As the last post showed, most of the data shows that hiking the minimum wage doesn’t kill jobs. But why? Researcher Jon Schmitt has a great little report that lays out what we know. The bottom line:
The strongest evidence suggests that the most important channels of adjustment are: reductions in labor turnover; improvements in organizational efficiency; reductions in wages of higher earners (“wage compression”); and small price increases.
This isn’t too surprising. When folks usually talk about the minimum-wage, they’ve got a simpleminded Econ 101 way of thinking about it: the cost of labor goes up, so employers hire fewer workers. But in the real world, it’s a different story.
The most likely reason for this outcome is that the cost shock of the minimum wage is small relative to most firms’ overall costs and only modest relative to the wages paid to low-wage workers. In the traditional discussion of the minimum wage, economists have focused on how these costs affect employment outcomes, but employers have many other channels of adjustment. Employers can reduce hours, non-wage benefits, or training. Employers can also shift the composition toward higher skilled workers, cut pay to more highly paid workers, take action to increase worker productivity (from reorganizing production to increasing training), increase prices to consumers, or simply accept a smaller profit margin. Workers may also respond to the higher wage by working harder on the job. But, probably the most important channel of adjustment is through reductions in labor turnover, which yield significant cost savings to employers.
What I found most interesting about his summary of the evidence is that there just isn’t a whole lot of it. Researchers haven’t dug deep to get hard data on what’s happening. An example from Schmitt:
Little direct evidence exists on operational and human resource efficiencies as a channel of adjustment. Hirsch, Kaufman, and Zelenska’s study of the impact of the federal minimum-wage increase on 81 fast-food restaurants in Georgia and Alabama, however, asked fast-food managers specifically about scope for efficiency improvements in response to the minimum-wage rise. About 90 percent of managers indicated that they planned to respond to the minimum-wage increase with increased performance standards such as “requiring a better attendance and on-time record, faster and more proficient performance of job duties, taking on additional tasks, and faster termination of poor performers.”68 Roughly the same share of managers said that they sought to “boost morale” by presenting the minimum-wage increase as a “challenge to the store” and using this as a way “to energize employees to improve productivity” Based on their interviews with store managers, Hirsch, Kaufman, and Zelenska suggest that a minimum-wage increase may function as a “catalyst or shock that forces managers to step out of the daily routine and think about where cost savings can occur.”
This example also reminds us of just how fragile the Econ 101 way of looking at the world is. In Econ 101, everyone is rational, has infinite knowledge, and is always doing everything they can to cut costs. In the real world, most managers are just trying to keep their heads above water, so raising the minimum wage may end up getting them to find new ways to reduce costs that they otherwise wouldn’t have taken the time to explore. But how much is this actually happening? We need more work to come up with real answers.