Does a higher minimum wage encourage firms to invest more in training their staff?
There is a great deal of debate among academics about minimum wages, the vast majority of which looks at whether a higher minimum wage increases unemployment, see Neumark and Wascher (2007) for a summary (sources are listed below). However, an often neglected question is whether a minimum wage encourages firms to invest in their staff whose productivity is below the new wage level.
An employee’s wage is often a reflection of their level of output and employees who benefit from a minimum wage increase are getting a higher wage without increasing their output levels. This means that firms need to somehow increase the productivity of their staff to reflect the new wage rate. Connelly (2002) finds that this does happen, showing that, among males, a higher minimum wage is associated with a better educated workforce. The question is how firms increase the skill level of their workforce.
Firms can achieve this through letting go of their low skilled employees and hiring higher skilled ones. This is something that is shown by Yelowitz (2005), who found that a minimum wage in Santa Fe led to the less skilled employees being replaced by higher skilled ones. Alternatively, firms can train their existing staff so that they are more productive, demonstrated by Acemoglu and Pischke (1999) who find that minimum wages did in fact induce firms to train affected workers in their study.
This last study shows that when they have the incentive, firms can train their low skilled workers to be more productive. The idea that those on minimum wage can improve their productivity shows that progression is achievable for all employees with training support from their employers. Given that we have seen increasing numbers of employees stuck on minimum wage, the potential for such progression is a very interesting area for future research.
Oliver Hicks-Pattison, Researcher, Tooley Street Research
June 2nd 2014
Sources:
Acemoglu, Daron; Pischke, Jorn-Steffen. “Minimum wages and On-the-job Training”. NBER Working Paper No. 7184. June 1999.
Connolly, Helen. 2002. “Are Low-educated Workers Disproportionately Affected by a Change in the Minimum Wage?” Unpublished paper, Northeastern University.
Neumark, David; Wascher, William. “Minimum Wages and Employment.” Discussion Paper 2570, Institute for the Study of Labour. January 2007.
Yelowitz, Aaron S. 2005. “How Did the $8.50 Citywide Minimum Wage Affect the Santa Fe Labor Market.” Employment Policies Institute, Washington, D.C.