The minimum wage and productivity differentials

A firm’s ability to adjust its production process to economize on low-skilled labor when faced with a minimum wage increase will differ greatly depending on industry or occupation. For example, more capital-intensive means of cleaning hotel rooms or serving customers at restaurants may not be readily available without degrading service quality. In such situations, the productivity of labor is essentially capped, and firms have few options when the minimum wage increases. This simple observation has implications for studies that rely on microdata to examine the effects of minimum wage increases. If firms only increase prices in response to a minimum wage increase, employment effects are likely small. If the goal of the minimum wage is to redistribute income from firms and consumers to workers, minimum-wage increases targeted at industries and occupations where such rigidities result in an inelastic demand for labor may achieve the desired goal at a lower cost than across-the-board increases. However, such a scheme causes an inefficient allocation of labor and would be subjected to substantial political pressures that may lead to anomalous results. Additionally, it is unreasonable to conclude that policy makers have the necessary information to skillfully set the minimum wage.