Voodoo Economics and the Minimum Wage

Quartz suggests that companies can make more money by raising their wages, focusing on the well-paid line workers at QuikTrip and the research of Zaynep Ton at MIT Sloan..  I think we should probably file this under “Wonderful if true, but pretty darn unlikely”.  I think there’s a simple way to evaluate this type of claim – if true, where are the private equity firms running LBOs of fast-food chains and raising everyone’s wages?  This argument doesn’t even have to be of the “nobody leaves $20 on the sidewalk” strength, merely that if this were a reasonable strategy someone would have tried it.  However, that’s not the only argument against it.

Let’s assume that QuickTrip does get positive ROI on the high wages – how much of the “QuickTrip effect” is compositional?  There are two possible stories of the QuikTrip effect – the first is that higher wages drive higher productivity, and the second that higher wages attract more productive employees.  The Quartz story and Zaynep Ton focus on the first story, but to me that seems less plausible than the second.  A QuikTrip job is obviously much more appealing than one at McDonald’s, and presumably the selection process is more competitive.  Even if you believe in the QuikTrip effect, and there’s no reason not to, it is almost certainly because they attract better employees than their competition.

This has important policy consequences. First, this isn’t a generalizable strategy – by definition only a few companies can be “well-paid” relative to their competition and poach the better employees. For many companies, choosing not to play this game is the smarter choice.  Secondly, we should be very dubious about common liberal claims that raising the minimum wage will be inexpensive or positive-sum.  If there’s no direct productivity effect of high wages, then raising the minimum wage is costly; it doesn’t mean that it’s a bad idea, but deluding oneself about its effect does nobody any favors.  The belief in the positive-sum minimum wage raise is probably the closest liberal equivalent to the voodoo economics of deficit-reducing tax cuts – wonderful if true, but pretty darn unlikely.

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