When I teach labor economics, students and I discuss economic theory and empirical evidence on both sides of the minimum wage debate. Several weeks ago, I enjoyed watching some of my former students discover for themselves one of the reasons many economists believe increasing the minimum wage is feasible without causing the widespread unemployment other economists fear.
Several weeks ago, I had the pleasure of observing the senior capstone presentations for our graduating Business students. Each semester, seniors in this course work in teams to manage a multi-million – sometimes billion– dollar international business using the Glo-Bus online business simulation platform. They make decisions about R&D, production, marketing, business image, and responsibilities to shareholders. The simulation draws on actual market data to give feedback on students’ performance and profits.
Coastal business students do really well in the simulation, often ranking among the top firms globally on the platform that hosts almost 30,000 students from over 200 colleges and universities in 23 different countries. And for their professors who get to see their presentations, it is a really rewarding opportunity to see our senior students showcase their professionalism while describing the successes, failures, and lessons learned from running their own business.
One theme that came up in several presentations this Spring piqued my interest. Each group talked about raising wages or employee benefits as a strategy for increasing productivity in their firms. When I asked the students about this decision and its results, each group was able to demonstrate using their firms’ realistic productivity and profit data that investing more money in employee salaries and benefits led to improved productivity and increased profits for their firms.
This was interesting to me because it is not what should happen according to economic theory. Theory says that in a competitive labor market wages are set according to the equilibrium of labor supply and labor demand, and then firms hire workers until the market wage is equal to the value of the last worker hired. This value is the product of the worker’s productivity and the price the firm receives from selling whatever the worker produced.
Key to this theory is the assumption that workers are all the same and they are all working at maximum efficiency. If this were true, increasing wages would cause a firm’s profits to decrease, since they would be paying a worker more than that worker is contributing to the firm’s revenue.
What our senior students observed in their simulation is not surprising to most students of human behavior and is one of the major arguments used in favor of increasing the minimum wage. Most of us do not work at 100% efficiency 100% of the time. The assumption that we do is fundamental to the argument that an increase in wages will cause unemployment.
What if, instead, a wage increase is a mood-lifter or an incentive that causes employees to increase productivity? Or what if employee benefits are increased to improve wellness or encourage professional development? Then, increases in employee compensation could translate to increases in employer profits rather than decreases in employment.
A 2018 article in the Harvard Business Review about Amazon’s increasing their minimum wage predicted that this would cause an increase in competition for jobs at Amazon, which would necessitate an increase in productivity among employees wishing to keep their jobs.
It had been shown in a lab experiment published a couple years earlier that an unexpected wage increase induced a sense of reciprocity among workers, which caused them to work harder for their employer.
And here at the Murphy Center, we have heard real-world anecdotes of local businesses that raised wages to attract workers during the pandemic and were rewarded with increases in employee motivation and productivity.
I think our senior Business students are onto something. Increasing wages is a tried and true strategy for increasing employee productivity and employer profit.
I am proud of the insight our students display, and I am excited to watch how Coastal Georgia graduates continue to contribute to growing our local economy.
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Dr. Melissa Trussell is a professor in the School of Business and Public Management at College of Coastal Georgia who works with the college’s Reg Murphy Center for Economic and Policy Studies. Contact her at mtrussell@ccga.edu.
Reg Murphy Center