The Efficiency Wage Hypothesis, Labour Productivity and the Minimum Wage

Abstract

This chapter explores the influence of price stability on the effects of a positive minimum wage shock on labour productivity, employment and GDP growth. Evidence shows that a positive minimum wage growth shock leads to an increase in labour productivity growth, which is consistent with the wage efficiency hypothesis. In addition, the responses of labour productivity and employment growth to a positive shock to the minimum wage tend to be significantly higher in the low-inflation regime compared to the high-inflation regime. A positive minimum wage growth shock lowers excess gross operating surpluses (profits). The important role played by the inflation regimes is evident given that the low- (high-) inflation regime accentuates (mitigates) the reduction in excess operating surpluses. This implies that the high-inflation regime exacerbates the inefficiency, which leads to lower wages that compensate the pricing strategies that take advantage of inflationary pressures. In policy terms, the results imply that the effects of a minimum wage shock depend on the prevailing inflation regime, hence price stability matters.