+

Cookies on the Business Insider India website

Business Insider India has updated its Privacy and Cookie policy. We use cookies to ensure that we give you the better experience on our website. If you continue without changing your settings, we\'ll assume that you are happy to receive all cookies on the Business Insider India website. However, you can change your cookie setting at any time by clicking on our Cookie Policy at any time. You can also see our Privacy Policy.

Close
HomeQuizzoneWhatsappShare Flash Reads
 

A 2011 Study Exploded One Of The Biggest Fears About Raising The Minimum Wage

Feb 14, 2013, 23:34 IST

President Obama proposed increasing the minimum wage to $9.00 from the current level of $7.25 during his annual State of the Union address.

Advertisement

Right now, proponents and opponents are duking it out over what possible effect this would have on the economy and for workers.

The main confusion comes with the dissonance between what "should" happen to the labor market when the minimum wage goes up and what does historically happen.

In the abstract, increasing the price floor of labor should result in wage cuts. However, that hasn't historically been the case. Historically managers will cut other expenses in order to compensate for an increase in the minimum labor cost and the increased minimum wage functions as a form of stimulus. Given the controversial nature of fluctuations in the minimum wage — billions of dollars hang in the balance for all parties involved — it's going to be a very tough fight.

Still, a November 2011 study from Barry Hirsch and Bruce Kaufman of Georgia State University and Tetyana Zelenska sheds light on how businesses respond to increases in labor costs, and the results were surprising.

Advertisement

The group surveyed managers of fast food restaurants in Georgia and Alabama as they contended with three annual increases in the federal minimum wage between July 2007 and July 2009.

They asked the managers if they were taking any steps to offset increases labor costs.

Here is what managers did with regards to human resources:

Minimum Wage Channels of Adjustment

Notice that only 8 percent of managers surveyed thought that firing current employees was at all important to make up for lost wages.

Advertisement

Indeed, raising the minimum wage allowed management to extract more performance from current employees in more than half of all cases.

Higher labor costs weren't only offset from cuts to total labor cost, either. Management also took several steps to increase efficiency and productivity to compensate for the higher costs:

They also tapped into other costs to cut:

Minimum Wage Channels of Adjustment

Advertisement

This far from settles the fight over raising the minimum wage, but does address concerns that a rise in the minimum wage would lead to across the board job losses.

(h/t) Modeled Behavior for the study

You are subscribed to notifications!
Looks like you've blocked notifications!
Next Article