Why raising minimum wage could make more employees quit
WASHINGTON: Wal-Mart’s US$ 9 minimum wage has been in place for a little while now, and not everybody is happy about it. Employees who have been there for years are complaining it’s unfair that they now make not much more than someone who’s just been hired off the street, reports Bloomberg News. While some low-level managers have also gotten higher starting wages, raises are small and infrequent for those at the bottom rung, so the jump to US$ 9 wiped out years of accumulated comparative gains for those rank-and-file employees.
It’s not the first story we’ve heard illustrating this phenomenon. After a Seattle company raised its minimum annual salary to US$ 70,000 for all employees – with much fanfare for the chief executive’s stand against income inequality – experienced employees felt resentful that they spent years working their way up the payscale only to have less skilled colleagues all of a sudden earn just as much. Some have even quit.
That flies in the face of one argument for raising the minimum wage: It’s supposed to decrease turnover by giving workers a better reason to stick around. Wal-Mart itself has already said it saw a drop in turnover after it boosted wages in April, so the disgruntled employees Bloomberg found probably weren’t leaving in large numbers because of it.
Still, while it might not be an economically rational decision to leave a job just because someone below you is all of a sudden making nearly as much, humans aren’t always perfectly rational beings. Prosperity relative to one’s neighbour tends to be a more important determinant of happiness than the actual number on the pay cheque.
And actually, there’s research to back this up in an employment
Overall, we find strong evidence that peer comparisons matter. Workers were much more likely to quit when their peers received bigger raises because the peers were just above a pay-step threshold.
Researchers
context. A new working paper out from the labour research institute IZA took a look at data from a large retailer related to the minimum wage increases of 1996 and 1997 by placing employees in 15- cent bands above the new minimum. People got different raises depending on where they had fallen before, sometimes opening up gaps – if very small ones – between employees that had previously earned nearly the same amount. That didn’t go over well.
“Overall, we find strong evidence that peer comparisons matter,” the researchers wrote. “Workers were much more likely to quit when their peers received bigger raises because the peers were just above a paystep threshold.” So even if wages compare favorably with the market rate, and even if nobody took a pay cut, those who felt like they had fared badly relative to their colleagues might decide to go somewhere else.
This will be important to watch as minimum wage increases spread throughout the country. Companies do try to keep employees they’ve had for a while making a little more than those who just walked in the door, so they might move the whole payscale up a bit – but the differential between those two classes of worker likely won’t be as large. Even with everybody making more, perversely, water cooler conversation could be a little darker as a result. — WPBloomberg