some economics of the minimum wage

Oklahoma City based Hobby Lobby announced its increasing the wages it pays its workers to well above the minimum wage required by law.

In a story in The Coloradoan it is reported that Hobby Lobby’s “full-time workers will make no less than $13 an hour while part-timers will be paid no less than $9….In Fort Collins, the increase affects 90 percent of the store’s 19 part-time and 17 full-time workers…”

Nationally, Hobby Lobby employs more than 15,000 workers in more than 500 stores. Given the fact that unemployment remains high, especially for workers at the lower end of the wage scale, this announcement is pretty interesting from an economics perspective.

Generally, we expect that wages will go down when unemployment increases, as the supply of willing workers outstrips the demand. Indeed, one of the main arguments forwarded by minimum wage opponents is that it actually creates unemployment, as employees will want fewer workers if they have to pay them more money, while more workers will join the labor force in response to higher wages.

Yet Hobby Lobby’s actions run counter to this simple supply and demand model of the labor market. Why might that be so?

Labor economists have another model that can explain why a company might willingly (and rationally) pay wages higher than its competitors. The “efficiency wage” model suggests that some companies might find it more profitable for companies to offer above market wages. There are 3 explanations.

First, if a business cuts wages–a reasonable action in times of high unemployment–they might discourage worker effort. Alternatively, if a worker fears losing a particularly good job (as measured by relatively high wages), then they might work harder to keep it.

Second is what economists call “adverse selection.” Basically, this argues that businesses get what they pay for. If they offer a wage that is too low, they might only attract low-ability job applicants.

The third explanation is that an above market wage reduces costly employee turnover. In practice it is expensive to hire and fire workers. Some of the obvious costs involve advertising positions, screening applicants and training. But as employees stay together longer, they also become more productive as a team.

In short, Hobby Lobby’s decision is good for its workers and good for the company’s bottom line. Not much wrong with that.

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