Higher Wages for Low-Income Workers Lead to Higher Productivity

Source: Justin Wolfers and Jan Zilinsky, Peter G. Peterson Institute for International Economics, RealTime Economic Issues Watch, January 13th, 2015

Under what circumstances can raising the pay of low-skilled workers at large corporations lead to general improvements in productivity? Last month, Aetna informed the Institute of its plan to raise wages of its lower-paid workers. With this natural experiment in mind, Justin Wolfers and Jan Zilinsky decided to explore literature and theory on how pay increases influence productivity. The following note summarizes their findings for major private-sector companies in the United States in general (and does not address the implications for Aetna itself or for any specific company or sector).

Economists have long argued that increases in worker pay can lead to improvements in productivity—indeed, that it can actually be profitable to pay workers higher wages. As Alfred Marshall, the father of modern economics, argued almost 125 years ago, “any change in the distribution of wealth which gives more to the wage receivers and less to the capitalists is likely, other things being equal, to hasten the increase of material production.” Since then, economists have compiled rich data validating Marshall’s hypothesis that paying higher wages generates savings:
Higher wages motivate employees to work harder. ….
Higher wages attract more capable and productive workers ….
Higher wages lead to lower turnover, reducing the costs of hiring and training new workers. ….
Higher wages enhance quality and customer service. ….
Higher wages reduce disciplinary problems and absenteeism. ….
Firms with higher wages need to devote fewer resources to monitoring. ….
Workers excessively concerned about income security perform less well at work. ….
Other mechanisms by which higher wages can yield offsetting benefits include:
– Higher wages are associated with better health—less illness and more stamina, which enhance worker productivity.
– Greater job satisfaction can result in less conflict between employers and labor groups.
– Enhanced reputation with consumers (compare the reputations of Costco and Walmart). …..
Effect of Large Corporations Raising Wages of Low-Paid Workers
Source: Tomas Hellebrandt, Peter G. Peterson Institute for International Economics, RealTime Economic Issues Watch, January 13th, 2015