Your competitor might find it advantageous to compete with you on employee wages and poach your good employees leaving you unable to compete. Supply and demand works for salaries as much as it does for physical goods.

Which is what history proves happens all of the time, and is the reason that we don't have any labour laws, right?

And what about the poor bastards who are judged to be "average" employees by whatever metric?

I never said anything about that. I believe in rewarding good value, and I often fight for employee raises more than most of my colleagues.

A business owner that engages in that practice is not going to keep his/her employees long.

Like Walmart?