — yet that workers wouldn’t suffer. Given the constrained fiscal environment, this strategy is probably not very attractive to the Coalition, not least because it would be resisted by organized labor and other influential constituencies. And I’m sure that I’m oversimplifying matters. But focusing on the wage floor allows us to see O’Connor’s (excellent) article in a new light. 



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