Turnover, Prices, and Reallocation: Why Minimum Wages Raise the Incomes of Low-Wage Workers

Abstract

The research on the minimum wage contributes insights into claims raised in legal arguments that employers and workers have equal power and that an employer’s management power must be unrestricted lest the firm or the economy suffer. Mandated minimum wages, the conventional argument goes, will force firms to pay a wage higher than the market rate, resulting in job losses and, potentially, bankruptcy. But evidence from minimum wage increases and expansions finds that the policy can improve labor market conditions without causing harmful side effects because of such “channels of adjustment” as reduced worker turnover, consumer price increases, and the reallocation of low-wage workers to higher-paying establishments. In general, employer mandates can increase the prevalence of good jobs. By altering the mix of firms and reallocating workers across them, the minimum wage creates or at least shifts the composition of jobs toward those that are more productive and pay higher wages.