Minimum wages generate positive productivity effects and slash the number of working poor, Australian Catholic University (ACU) and British researchers have found.
A new study challenges the common industry position that minimum wages resulted in an excessive cost burden, significant job losses and no guarantee of future productivity growth.
One of the lead authors Professor Thomas Lange, Associate Dean of Research at ACU’s Faculty of Law and Business, and collaborators at Middlesex University London and Lincoln University counter this, instead saying that wage-induced incentives and behavioural effects can have a positive impact on productivity in the low-pay economy.
Published on Monday 23 May in the British Journal of Management, ‘The UK national minimum wage’s impact on productivity’ presents evidence that the introduction of the national minimum wage in the UK has improved productivity through behavioural incentive effects. Australia already has a minimum wage, but the conclusion that people work better if they feel their efforts are recognised can also be applied to the Australian workplace.
Professor Lange said that improving the minimum wage to a “fair” or “living” wage would demonstrate governments were serious not just about an innovation boost but also about fair treatment of low-paid workers with productivity-enhancing benefits.
“We use British data, but our findings also provide powerful lessons for Australia. Calls by the Australian trade union movement for improved minimum wages to counter the development of a working poor underclass are all too often greeted by industry and policy rebuttals, with at times remarkably vocal suggestions to pour scorn on the idea. If Australia’s government is serious not just about an innovation boost, but also about fair treatment of low-paid workers with productivity-enhancing benefits, then the issue must be urgently revisited.”
The study is first of its kind that provides empirical evidence in support of minimum wage-induced productivity enhancements and embraces the UK government’s introduction of a National Living Wage in April.
The research shows that the impact will be stronger in service sectors such as retail, cleaning and security services where labour input is relatively important and in larger organisations where wage differentials are usually greater. Total factor productivity improvements of up to 11% became evident in large firms, while cleaning and security services recorded the highest productivity gains, with an increase of around 25%.
Professor Lange said the analysis showed that the introduction of the minimum wage in the UK led to improvements in total factor productivity across a variety of low-paying sectors.
“Our results support suggestions that public policy has not fully realised the potential benefits of a fair minimum wage. Managers who are focused on myopic cost-reduction strategies may not grasp potential productivity benefits.”
“The argument here is actually a fairly simple one. If individuals perceive their wages to be below their felt-fair level, they will reciprocate with reduced effort. Productivity will remain low as a consequence. Low wage, cost-reduction strategies are counter-productive if discernible productivity growth and a truly innovative economy is the ultimate goal.”
Minimum wages in Australia are $17.29 per hour or $656.90 per 38 hour per week before tax.
The UK National Living Wage has been set at £7.20 an hour ($A13.58), starting April 2016. Paid to all workers over the age of 25, it will rise to £9 ($A16.98) an hour by 2020. At the time of the announcement (July 2015), the National Minimum Wage was set at £6.50 ($A12.26) an hour.
The study models the link between total factor productivity (TFP) and the National Minimum Wage (NMW) using a structural productivity estimation approach. Previous studies relating productivity to the NMW employ a two-step analysis where in the first step productivity is estimated without controlling for the NMW’s effects and then, in a second step, the NMW’s association with the productivity measures is analysed. The productivity measures estimated in the first step are likely to suffer from omitted variable bias.
The new approach utilised in the present study explicitly models the unobserved productivity and directly incorporates the effects of the NMW into an integrated semiparametric estimation algorithm. The analysis therefore generates robust empirical evidence on the relationship between NMW’s introduction and improved productivity over time.
The British dataset under study is highly representative and includes information on detailed unconsolidated firm-level financial statements, remuneration costs, ownership structure, and location of over 360,000 UK firms for the pre-Global Financial Crisis period of 1995-2008.
Rizov, M., Croucher, R. and Lange, T. (2016). The UK national minimum wage’s impact on productivity.