To illustrate the power of anchoring, consider the example of a cooking-product retailer who introduced the first automatic bread maker to the market some years ago for a price of about $260. Is $260 a lot of money to pay for a gadget that takes flour, yeast, water, salt and sugar and turns it into a loaf of bread at the push of a button? Who knows? What should we compare it to? What we do know is that when the company introduced a deluxe version of the bread maker about six months later for $400, sales of the regular model went through the roof. The deluxe model told consumers that indeed, $260 was not a lot of money to spend. With the $400 anchor, $260 seemed cheap.
Or consider how people pay their credit-card bills. Each bill comes with a required minimum payment, a tiny fraction of the outstanding balance. No doubt, this minimum is there in part to protect consumers from falling deeply into debt.
But a recent study has shown that people who get bills that contain required minimum payment information pay down less of their balance than people who get identical bills but without the required minimum. The researchers estimated that the size of this effect was large enough to roughly double the lifetime costs of the debt for people whose bills contained the required minimum. Why does this happen? Well, suppose your bill comes and you’re feeling kind of flush this month, so you decide to pay more than you normally do. Well, how much more? With a required minimum of say $15 on a $1,500 balance as an anchor, you may decide that a generous payment would be $50. Without that anchor, you might think a generous payment was more than twice as large.
What does this have to do with the minimum wage? The minimum wage supplies an anchor, and when employers are setting wages, they can judge themselves to be paying generously and competitively by exceeding the minimum wage. When the minimum wage is $7.25, then a wage of $9 seems quite generous. But when the minimum wage is $9, the costs of being generous will go up. In other words, though the minimum wage only establishes a floor, we can reasonably expect that over time raising the anchor by raising the minimum wage will ramify over a wide swath of the wage scale. In the long run, everyone’s wages will go up. This will allow people earning wages near the bottom to manage to pay their bills, and it will allow those with higher wages to join the middle class.