What Are the Effects of the Minimum Wage and Productivity Growth on the Manufacturing Sector Output and Employment Growth?

Abstract

What are the effects of the minimum wage and productivity growth on the manufacturing sector output and employment growth? We find that a positive shock to the minimum wage shock results in an increase in the manufacturing sector output growth, employment growth, labour productivity growth, unit labour costs and a decline in hours worked. These results are consistent with the institutional model, which postulates that the passthrough of an increase in the minimum wage and labour costs into higher prices is neutralised by the increase in efficiency and productivity gains. In addition, the increase in the labour productivity growth due to positive minimum wage shocks indicates that the efficiency wage theory holds. The imposition of a higher minimum wage in the manufacturing sector does not necessarily destroy jobs growth. In fact, it leads to improvements in labour productivity consistent with the efficiency wage theory. However, positive shocks to labour productivity growth and unit labour costs exert opposing effects on the manufacturing sector output growth and employment growth. Positive shocks to labour productivity growth lead to an increase in the manufacturing sector output growth and employment growth, whereas positive shocks to unit labour costs have the opposite effect. Furthermore, evidence shows that the labour productivity channel amplifies the positive shock effects of the minimum wage on the manufacturing sector output growth and employment growth. In the absence of the labour productivity channel, the manufacturing sector output growth and employment growth are lower. Thus, the increase in labour productivity growth is necessary and has to accompany increases in the minimum wages as an adjustment channel in the manufacturing sector.