Does Minimum Wage Increase Labor Productivity? Evidence from Piece Rate Workers in a Casual Labor Market

Abstract: 

In a competitive model, there are two main pathways of adjustment to a minimum wage hike: firms can choose to dismiss (or not hire) workers whose productivity is below the new minimum wage or subminimum wage workers can increase their efforts (and hence productivity) to preempt possible discharge. Whereas the first effect is the subject of extensive study, the second—incumbent workers’ effort responses—is largely overlooked in the literature. Using unique data on piece rate workers who perform a homogenous task and whose individual productivity is rigorously recorded, we examine possible effort responses of workers to a minimum wage hike in a casual labor market. By employing a difference-in-differences strategy that exploits the increase in Florida’s minimum wage from $6.79 to $7.21 on January 1, 2009, and worker location on the pre-2009 productivity distribution, we provide evidence consistent with incumbent workers’ positive effort responses.