Imagine you’re an employee at Walmart. Maybe you’re a single mom working to pay the bills or a teenager looking to get work experience. This past year has been rough for you and your colleagues, but you’ve all persevered and pushed through despite the difficult circumstances.

Now imagine that you walk into work one day and find out that you’re getting a raise, even though you didn’t ask for one. This was what roughly 425,000 Walmart employees experienced in February.

Walmart’s average hourly wage used to be $14 per hour back in January 2020, but with these new raises they plan to boost that average to over $15 per hour. This move comes on the heels of increasing demand for household goods due to COVID-19, especially through online orders.

But Walmart isn’t the only large employer handing out raises. On February 25, Costco announced it would be raising wages for its lowest paid hourly workers, setting a new company-wide minimum of $16 per hour.

“It takes a lot of time to interview and find employees,” CEO Craig Jelinek said when asked about the wage hike. “We want people to stay with us.”

Raises without Government Minimum Wage Mandates

Conspicuously absent from these raises is any change in federal minimum wage law.

While a federal $15 minimum wage was originally in President Biden’s $1.9 trillion stimulus proposal, a Senate official recently ruled that this inclusion didn’t comply with Senate budget rules, making it unlikely to pass anytime soon.

So if the federal minimum wage hasn’t gone up and likely won’t be going up anytime soon, just what exactly is driving these wage hikes?

The answer, in a word, is competition.

“Walmart has been competing with Amazon and others for warehouse workers and other staff that are handling a surge in online orders during the pandemic,” the Wall Street Journal reports.

Notably, Amazon raised its minimum pay to $15 per hour back in 2018, and both they and Walmart gave out substantial bonuses in 2020. Target also established a minimum hourly pay of $15 last year, so it’s clear that this is becoming an industry-wide trend.

Why Competition for Labor Leads to Higher Wages

To understand how competition for labor leads to higher wages, consider a typical hourly Walmart worker. Every time they work, they produce a certain amount of value for Walmart. The value they produce can vary substantially depending on the work they do and the tools and equipment they have access to, but let’s assume that for every hour they work, they bring in $17 of additional revenue for Walmart (economists call this the worker’s marginal revenue productivity).

Now, if Walmart is only paying them $14 per hour, then Walmart gets a profit of $3 per hour. However, this profit margin creates an opportunity for Amazon. Amazon could outbid Walmart by offering them $15 per hour, and still make a profit, albeit a smaller one. So, Walmart would need to raise their worker’s wages to avoid losing them to Amazon.

A worker’s marginal revenue productivity can also go up, which would put upward pressure on their wages.

If a worker develops new skills or has access to better tools, for example, then they might start producing $20 per hour of value. Under these circumstances, their employer will likely give them a corresponding raise. If the employer doesn’t do so, there will be a market incentive for another company to hire them away.

Alongside higher demand for workers, this increase in productivity is one of the key factors driving the wage hikes at Walmart and Costco, and it has a lot to do with the “surge in online orders” that the Wall Street Journal reported. What’s happening here is that Amazon, Walmart, and Costco have all invested in eCommerce infrastructure (servers, web sites, etc). Those investments have made sales more efficient, which has made warehouse personnel and other workers more productive.

This higher productivity has in turn created an upward market pressure on wages, and the wage hikes that we’re seeing are the natural result. Hence, capital and labor are natural allies (and not enemies as Karl Marx described them), because it is capital investment which ultimately leads to higher wages.

Government Solutions vs. Market Solutions

We would all like to see people earn higher wages. Nobody wants a society where people are struggling to get by or relying on welfare. But how do we solve the problem of low wages? Well, there are two approaches: The government approach, and the market approach.

The government approach is to impose a high minimum wage, which effectively just outlaws low-paying jobs. Ironically, these kinds of policies hurt low-skilled workers the most, because it is precisely those workers who lose their jobs as a result.

But while the government approach takes options away from workers, the free-market approach is to give workers more options. Thus, free market proponents advocate for lower taxes and fewer regulations, not only because that’s good for businesses, but also because it fosters competition for labor and thus creates upward pressure on wages. What’s more, when employers have more resources to invest in capital such as online infrastructure (instead of having their money taxed away), they can increase the productivity of their workers, which ultimately leads to better compensation.

The recent wage hikes from Walmart and Costco are perfect examples of this phenomenon. It’s a vivid reminder that the free market, not the government, is what truly uplifts workers in the long run.

This piece was originally published on FEE.org under the title, “Walmart and Costco Just Gave Over 400,000 Workers a Raise Despite No Minimum Wage Increase. Here’s Why“