But there’s another area of contention that gets less attention: how raising the minimum wage might affect worker productivity.
“The average person would imagine that when wages go up, including the minimum wage, workers would be more committed to their employer and could become more productive because they care more about keeping their jobs,” he says. Nikola Persiko, Kellogg professor of managerial economics and decision sciences. This could be a win for both employees and employers.
The problem is that economists don’t know much about the effects of a higher wage on productivity. There just hasn’t been much research on the question, in part due to a lack of relevant data.
“There is very limited evidence on the effect of the minimum wage on individual workers,” he says Erika Deserrano, associate professor of managerial economics and decision science at Kellogg. “A lot of research is about general trends like whether the minimum wage results in more people being employed, but there is very little about what actually happens to those workers. Do they work longer? Do they work less?’
In order to investigate this question, Kellogg researchers, along with co Decio Coviello at HEC Montreal, they were able to secure a huge dataset on employee productivity from a major retailer in the US. Importantly, the retailer has stores in areas both with and without higher mandatory minimum wages, allowing researchers to compare worker productivity across stores.
The study finds that while a higher wage improved individual worker productivity overall, the effect was not evenly distributed across workers or locations. Additionally, store profits tended to decline with higher wages.
However, the researchers suggest that a higher salary is worth considering. “It pays in part because you get employees who are more productive and more attached to the business,” says Deserranno.
A natural experiment
To study the impact of a higher minimum wage on productivity, the researchers took advantage of the fact that different cities, counties, and states implemented different minimum wage laws at different times. This makes it possible to compare productivity in stores on one side of the jurisdictional border with productivity in stores on the other side.
“We can compare these two stores that are very close geographically and therefore probably similar in every way except for the minimum wage change,” says Persico. “It provides a physical experiment.”
The largest US retailer they study operates over 2,000 stores in all 50 states, employing over 40,000 salespeople. They analyzed data from February 2012 to June 2015, which saw more than 70 state and local minimum wage increases. The researchers were interested in how the productivity of individual workers, as measured by the value of the sales they made, varied between locations.
Importantly, the workers studied were not paid a fixed salary, but based in part on performance. They earned a base rate of pay that varied by location, averaging $6.12/hour across all stores, with commission-based compensation in addition to incentivize productivity, such as increasing sales on higher-margin products or selling product warranties and other optional items. In other words, while wages varied by worker based on performance, all workers in a given region had to earn at least the minimum rate for that region. For the company, this meant that it had to “stretch” the weekly compensation of any worker whose pay fell below that minimum.
This could have two very different effects on workers. “If you’re an employee who’s not that good at sales, a higher minimum wage can actually give you an incentive to work less because you’re going to get a raise no matter what,” Deserranno says.
At the same time, higher guaranteed compensation could make workers more attached to their jobs, especially if employment options outside their current workplace are limited. “The increased salary can provide a kind of insurance for workers’ compensation, and if they lose that job, they lose that insurance,” Deserranno says. “So maybe they’re more productive now because they don’t want to get fired. This makes them more attached to the employer.”
The researchers analyzed productivity, along with other data from the retail store, such as store profits, the number of supervisors in the store and employee turnover.
Greater productivity, but . . .
In general, the study found that a higher minimum wage led to higher productivity. “Employees work harder per hour,” says Persico. “They sell more goods”—about 4.5 percent more to all workers.
And most importantly, this sales boost really seemed to be in response to an upward effort by employees. The researchers were able to use satellite photos of parking lots to determine that stores did not see additional traffic after the minimum wage increase, suggesting that an increase in local demand was not to blame.
However, the measures for companies and policy makers are not simple.
First, the results were largely driven by lower performing workers whose productivity increased. “We didn’t see much happening for workers who were already well above the minimum wage [due to their commissions]” says Deserranno. For example, while a $1 increase in the minimum wage improved the productivity of low performers by 22.6 percent, it had no appreciable effect on high performers.
Furthermore, the relationship between salary and productivity is only observed in stores with more supervisors to monitor workers. In the presence of a higher minimum wage, high attendance led to 6.6% higher productivity among workers, while low attendance led to a 9.4% decrease in productivity.
“If you’re in a shop where there’s very little monitoring and where low effort doesn’t necessarily get you fired, a higher minimum wage actually reduces productivity,” Deserranno says. After all, why bother if no one is following you and you’re guaranteed a certain payout amount? “But in stores where you can get caught, people work harder because they don’t want to lose their jobs.”
Another twist is that increased productivity does not necessarily mean greater profits, especially in the short term. Across all stores, a $1 increase in the minimum wage reduced hourly earnings by 16%. This explains why many businesses are reluctant to raise wages – they believe, rightfully so, that it will erode their profit margins.
However, the researchers argue that higher minimum compensation likely leads to some long-term economic benefits for businesses. Specifically, they found that higher wages lead to lower turnover for lower-performing workers, with 19% fewer layoffs among this group.
“Lower turnover is good because leaving employees at any level of performance has a cost to businesses,” says Persico. The study didn’t estimate the potential value of reduced turnover, so it’s hard to say whether it’s enough to offset lower profits, but it remains a possibility.
A policy worth considering
So how should employers and policymakers interpret these findings?
In some cases—particularly when the long-term value of retention outweighs any profit loss from a higher wage—a higher minimum wage can be a boon for workers and companies.
“Raising the minimum wage is a cost to businesses, but it works well as long as outside employment options are not great and if there is good monitoring of workers within the business,” says Deserranno. “Productivity goes up and departures go down.”
Persico adds, “A higher minimum wage creates greater attachment of workers to employers, greater stickiness. This is good policy-wise, because in the United States, when people lose their jobs, they often lose their health benefits, which creates other costs for individuals and society. So you want to keep them in their jobs.”
In the future, the researchers hope to continue their research on employee productivity by working with more companies.
“We can do a lot of things with this kind of data, including measuring what makes a worker more productive or what makes managers more effective. We have many statistical methods to do this and we invite companies with HR data to share to come to us for this kind of collaboration. Business knowledge can be very valuable.”