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A Minimum Wage Puzzle

Summary:
Two new studies show that giving pay raises to low-wage workers is good for consumers, too. That finding could add momentum to efforts to help grocery store clerks, nursing home workers and delivery drivers who are being paid a minimum wage despite their efforts being so essential during the current pandemic. The new research shows that raising the minimum wage improves workers’ productivity, which translates into businesses offering higher-quality service. These are the opening three paragraphs of Seema Jayachandran, “How a Raise for Workers Could be a Win for Everybody,” New York Times, June 18. The rest of the article goes on to highlight the results of the two studies on minimum wages. One was about the effect of minimum wage increases on nursing homes and

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Two new studies show that giving pay raises to low-wage workers is good for consumers, too.

That finding could add momentum to efforts to help grocery store clerks, nursing home workers and delivery drivers who are being paid a minimum wage despite their efforts being so essential during the current pandemic.

The new research shows that raising the minimum wage improves workers’ productivity, which translates into businesses offering higher-quality service.

These are the opening three paragraphs of Seema Jayachandran, “How a Raise for Workers Could be a Win for Everybody,” New York Times, June 18.

The rest of the article goes on to highlight the results of the two studies on minimum wages. One was about the effect of minimum wage increases on nursing homes and the other about the effects of minimum wage increases on department stores.

Another excerpt:

Ms. Ruffini’s most startling finding was that higher minimum wages reduced mortality significantly among nursing home residents. Her research suggests that if every county increased its minimum wage by 10 percent, there could be 15,000 fewer deaths in nursing homes each year, or about a 3 percent reduction.

How did pay increases translate into better patient health and longer lives? It appears that with better pay, jobs in nursing homes became more attractive, so employee turnover decreased. Patients benefited from more continuity in their care.

In addition, the better paid employees may have simply worked harder, perhaps because they cared more about holding onto their jobs. Economists say they have been paid an “efficiency wage”: Employees become more productive when their wages are higher.

The higher wage may also have attracted more skilled or industrious people to the job, but this seems to account for at most a small portion of the improvements in patient health.

A crucial finding is that the benefits for workers and patients did not come with any apparent downside to nursing homeowners. Their profits remained steady because they were able to defray their increased costs by charging higher fees. That’s one reason these results might not apply in all industries. There are few alternatives to using a nursing home, so if the industry raises prices, it will not lose too many customers.

Why is this a puzzle? Because if nursing homes were able to respond this way after a minimum wage increase, why wait for a minimum wage increase? Why not increase wages on their own and get all these good results?

She has somewhat of an answer. She writes:

What unlocked these gains was government action: All nursing homes in a community had to pay employees more. That eliminated competitive disparities that might have made individual operators reluctant to raise wages unilaterally.

In other words, a nursing home could not have made these gains on its own because then it would have had to raise prices and be less competitive with other nursing homes in the area. So fees, that is, prices, increased; otherwise profits wouldn’t have remained steady while costs increased. If a lot of the nursing home patients were funded by Medicaid, and many are, then presumably Medicaid started paying more. Also, presumably private insurers of nursing home care, and maybe patients themselves, started paying more.

In her concluding paragraph, Professor Jayachandran writes:

Supporters of raising the minimum wage usually make their case based on fairness and equity. That rationale is important, but the central finding of these studies — that a higher minimum wage can boost work force productivity and save lives — is a powerful one, too.

She should have pointed out, especially since she’s a bona fide economics professor at Northwestern University, that one main reason an increase in the minimum wage boosts work force productivity is that it causes employers to lay off, or not replace, the least productive workers, those whose productivity is worth less than the new higher minimum wage. To take an extreme example, if the minimum wage were raised to $15 an hour, as many people now propose, work force productivity would increase and well over one million people would likely lose their jobs.

HT2 Cyril Morong.

For the minimum wage entry in The Concise Encyclopedia of Economics, see Linda Gorman, “Minimum Wages.”

For a relatively recent review of the literature on minimum wages, see Robert P. Murphy, “Large Increases in Minimum Wages Are Likely to Destroy Jobs,” Econlib Feature Article, October 2015.

David Henderson
David Henderson is a British economist. He was the Head of the Economics and Statistics Department at the OECD in 1984–1992. Before that he worked as an academic economist in Britain, first at Oxford (Fellow of Lincoln College) and later at University College London (Professor of Economics, 1975–1983); as a British civil servant (first as an Economic Advisor in HM Treasury, and later as Chief Economist in the Ministry of Aviation); and as a staff member of the World Bank (1969–1975). In 1985 he gave the BBC Reith Lectures, which were published in the book Innocence and Design: The Influence of Economic Ideas on Policy (Blackwell, 1986).

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