No, Fewer Turnovers Won’t Prevent Minimum Wage Layoffs

By: Colin Combs

On July 5th, Jared Bernstein wrote for the Washington Post that “No, raising the minimum wage doesn’t lead to layoffs”. He then proceeded to immediately contradict that statement by moving his goalpost over to saying that minimum wage layoffs are only “moderate”. The rest of the article can be summed up by saying that he doesn't believe minimum wage laws cause much unemployment because of the “efficiency wage theory”, which essentially argues that

“some employers will pay more than they have to based on the ‘you-get-what-you-pay-for’ principle: Paying above the minimum inspires effort above the minimum, and that translates into higher productivity, which absorbs the higher labor cost.”

Therefore, Bernstein argues, higher minimum wage laws are actually good for businesses, even though it puts wages above the market-clearing price, because they will have better employees and fewer turnovers.

There is certainly merit to the idea of higher wages inspiring better work and loyalty. Bernstein even gives us “a number of fast-food joints” as empirical examples of places that pay above the minimum wage to cut down on turnover costs.  Similar examples can be seen throughout history. Henry Ford, for example, is famous for paying $5 per day (quite high at the time) to prevent  his skilled workers from leaving for more attractive jobs and not as it is so commonly claimed so that his workers would have "enough to buy back the product”. So what's the problem here?

The main flaw here is that Bernstein is implicitly assuming that if these gains are actually possible, businesses won't take them voluntarily, and therefore must be forced to by law. But what business would not jump at the chance to increase production while decreasing costs?

There is no reason to assume that businesses haven’t already taken advantage of the “efficiency wage theory”, in fact Bernstein provides plenty of evidence that they have. But if that's true, then the only reason we can expect businesses to consistently refuse to take advantage of such "efficiency wages" is because doing so would cause them to lose profits, thus losing the ability to pay higher wages or create more jobs in the future. So Bernstein’s whole attempt at saving the minimum wage law is fallacious, since he's appealing to advantages of higher wages that simply aren't there.

No matter how much “happier” an employee is with a higher wage, he will not produce enough cheeseburgers to enable a fast food restaurant that pays its staff $100 an hour to keep the restaurant open, and presumably the worker would prefer to not have his employer go out of business. Finding at what point a business does get what is pays for is precisely what markets are best at doing. Imposing a minimum wage law can only hamper that process, leading to a poorer and unemployed society. Economic law is not something so easily dodged.

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