Increases revenue while decreasing costs.
Justin Wolfers 15, nonresident senior fellow, has been associated with the Peterson Institute for International Economics since September 2014. He is professor of economics and professor of public policy at the University of Michigan. He is also visiting professor of economics at the University of Sydney, research associate with the National Bureau of Economic Research, research fellow with the Institute for the Study of Labor (IZA) in Bonn, research affiliate with the Centre for Economic Policy Research in London, international research fellow with the Kiel Institute for the World Economy, and fellow at CESifo in Munich. He was previously visiting professor at Princeton University, associate professor at the Wharton School of the University of Pennsylvania, assistant professor at Stanford Graduate School of Business, and economist with the Reserve Bank of Australia. Jan Zilinsky was a research analyst at the Peterson Institute for International Economics from October 2014 to August 2016. He worked with Senior Fellow Justin Wolfers on economic inequality and related policy issues and with Senior Fellow Paolo Mauro on euro area recovery and the impact of fiscal policy on growth. January 13, 2015, "Higher Wages for Low-Income Workers Lead to Higher Productivity," PIIE, https://www.piie.com/blogs/realtime-economic-issues-watch/higher-wages-low-income-workers-lead-higher-productivity ---ML
Economists have long argued that increases in worker pay can lead to improvements in productivity—indeed, that it can actually be profitable to pay workers higher wages. As Alfred Marshall, the father of modern economics, argued almost 125 years ago, "any change in the distribution of wealth which gives more to the wage receivers and less to the capitalists is likely, other things being equal, to hasten the increase of material production." Since then, economists have compiled rich data validating Marshall's hypothesis that paying higher wages generates savings:
Higher wages motivate employees to work harder. Janet Yellen (1984) suggested that higher wages create the conditions for workers to be more productive, pointing to "reduced shirking by employees due to a higher cost of job loss; lower turnover; an improvement in the average quality of job applicants and improved morale." Among the studies documenting this point are Levine (1992), which analyzed a sample of large (mostly Fortune 500) manufacturing companies, and Holzer (1990), which used data from a national sample of firms finding that "high-wage firms can sometimes offset more than half of their higher wage costs through improved productivity and lower hiring and turnover cost." Reich et al. (2003) surveyed employers at the San Francisco airport after a broad-based increase in wages and found that the employers of the majority of affected workers reported that their overall performance had improved. Mas (2006) analyzed the case of New Jersey police officers who were granted a wage increase of 17 percent, and who were 12 percent more productive in clearing cases than those who were refused the increase.
Higher wages attract more capable and productive workers. The evidence that higher wages attract more high quality applicants for new jobs is voluminous. Dal Bó et al. (2013) show that offering higher salaries yielded an applicant pool with a higher IQ and with personality scores and motivation that made them a better fit for the advertised jobs. Moreover, the first firm to offer higher wages is more likely to attract and retain more productive workers.