Bailout

The minimum wage and productivity

By Felix Salmon

Cardiff Garcia pushes back a little at my contention that raising the minimum wage might help the problems of unemployment, underemployment, and bad employment:

How do we know that with a higher minimum wage, employers will “compete on who has the best employees” and “invest significantly in those employees”?

It seems just as possible that employers would react by doing one of the following, or some combination thereof:

• Hiring fewer workers and asking existing workers to do more (a tactic employers are more likely to get away with in an environment of sustained unemployment)

• Investing more in capital (whose price relative to labor obviously declines as the minimum wage increases) to help the company do the same work with fewer people

• Simply continuing to compete on price, even if the prices will be higher across the board as the increased minimum wage affects all employers in the same industry…

I’ve never seen the argument that employers react to higher minimum wages by increasing their investment in human capital.

To Cardiff’s last point first: pretty much by definition, an increase in the minimum wage forces an increase in employers’ investment in human capital. And my point is, at heart, the idea that the more employers spend on human capital, the more they think about it as an investment, as opposed to merely an expense.

To Cardiff’s other points, yes, it’s entirely possible that employers will hire fewer workers to do the same job, if those workers become more expensive. That’s called improving labor productivity, and it’s a good thing, especially when labor is rewarded for its improved productivity in the form of higher wages. Going back to Rich Florida’s original point, America doesn’t just need more jobs, it needs better jobs — especially in the service sector. And in the long term, more productive companies are more successful, and grow more, and end up hiring more people. Higher-productivity jobs are precisely the ones we most want to create.

Finally, Cardiff seems to worry that an increase in the minimum wage would cause price inflation. We should be so lucky. Right now, a bit of wage-driven inflation is exactly what the doctor is ordering. I just don’t see it happening, unfortunately.

Full post as published by Macroprudential on July 12, 2010 (boomark / email).