The Economist Employment Down, Productivity Up
The Economist Employment Down, Productivity Up
The Economist Employment Down, Productivity Up
Buttonwood’s notebook
Minimum wages
Employment down, productivity up?
Most studies show a higher minimum wage leads to a fall in employment but the
(http://www.economist.com/news/finance-and-economics/21651897-replacing-
governments grapple with the rise in inequality over recent decades. Britain
introduces a "living wage"* of £7.20 an hour today (around $10.30) for those aged
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8/15/2017 Employment down, productivity up?
wage/) , phased in over seven years (the federal minimum wage is currently $7.25
Economists have been grappling for decades with whether (and by how much) a
(http://wol.iza.org/articles/employment-effects-of-minimum-wages) of the
University of California (on the very useful IZA World of Labor's website)
summarizes the literature. Most studies show there is an impact with a 10% rise in
the minimum wage causing around a 2% drop in employment for affected workers
(normally the young and low-skilled). This is not the same as saying that overall
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workers don't all belong to low-income
poverty line (or approximately $63,000 in 2008 for a family of four) or higher.
Thus, if the benefits of the minimum wage were spread equally across all
households, and nearly half would go to households in the top half of the
adding that
“ Another reason minimum wages may fail to help low-income families is that
many low income families have no workers. Of families whose head was below
age 65 in 2010, 52% of families below the poverty line had no labour income,
Still there are other potential impacts of higher minimum wages; one is higher
productivity (http://www.bloomberg.com/news/articles/2016-03-31/cameron-wage-
(http://www.economist.com/news/ britain/21631137-more-companies-find-paying-
rates reduced, and productivity improved. It is hard to disentangle cause and effect
here; are better-paid staff better motivated or are employers forced to become more
This issue is also very topical because of the apparent slowness of productivity
(http://www.economist.com/news/special-report/21621237-digital-revolution-has-
the sluggishness of wage growth; labour is so cheap that employers have less
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8/15/2017 Employment down, productivity up?
Over time, one would expect higher productivity to lead to higher wages. Robert
Gordon's monumental economic history "The Rise and Fall of American Growth"
points out that the US experienced a "great leap forward" in productivity growth
between 1928 and 1950, despite the Great Depression. In the second half of this
period, there was a very big increase in real wages per hour. Some of this may be
down to a tendency to substitute capital for labour; some of it may be down to the
forced American business to get more innovative during the Second World War to
churn out the armaments that America needed; those lessons were then carried
hypothetical scenario of economic growth after 1939 that does not include the
Since we can hardly hope for a war, might there be other positive impacts? Higher
minimum wages could stimulate the economy and boost wages, for example. Or if
employers focus on high-skilled workers in the short term, that could boost
productivity and the economy in the long term, eventually providing jobs for the
low skilled.
University, is not encouraging on this score. He does find evidence that higher
But
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“control” regions.”
It would be nice to think that a higher minimum wage had very positive
good news for those workers who receive it, and the legislation may discourage the
that politicians are tempted by the idea; it is a policy with no revenue implications
for the government, just for the private sector. Indeed, in the July 2015 Budget
(http://www.economist.com/news/ britain/21657412-george-osborne-well-way-
good news of a higher minimum wage to offset the bad news of benefit cuts. The
that those who lose from the second won't necessarily gain from the first
Our scenario suggests that only around 13% (£150 per year) of the losses due to
tax and benefit changes (£1,090 per year) of all working age households
When it comes to helping the poor, the issues are much more complex than simple
* This is a renamed version of the minimum wage. Prior to the May 2015 election,
the Labour party was campaigning for a "living wage" and the Conservatives neatly
Next
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