How Higher Wages Can Benefit Business

Happier, healthier, more productive, more committed. It sounds like paying employees more should be a no-brainer.

It is, of course, not that simple. Global competition continues to dominate discussions of compensation - for those at the top as well as the bottom.

Curiously, though, the same economic forces cited in this debate cause partisans reach very different conclusions about how to achieve desired outcomes.

For executives, the belief is that global competition in the shape of 'the war for talent' means that the top people should be paid even more or they will depart for more financially attractive opportunities.

Even for skilled workers in technology, though, the conclusion is often that they should be paid less so that product costs can be kept to a minimum.

The reality appears to be that there are exaggerations on both ends of that spectrum. As the economy continues to improve, however fitfully, it is apparent that more attractive compensation almost certainly works just as well at the bottom as it does at the top. There are ideologues who will never be comfortable with this formulation, but for most pragmatists, which is to say, almost everyone who has to meet a budget, results will dictate strategy for achieving future outcomes. In the meantime, it is worth remembering that those on the receiving end of the compensation equation reverse roles when they walk out the door - and become customers. JL

Pedro da Costa reports in the Wall Street Journal:

Benefits to higher wages include prompting employees to work harder, attracting more capable and productive workers, and reducing turnover and the costs of hiring and training new workers.
Better-paid workers are healthier and more productive.
That’s among the findings of Justin Wolfers and Jan Zilinsky at the Peterson Institute for International Economics in a review of the academic literature and theory.
“Higher wages are associated with better health—less illness and more stamina, which enhance worker productivity,” they write in a blog post on the think tank’s website.
The authors posed the question, “Under what circumstances can raising the pay of low-skilled workers at large corporations lead to general improvements in productivity?” They were prompted by word that Aetna Inc., the large health insurer, planned to boost the incomes of its lowest-paid workers to a minimum of $16 per hour to reduce employee turnover and attract top job applicants. The company announced the move Tuesday.
The Peterson Institute blog post cites papers going back decades finding numerous benefits to higher wages. They include prompting employees to work harder, attracting more capable and productive workers, and reducing turnover and the costs of hiring and training new workers.
Among the papers they cite is one from 1984 by labor economist Janet Yellen, now the Federal Reserve chairwoman, suggesting higher wages make workers more productive. She wrote, “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.” 
The issue of wages has become central to the Fed’s decision on when to start raising interest rates. Worker pay has been stagnant for decades, a trend that has continued despite a recent pickup in the economy and the labor market.  Among private-sector workers, average hourly earnings were up 1.7% in December from a year earlier, barely ahead of inflation.
The Fed has held its benchmark short-term interest rate near zero since December 2008. With economic growth and job gains strong in recent months, most central bank officials expect to start lifting rates this year, but have stressed the decision will depend on the health of the recovery. Several have said they want to see wage gains before moving.
Atlanta Fed President Dennis Lockhart said Monday he expects this year, “continued robust job creation accompanied by growing wages.”
Mr. Lockhart said the Fed likely will start raising interest rates by the middle of the year. But he added, “If the early months of this year bring mixed news on the economy, the risk manager in me will lean to preferring a later date for the first policy move to an earlier one.”
The Peterson Institute authors disclosed that Aetna is a supporter of the think tank, but the company had not participated in their analysis or reviewed their conclusions.