Minimum Wage and Job Retention
In another interesting presentation on research in progress at the StatsCan conference, David Green and Pierre Brochu report that increases in minimum wages in Canada are associated with significantly longer job tenure for less educated, low job tenure workers – at least for the short-term period following the minimum wage increase.
One possible implication is that employers benefit from higher minimum wages in the form of reduced recrutiment and training costs, and having access to more experienced workers.
And then there is efficiency wage theory. But seriously, is this finding independent of the unemployment rate for said group of workers?
The neoclassical response, I imagine, would be that employers already account for the benefits of retention in setting wages. To the extent that retention benefits exceed wage costs, employers would voluntarily offer higher wages.
Therefore, it could be a stretch to argue that low-wage employers benefit from higher minimum wages. However, one could legitimately contend that increased retention benefits offset some portion of the increased wage cost.
Yah but we do not live in a neoclassical universe.
The expression “penny wise pound stupid” is as good a behavioral axiom to characterize the mindset of petty proprietors as I can think of.
It falls to the neoclassicals to prove that minimum wage employers make such a reasoned calculation.
Even among professional employers workers do not get offered a retention salary until they show up with a counter party offer. And these employers have HRM departments well versed in New-Classical/New Keynesian cum neolclassical wage theory.
Employers tend to pay what they can get away with relative to the established norm in the sector. In the minimum wage sector I assure you there is little to no accounting for the benefits of retention in setting wages. Not because they are irrational but because they tend to be penny wise and pound stupid.
I agree with Travis and dimly recall Richard Freeman contending that indeed low wage employers can and do set the wage at a level which is too low even from their own self-interest. If this were not so, it is a bit hard to explain the very small negative impacts of minimum wage increases on employment.
Erin you seem like you might be able to walk me through an explanation of how efficiency wages can cause unemployment. Perhaps you could email off list and we could have discussion via email. My problem is this. If employers pay higher wages to elicit higher effort/lower turnover costs and this raises the productivity of the firm how can the so called wage premium be the cause of unemployment? The only answer I can come up with is that EWs are premium on top of the average but then that average would have to be composed of efficiency wages and therefor be higher than the marginal performance gain warranted. Why would firms pay this premium?