Thompson Rivers University

Raising minimum wage boosts productivity, study finds

  Posted on: February 22, 2022

Dr. Meng Sun

New research from School of Business and Economics (SoBE) faculty member Dr. Meng Sun challenges economic models that suggest a higher minimum wage will harm the economy.

In June 2021, BC raised its minimum wage to $15.20 an hour. The province now has the second-highest minimum wage in the country, and estimates that 400,000 workers have seen the benefit of incremental increases introduced in 2018.

BC first implemented a minimum wage in 1918. And for almost as long, debates have raged over whether a minimum wage is effective economic policy, or whether it raises inflation and unemployment. Just last year, the United States voted against raising its federal minimum wage of $7.25, set in 2009.

“A minimum wage has been a core element of public policy for more than a century. More than 100 countries have a minimum wage to protect workers for a low wage. But there is much less agreement about whether this minimum wage is effective,” says TRU Economics Professor Dr. Meng Sun. “The prediction from the model used in almost every introductory economics textbook suggests that increasing the minimum wage will destroy jobs.”

Sun’s new paper, Effects of minimum wage on workers’ on-the-job effort and labor market outcomes, challenges this prediction.

“Since the ’90s, many empirical studies have shown that a higher minimum wage has little to no impact on employment. We wanted to see if there is a new channel to explore.”

Sun and his co-author, Naibao Zhao, were interested in determining whether a higher minimum wage contributes to higher productivity—if people who are paid more put in more effort. The difficulty lies in part with determining how to measure a worker’s effort. Does effort increase if they send more emails or complete more sales? And are they working harder because they are being paid more, or to avoid being laid off in a more competitive labour market?

Sun and Zhao made a model to explicitly calibrate effort by adapting a job-search model developed at the University of Calgary for their own research. They found that a higher minimum wage does motivate workers to be more productive, which moderates the cost of higher wages and leads to a stronger labour pool overall. It also creates a spillover effect: when the lowest-paid workers are paid more, the pay of other workers climbs as well.

While this research challenges the assumptions about the effects of a higher minimum wage, Sun believes there are additional aspects worth exploring. One, that a higher minimum wage is often an ineffective tool at reducing poverty, as most minimum wage earners don’t live in low-income households. And second, most discussions about minimum wage focus on short-term impacts when long-term effects may reveal additional insights.

“If a higher minimum wage can help younger workers worry less about their financial situation, it may help them pay for school or move to a different job and consider other career opportunities,” says Sun.

Contact:
Dr. Meng Sun
msun@tru.ca