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Research Summary

Minimum wages create opportunities for good jobs and better business productivity

Joe Peck February 13, 2024
Source: Journal of Law and Political Economy, 3(1) Title: Turnover, Prices, and Reallocation: Why Minimum Wages Raise the Incomes of Low-Wage Workers Author(s): Ben Zipperer Original Publication Date: 2022 Read Full Research Article

Around one million workers in the United States earn at or below the federal minimum wage, which has remained at $7.25 an hour since 2009. In recent years—and in light of inaction by the federal government—a rising number of states and localities are acting on their own. As of the end of 2023, 30 states, 48 localities, and Washington, DC have adopted their own minimum wages above the federal rate.

Critics of minimum wages highlight the theoretically negative impact of minimum wages on company profits and the tendency to raise prices, which in turn damage the employment prospects and purchasing power of low-wage workers. This argument alleges that wage floors can damage the prospects of low-wage workers even as they aim to help them.

A recent paper by Ben Zipperer, an economist at the Economic Policy Institute, on minimum wages tries to unravel their exact implications for workers and presents a far rosier, if more nuanced, picture than the critical view above provides. There are three primary avenues through which minimum wages can improve labor market conditions and businesses’ bottom lines, contrary to the arguments against them: reducing the rate at which workers move in and out of jobs; raising prices and wages in a more egalitarian and business-friendly way than critics often admit; and moving workers into better-paid jobs.

Key findings
  • Generally, low-wage workers shift in and out of jobs at a higher rate than higher-wage workers. Up to 10 percent of workers gain new jobs or become unemployed every month, and more than 20 percent change their employment statuses in these two ways every three months. This is because when wages are low, workers are more likely to seek out and switch to new, better-paying jobs.
  • Employee turnover declines as minimum wages rise. One indirect effect of raising the minimum wage is that employees stay on with companies for longer, reducing the need for new employees to be hired as frequently. Lower employee turnover rates can increase the productivity of firms because more experienced workers stay on for longer. Lower turnover rates also reduce the costs associated with the hiring process, saving money.
  • Prices rise following increases in the minimum wage. This effect is particularly strong within sectors that employ a large share of low-wage workers, such as in food service and retail.
  • Yet these price rises are often smaller than the rise in wages, benefiting the lowest-paid workers who are earning more as they may face slightly higher costs. Increases in wages for households in the lowest 10 percent income group are 10 times larger than increases in prices.
  • Minimum wages also allow prices to rise consistently so that low-wage establishments are on equal ground. Increases in the minimum wage raise the prices of all low-wage establishments simultaneously. Without such an increase, an individual business—say, a restaurant—would be unwilling to increase pay if another, similar one would have relatively lower prices as a result. Increases in the minimum wage avoid this problem by raising wages for all low-wage workers employed by all firms. This is important as the majority of low-wage workers are within nontradable sectors where prices more likely to rise alongside wage costs.
  • Minimum wage increases benefit higher-productivity firms. While low-productivity firms might see costs increase so much as to be unsustainable, more efficient firms might boost their employment, as higher wages allow them to find and keep workers. In short, minimum wages shift employment to higher-productivity firms.
  • Workers moving into higher-productivity firms can increase the number of good jobs. Shifts in employment from low- to high-productivity firms means that low-wage workers gain higher-quality jobs. Evidence from Germany’s 15 percent minimum wage increase in 2015 showed that workers moved to higher-paying, long-term jobs at larger companies as lower-productivity companies shut down.
Policy and practice implications

WorkRise has identified the following implications for policy and practice:

Implications for policymakers

  • Tie minimum wages to inflation to ensure the prevalence of better jobs. Of the 30 states and the District of Columbia that have implemented a minimum wage, only a fraction have fixed this wage to increase when prices rise. High inflation in recent years highlights the need for laws of this kind to match the prices that workers pay for simple goods and services; otherwise, their purchasing power steadily diminishes.
  • Consider the positive impacts of raising the minimum wage on overall business productivity. Policymakers interested in maximizing productivity and growth in the US economy should consider raising the minimum wage to shift low-wage workers into better, more productive jobs.
  • Employ other solutions to protect workers from unemployment. When job losses do occur as due to increases in the minimum wage, it is important for policymakers to enact policies that can protect workers during these times, such as expanded unemployment insurance. These policies can spur increased employment and better job matching in the long run, without keeping wages low for entire sectors in the short run.

Implications for businesses and practitioners

  • Build on recent gains in worker power to demand higher minimum wages. Recent, substantial increases in state and local minimum wages can find their root in worker organizing over the past 15 years. Advocacy groups, such as the Fight for 15, have brought the attention of state and local policymakers to the economic necessity of wage increases for low-income workers. The recent rejuvenation of the worker power movement could heighten the pressure on policymakers to enact similar legislation in the coming years.
  • Raise company wages to reduce turnover costs. Given the evidence of links between higher wages, reduced employee turnover, and the resultant rise in productivity and reduction in hiring costs, companies should consider the benefits of wage increases irrespective of minimum wage policy.

Implications for researchers

  • Study novel policy changes. Differences in state minimum wages in the past allowed researchers to then assess their impacts. With the recent flurry of state and local minimum laws over the past decade, such as in Seattle and San Francisco, there are ample new and emerging new data, through which increases in the minimum wage can be studied and the lessons from these programs can be applied.

Higher minimum wages can shift low-wage US workers into good jobs and raise wages more than prices. They remain one of the best mechanisms for generating economic mobility among low-wage workers while improving many businesses’ productivity. In light of this growing body of evidence, policymakers should consider ways to implement and strengthen minimum wage policies in the future. Businesses, practitioners, and researchers, too, all have important roles to play in increasing wages for low-income workers and understanding how best these workers can contribute to stronger US business and overall economic productivity.

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