The Minimum Wage is Really an Efficiency Wage

by Oren Levin-Waldman

Oren Levin -Waldman

Oren Levin-Waldman

Market Purists are steadfast in their belief that increasing the minimum wage will lead to lower employment. The standard textbook model holds that as workers lower their wage demands, employers will demand more of their services. A wage floor only prevents workers from accepting lower wages in exchange for opportunities to work. Therefore, fewer workers will be hired, with the result being lower employment. But opponents of minimum wage increases are only citing half of the model.

What the model really says is that a minimum wage if it is effective will do either one of two things: it will either result in the layoff of those workers whose value is less than the minimum or it will result in an increase in productivity among low-efficiency workers. Of course, one way to increase efficiency would be to substitute technology for low-skilled workers. But given that most low-skilled workers are concentrated in the fast-food and retail sectors, that option may have limitations. Another way to increase productivity is for employers to invest in the human capital of their workers by providing them with the type of training that will enable them to become more productive.

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