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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 ar 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.
I. Introduction
The Department of Labor (DOL) (1998) reports that between 1966 and 1997 the real value of the minimum wage fell by 17 percent. In relative terms, the minimum wage was equal to about 50 percent of the average wage in the 1960s but fell to approximately 40 percent in the 1980s and 1990s. This information suggests that the minimum wage has declined in importance and that small minimum wage increases should only moderately affect employment. Reliance on economy-wide average wages may not capture the degree to which minimum wage increases affect employment, however. Since the 1980s, the decline in the real value of the minimum wage has been coupled with a relatively large increase in the dispersion of wages.1 While increased wage dispersion is likely to be related to the decline in the real minimum wage (Lemieux and Fortin, 1997), the poor performance of wages at the bottom of the distribution implies that minimum wage increases will have larger effects on labor markets than the decline in the real...