The minimum wage and productivity differentials

A firm's ability to adjust its production process to economize on low-skill ed labor when faced with a minimum wage increase will differ greatly depend ing on industry or occupation. For example, more capital-intensive means of cleaning hotel rooms or serving customers at restaurants may not be readil y available without degrading service quality. In such situations, the prod uctivity of labor is essentially capped, and firms have few options when th e minimum wage increases. This simple observation has implications for stud ies that rely on microdata to examine the effects of minimum wage increases . If firms only increase prices in response to a minimum wage increase, Emp loyment effects are likely small. If the goal of the minimum wage is to red istribute income from firms and consumers to workers, minimum-wage increase s targeted at industries and occupations where such rigidities result in an inelastic demand for labor may achieve the desired goal at a lower cost th an across-the-board increases. However such a scheme causes an inefficient allocation of labor and would be subjected to substantial political pressur es that may lead to anomalous results. Additionally, it is unreasonable to conclude that policy makers have the necessary information to skillfully se t the minimum wage.