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A 2011 Study Exploded One Of The Biggest Fears About Raising The Minimum Wage

President Obama proposed increasing the minimum wage to $9.00 from the current level of $7.25 during his annual State of the Union address. 

Right now, proponents and opponents are duking it out over what possible effect this would have on the economy and for workers. 

The main confusion comes with the dissonance between what “should” happen to the labour market when the minimum wage goes up and what does historically happen. 

In the abstract, increasing the price floor of labour should result in wage cuts. However, that hasn’t historically been the case. Historically managers will cut other expenses in order to compensate for an increase in the minimum labour cost and the increased minimum wage functions as a form of stimulus. Given the controversial nature of fluctuations in the minimum wage — billions of dollars hang in the balance for all parties involved — it’s going to be a very tough fight. 

Still, a November 2011 study from Barry Hirsch and Bruce Kaufman of Georgia State University and Tetyana Zelenska sheds light on how businesses respond to increases in labour costs, and the results were surprising. 

The group surveyed managers of fast food restaurants in Georgia and Alabama as they contended with three annual increases in the federal minimum wage between July 2007 and July 2009. 

They asked the managers if they were taking any steps to offset increases labour costs. 

Here is what managers did with regards to human resources:

manager reaction to higher labour cost survey

Photo: Minimum Wage Channels of Adjustment

Notice that only 8 per cent of managers surveyed thought that firing current employees was at all important to make up for lost wages. 

Indeed, raising the minimum wage allowed management to extract more performance from current employees in more than half of all cases. 

Higher labour costs weren’t only offset from cuts to total labour cost, either. Management also took several steps to increase efficiency and productivity to compensate for the higher costs:

manager reaction to higher labour cost survey

Photo: Minimum Wage Channels of Adjustment

They also tapped into other costs to cut:

manager reaction to higher labour cost survey

Photo: Minimum Wage Channels of Adjustment

This far from settles the fight over raising the minimum wage, but does address concerns that a rise in the minimum wage would lead to across the board job losses. 

(h/t) modelled behaviour for the study

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