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A minimum wage increase could also affect aggregate productivity in the economy. Photo: Reuters
A minimum wage increase could also affect aggregate productivity in the economy. Photo: Reuters

Minimum wage hikes may boost productivity

New research claims that a minimum wage hike could force firms to become more productive and force unproductive firms out of the economy

One of the defining features of the global economy in recent years has been a stagnation in productivity growth. Nowhere is the issue bigger than in Japan, where a rapidly ageing population is exacerbating the challenge of low productivity. According to new research, one potential solution for the productivity slowdown in Japan and other countries could be to raise the minimum wage.

In a recent article, economist Keisuke Kondo examines the potential effects of a minimum wage hike on productivity in the context of Japan. He suggests that minimum wage changes affect productivity at both the firm-level and economy-level in two different ways. First, a wage hike could make companies more productive by compelling management to implement reforms that boost productivity. The improved productivity among firms could, in turn, boost overall economic productivity.

Alternatively, a minimum wage increase could also affect aggregate productivity in the economy by making it too costly for unproductive firms to operate. The exit of unproductive firms from the economy increases average productivity levels. If the workers who lose their jobs in the unproductive firms are absorbed by the more productive firms then overall economic welfare could increase. But this may not be the case since more productive firms may not expand production and employ more workers - at least immediately.

He argues that ultimately the effect of a minimum wage increase on productivity will vary across countries and firms. In different countries, the effects of minimum wage changes will depend on firm characteristics and market structure.

Also read: Productivity impacts of minimum wage hikes

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