Minimum Wage Followup

20 November 2016
20 Nov 2016
3 min read

Regarding my piece about the possible benefits of a minimum wage increase, a reader wrote in with a question: if the minimum wage is raised for everyone, do the benefits to productivity decrease? 1

The question is a complicated one, because there are benefits due to a relative as well as absolute increase. Receiving a raise is a common example of a relative increase, because one’s wages are higher than they were before. Another example is when Walmart raised it’s minimum wage but other companies did not. The wage Walmart paid was relatively higher, because other companies' wages stayed the same.

Similarly, an absolute increase is when more money is getting paid out, but the other relationships between wages and products stay the same. The typical macroeconomics example includes wages being doubled but also having prices double. In this new world, if I want to buy something it still costs the same percentage of my wages. However, I do have more money overall than I did before.

To get back to the question at hand, because a minimum wage increase means that wages are not higher relatively speaking, I see the point being made. The prestige of a higher salary decreases if I can transfer to another company paying the same salary. Put another way, if a company is paying a higher wage than all the other companies, I’m more likely to stay there. However, if every other company is paying the same wage, there is no loss in salary to keep me committed to the company.

However, higher wages on an absolute basis do result in higher productivity, especially at a minimum wage level. A New York Times Article from a few years ago indicates that older workers are increasingly entering the fast food industry; these are the workers that would most benefit from a minimum wage increase. More costs are incurred as people age, and a higher wage can reduce some of the financial stress present.2 Having more of a financial cushion lets workers focus solely on working, increasing their productivity.

Hopefully this clarifies the benefits that can result from raising wages. Raising the minimum wage level may not increase the relative benefits, but should result in absolute benefits. Whether or not that outweighs the cost of the wages is a discussion for another post.

  1. As a reminder, efficiency wage theory says that wages may not be at a level where the market clears. In other words, there is an equilibrium wage, and then a firm (or several firms) are paying a higher wage than before. This results in productivity benefits. In the original model, these benefits are due to a lack of shirking but more money can increase worker productivity in a number of ways (making sure transportation isn’t an issue, being able to pay for medicine, better food, etc). ↩︎

  2. Possible examples of a higher wage increasing productivity include letting a worker purchase a more reliable car which makes transportation to and from work easier, letting the worker pay for child care, and being able to afford better medicine, resulting in less sick time being taken. ↩︎

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