Minimum Wages Raise Productivity

The 2007 OECD Employment Outlook incorporates a study (Chapter 3) finding that higher minimum wages raise productivity. In fact, a sophisticated quantitiative study finds that an increase of 10 percentage points in the ratio of the minimum wage to the median hourly wage raises the level of labour productivity in the long-run by between 1.7 and 2.0 percentage points.  One possible explanatation cited is that higher minimum wages simply induce employers to hire more skilled workers – though this would presumably only be a major factor in countries with high unemployment. Another explanation provided is that higher minimum wages raise productivity by inducing firms to invest more in the skills of lower skilled workers.  Other studies have drawn attention to an increased incentive for employers to raise capital investment in low wage sectors, and also to reduced worker turnover in low wage sectors.

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