Raising the minimum wage has been a hotly debated topic for years, with politicians, business owners and economists furiously debating the issue, with conflicting views on how wage increases affect hiring and profits.
Among the differences, though, one area that has received less attention is how raising the minimum wage might affect worker productivity.
“It’s generally believed that with higher wages, including the minimum wage, workers become more attached to their employers and are likely to be more productive because they’re more likely to keep their jobs,” says Nicholas Kellogg, a professor of managerial economics and decision science. Persic said. This is a win-win for both employees and employers.
The problem is, economists don’t quite understand the impact of higher wages on productivity. Little research has been done on this question in the past, partly because of a lack of relevant data.
“There is very limited evidence on the effect of minimum wages on individual workers,” says Erica Deserrano, an associate professor of managerial economics and decision science at the Kellogg School. “There’s a lot of research looking at general trends, such as whether the minimum wage leads to increased employment, but very little research on what actually changes in those workers. Are they working more, or are they working less?”
To explore this question, Kellogg researchers teamed up with Desio Covello of HEC Montreal to obtain a massive dataset of employee productivity from a major U.S. retailer. Importantly, the retailer has stores in areas with and without the high minimum wage, which allowed the researchers to compare employee productivity between the two types of stores.
The study found that while higher wages boosted the productivity of individual employees overall, the effect was not evenly distributed across all employees or work locations. In addition, branch profitability tends to decline as wages increase.
Still, the researchers argue that higher wages are worth considering. “It’s worth it in part because you get employees who are more productive and attached to the company,” De Serrano said.
natural experiment
To study the effect of higher minimum wages on productivity, the researchers used the fact that different cities, counties, and states implemented different minimum wage laws at different times, so that they could compare the results of stores on one side of a jurisdictional boundary with those on the other. productivity for comparison.
“We were able to compare two locations that were so close together geographically that they inferred that they were similar in every way except for the minimum wage change,” Persico said. “It provides a natural experiment.”
The major U.S. retailer they studied operates more than 2,000 stores in all 50 states and employs more than 40,000 salespeople. The researchers analyzed data from February 2012 to June 2015, a period in which state and local minimum wages rose more than 70 times. The researchers focused on changes in individual employee productivity across locations, as measured by employee sales.
It is important to note that the salaries of the employees in the study were not fixed salaries, but partly performance-based. Their base salary varies by location, with the average hourly wage at a branch being $6.12, plus commission bonuses designed to incentivize productivity, such as pushing customers on higher-margin items or promoting product warranties and other options. In other words, while employees are paid different amounts based on performance, all employees in the same region must be paid at least the region’s minimum wage. For the company, this means it has to “top up” the wages of employees whose weekly pay falls below the minimum threshold.
As you can imagine, this could affect employees very differently. “If you’re a poor salesperson, a higher minimum wage might actually encourage you to work less, because you’re getting topped up to some amount anyway,” Deserrano said.
At the same time, higher guaranteed wages may make employees more attached to their jobs, especially if employment options outside their current workplace are limited. “Increased wages provide employees with a kind of compensation security that if they lose the job, the employee loses that security,” De Serrano said. “So they’re now more productive, probably because they don’t want to be fired. That mentality makes them more attached to their employer.”
The researchers analyzed productivity, along with other data from the retailer, such as store profitability, the number of store supervisors, and employee turnover rates.
More productive, but…
Broadly speaking, the study found that higher minimum wages lead to higher productivity. “Employees work harder every hour,” Persico said. “They sell more merchandise.” About 4.5 percent more merchandise was sold by all employees.
Importantly, the uptick in sales does appear to be the result of employees working harder. Using satellite photos of the store’s parking lot, the researchers determined that the store did not see more customers after the minimum wage hike, showing that the increase in sales was unrelated to increased local demand.
What these findings mean for companies and policymakers, however, is not so straightforward.
First, these effects are primarily driven by lower-performing employees, who are more productive. “Employees who were already paid above minimum wage (because of the commission) haven’t seen any change,” De Serrano said. For example, a $1 increase in the minimum wage increases the productivity of low performers by 22.6%, but has no significant effect on high performers.
Furthermore, the wage-productivity association was seen only at locations with more supervisors supervising employees. In the case of a minimum wage increase, high levels of supervision led to a 6.6 percent increase in employee productivity, while low levels of supervision resulted in a 9.4 percent decrease in productivity.
“If you’re working in a store where there’s very little oversight and indolence doesn’t necessarily lead to firing, raising the minimum wage can actually reduce productivity,” DeSerrano said. After all, why bother if there’s no supervision and you’re guaranteed a fixed salary? “But in stores where you can get caught if you slack off, workers will work harder because they don’t want to lose their jobs.”
Another counter-argument is that increased productivity does not necessarily translate to increased profits, especially in the near term. Across all stores, a $1 increase in the minimum wage reduces hourly earnings by 16%. This helps explain why many businesses are reluctant to raise wages, which they reasonably believe will eat into their profits.
Still, the researchers suggest that higher minimum wages may bring some long-term economic benefits to businesses. Specifically, they found that higher wages lowered the turnover rate among low-performing employee groups, reducing turnover by this group by 19%.
“Reduced employee turnover is a good thing because employee turnover, regardless of performance level, is a cost to the company,” Persico said. The study didn’t estimate the potential value of reduced employee turnover, so it’s hard to say whether it would be enough to offset lower profitability, but the possibility persists.
Policies Worth Considering
So how should employers and policymakers interpret these findings?
In some cases, a higher minimum wage may benefit both workers and firms, especially if the long-term value of retaining workers can offset any loss of profitability from higher wages.
“Increasing the minimum wage is a cost to business, but as long as there are few external job opportunities and effective monitoring of employees within the company, higher wages can work,” De Serrano said. “Productivity is up and at the same time turnover is down.”
Persico added: “A higher minimum wage can create greater attachment and stickiness. From a policy perspective, this is a good thing, because in the United States, when people lose their jobs, they often lose their jobs. Medicare benefits, other costs to individuals and society. So keeping people in their jobs is the best policy.”
Going forward, the researchers hope to continue their investigation of employee productivity by working with more companies.
“We can do a lot of things with this kind of data, including measuring what makes employees more productive, or what makes managers more effective. We have many statistical methods to do this, and invite people who can share human resources Companies with resource data contact us to discuss such cooperation. The business insights gained may be of great value.” (Fortune Chinese Network)
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