Recently there has been a lot of talk about increasing the minimum wage in the U.S. Much of this debate has centered around the potential economic effects of such a raise. One side argues that increasing the minimum wage will decrease the number of jobs available as employers are forced to cut costs to afford new higher wages. On the other side advocates suggest that past wage hikes have not adversely affected employment.
I am not an economist, so it is not my intention to debate the potential economic fallout of the raising the minimum wage. What I am interested in discussing (and what I think is not getting enough attention) is the potential behavioral effects of increasing the minimum wage.
Some people have suggested that increases in the minimum wage will increase productivity in organizations, and cite several studies that support this assertion. However none of these studies are carefully controlled enough to be able to reliably say higher wages cause increases in productivity.
Another study cited as evidence showed the massive decrease in turnover at SFO after substantial increase in their minimum wage paid. However, a closer analysis of the study reveals that the wage changes coincided with a number of other changes including increased health benefits, changes in hiring practices and a nearly 5 fold increase in required training.
The point is that in none of these studies is a true causal relationship between wage pay and productivity established. High pay may be associated with better performance, but in industries where a company has the option to pay the minimum wage but does not it is also likely associated with better management practices, a much larger driver of on the job performance.
It is not surprising that these studies cannot establish a clear causal link between wage pay and performance, because the research literature suggests that such a link does not exist.
In one study reviewed in the Harvard Business Review researchers found that workers who were paid the standard wage of $3 per hour were just as productive as those who were paid a higher wage of $4 per hour (for the participants in this study $3 per hour represented an average hourly wage for the type of work examined). The authors found that a third group did perform better when they were promised $3 per hour, but were told that they would actually earn $4 right before the work began. This sort of “gift” caused workers to increase productivity for the single 4-hour session examined, but the study did not assess the extent to which this boost maintained over time, which is the outcome of greatest importance.
In a thorough review of the research literature surrounding monetary incentives Bucklin and Dickinson (2001) found that the biggest determinant of performance is the direct relationship between pay and performance. As little as 3% in incentive pay was shown to be enough to significantly (both statistically and practically) affect productivity.
Participants in most every study reviewed who were able to earn some percentage of their pay as performance contingent pay consistently performed better than those paid a flat hourly wage.
Taken together the results of these research studies suggest that an increase in the minimum wage alone will likely have little impact on productivity.
Some of the research into “gift” payments suggest that we may expect to see a temporary boost in performance, however it is unlikely that boost will maintain for a long period of time, as there is no link between actual productivity and effort. If increased productivity in the American workforce is what we are interested in then we should seriously considering building into the minimum wage plan an easy way for companies to make part of this pay variable.
The research suggests that as little as 3% of total pay (that is just about $0.30 per hour at the rate under consideration, $10.10 per hour) can have a substantial impact on performance. Logistical considerations aside, in such a system employers could be reasonably well assured that they will see a benefit from this legislation as well, which may help to alleviate fears of forced layoffs from increased expenses associated with a wage increase.
Again, my point here is not to argue the economic impact of increasing the federal minimum wage, nor is my point to discuss the potential effects on turnover associated with earning a living wage. Both those topics are for people much smarter than me to debate. What I can say is that we can expect little to no long term increase in on the job productivity associated with simply raising the minimum wage, based on the available research data. If that is in fact what we are interested in, then I would suggest a dialogue on embedding performance based pay into an increase in the federal minimum wage.