With inflation so high during 2022, whether, and how much, to raise the minimum wage was a hot topic of conversation among politicians and policymakers the world over. Traditionally, those opposed to the minimum wage would argue that its introduction would stop employers from creating low-productivity jobs as certain workers simply don’t provide sufficient value to justify the new wage floor.
By and large, this hasn’t happened anywhere where a minimum wage has been introduced, but the debates continue around just how high they should be. One angle that seldom gets examined is what happens to minimum-wage workers when their pay is increased. Research from Kellogg aims to fill that gap.
Rising pay
Instinctively, one might assume that a rise in someone’s pay would increase their loyalty to their employer, and potentially therefore their productivity as they would be more interested in keeping their job.
Knowing for certain isn’t easy due to a paucity of data, however, so economists have tended to try and infer patterns from employment data. In other words, if unemployment went up or not. The researchers overcame this by analyzing productivity data from a U.S. retailer, which has stores in regions with various minimum wage levels, which allowed them to analyze productivity levels between stores.
The results show that the higher minimum wage did appear to improve productivity among individual workers, but interestingly, this wasn’t evenly spread across either workers or locations. What’s more, profits at the store level seemed to go down as the minimum wage went up, suggesting that the increased productivity wasn’t enough to offset the higher wage costs.
Affecting motivation
Between February 2012 and June 2015, there were over 70 increases to the minimum wage at the state and local levels, but it’s important to note that none of the workers had a set wage. Instead, they had a base rate that was augmented by commissions based on sales, especially of higher-margin products.
As a result, while earnings clearly varied depending on performance, each worker had to earn at least the minimum wage for their area. In reality, this meant that the company was topping up the pay of poor performers, but better performers weren’t really affected.
Across the board, however, the company saw a 4.5% rise in productivity with a higher minimum wage, with the researchers confident that this rise in sales was a direct result of increased effort from employees. They used satellite imagery of the parking lot of each store to determine that they received no additional footfall during the period of the wage increase, which enabled them to discard any changes in local demand.
Interestingly, the link between higher wages and higher productivity was only evident in stores with a higher number of supervisors keeping an eye on employees. Indeed, productivity rose by 6.6% in stores with more supervisors, whereas in stores with fewer supervisors it actually fell by nearly 10%.
Commercial impact
In other words, the researchers believe that if there are no real consequences of taking the higher pay and not really putting in any extra effort, then this is often what happens. When there are consequences for slacking off, however, then workers seemed to put in extra effort in order to keep their job.
The increase in the minimum wage also had an interesting impact on store profitability, with this especially pronounced in the short term. Across all stores, for every $1 the minimum wage went up, profits per hour fell by 16%. This provides a degree of support for any hesitancy businesses might feel about such increases.
Despite this negative short-term impact, the researchers believe that in the longer term, businesses do see some benefits, especially as the higher wages are linked with a lower turnover of employees, especially among the lower-performing ones. Indeed, they saw 19% fewer terminations in this group. Overall, this probably makes a higher minimum wage a good thing for businesses as well as employees.
