[evanpw]

In an economically idealized world, if someone pays above-market wages then you would expect a competitor to appear that will charge less to their customers while making the same profits, destroying the first business.

Of course, in that idealized world, there are no "excess profits" (profits not commensurable with risk), so it should be impossible for the company to raise wages like that anyway.

So the real question is: why is this company so profitable, and can that continue indefinitely? Or does this guy just have such a high tolerance for risk that "acceptable profits" for him are unacceptable for any possible competitors?

[Jtsummers]

Employees are part of that market as well. If there are two companies, one paying market wages, and one paying more, the employees will move to the second company. The second company now has a larger pool (and potentially better pool) of candidates to choose from than the first.

The first company may do better on margins per sale, but the second will have better quality/productivity per employee.

[evanpw]

This is a valid point, I think the effect will usually be small.

1. If a company is paying above-market wages, then by definition there are more people who want to work there than there are available spots, so the second company will get some of the overflow.

2. The market for a particular kind of labor (e.g. phone techs) is usually much larger than whatever market for outputs these two companies are involved in (e.g., credit-card processing), so one company paying above-market wages is unlikely to change the market wage level very much.

This could definitely break down for some very specialized jobs.

[stingraycharles]

If we bring economics on the table, we can also turn it around: when you pay higher wages, you suddenly have a pool of better qualified employees to select from, increasing productivity / profits.

[evanpw]

It seems really strange to argue that wages are too low because business owners aren't greedy enough (to raise wages to profit-maximizing levels).

It actually appears more likely that employers have on average already set wages slightly above the market-clearing level in order to improve productivity and maximize profits. This is the theory of "efficiency wages" [1], which tries to explain why unemployment persists when companies could cut wages and employ more people.

There is no free lunch.

[1] http://marginalrevolution.com/marginalrevolution/2015/04/the...