Efficiency and the Minimum Wage

One of the bloggers at The Economist has some comments on the argument that a higher minimum wage will cause minimum-wage workers to work harder, thus mitigating or eliminating the adverse effects on employment:

There is another way in which the higher minimum wage could produce higher productivity. The efficiency wage theory predicts that if unemployment increases, workers will try harder because it would be difficult to find another job. But this seems a rather mean way for policymakers to increase hourly labour output.

I'd had the same thought. The argument is that raising the minimum wage will not reduce employment because it causes workers to work harder to keep their jobs and therefore become more productive. This strikes me as self-defeating, in that it relies on the assumption that increasing the minimum wage really will reduce employment. If it's easy to find another job, then losing your current minimum-wage job isn't a big deal. I suppose one could argue that it's already hard to find a minimum-wage job, and that a higher minimum wage increases the opportunity cost of unemployment. But this has not been my experience in the past---my college job-hunts were always short, and usually yielded jobs paying above minimum wage (the one exception being my public-sector job at the college library).

Another problem with this argument is that it assumes incompetence on the part of employers. If raising wages pays for itself by increasing productivity, then why isn't everyone doing it already? In fact, the benefits from being the only employer to raise wages are substantially greater than the benefits of raising wages along with all other employers. Aside from allowing employers to cherry-pick employees, paying a premium also encourages employees to work harder. If employers would benefit from a higher minimum wage, then why are they currently turning down the opportunity to gain a competitive advantage by raising wages unilaterally?

Share this