Does the Minimum Wage Increase Worker Productivity?

Does the Minimum Wage Increase Worker Productivity?

Antony Davies | Jul 28, 2014

The Department of Labor (DOL) recently proposed a regulation establishing a higher minimum wage for federal contractors. The stated goal of the proposed rule is to increase efficiency and lower costs in work performed by federal contractors. In its justification for the rule, the DOL cites numerous studies to support its claim that higher wages are associated with higher levels of worker productivity, but the agency gets the causality reversed, among other errors of interpretation.

Workers who are more productive command higher wages because employers compete for these valuable workers by offering them higher wages; higher productivity causes a higher wage. Raising the minimum wage makes workers more expensive. It does not necessarily make workers more productive.

This chart shows the relationship between the relative minimum wage (the minimum wage as a fraction of the average hourly wage) and unemployment rates for workers with different educational attainments. Historically, as the relative minimum wage has risen, unemployment among college-educated workers has not changed, unemployment among high-school-educated workers has risen slightly, unemployment among workers without high school diplomas has increased moderately, and unemployment among young workers without high school diplomas has increased dramatically. 

While employers make hiring decisions on the basis of more than education, it tends to be highly correlated with many of the factors employers consider, including intelligence, experience, training, and work ethic. Ultimately, all of these factors are themselves proxies for the single factor that concerns the employer: productivity.

If it were true that a higher wage increased productivity and the value of the increased productivity exceeded the cost of the increased wage, we would observe federal contractors voluntarily raising wage rates. The absence of such an increase in wages for the lowest-paid workers suggests that raising the minimum wage is unlikely to secure the gains in efficiency or productivity presented as justification for this rule.

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