Like technology, management practices are a key determinant of productivity, they are complex and difficult to adopt, and their adoption has many social spillovers. Improving management practices thus has much in common with developing and adopting new technology. The need to adopt complementary changes all at once and the need to vary the recipe when employers face different contexts that indicate slightly different payoffs to investments in training, task richness, schedule stability, and complex feedback from customer demand all raise the degree of difficulty. As noted above, adopting a high-road strategy requires not just changes in labor practices, but also changes in marketing, product development, and information technology to take advantage of the higher-skilled (but also higher-cost) labor entailed by the new policies. However, firms that would like to choose the high road often find it difficult to immediately shift from their current high-turnover, low-productivity strategy. (The reason is that the higher minimum compresses the wage distribution from below so that the gains that a worker can expect from job search will fall for a worker earning near the new minimum wage.) In addition, firms can reap the benefits of employees who can focus more on work and are less distracted by the cognitive demands of poverty, like whether their car might break down before they can afford to fix it. In fact, there is strong empirical evidence that higher minimum wages lead to more stable and experienced workforces. A minimum wage increase can improve the productivity of a given firm’s workforce because higher wages reduce turnover. A higher minimum wage makes high-road practices easier to adopt, since a firm with only local competition doesn’t have to worry about being undercut by rivals paying less. An increase in the legal minimum wage is a slightly different scenario, but has many similar effects. The high-road literature usually assumes that firms are paying higher wages than are their competitors. The resulting high productivity allows these firms both to pay high wages and still make acceptable profits. In sum, many high-road firms thrive while paying higher wages than their competitors do because their highly skilled workers help these firms achieve high rates of innovation and quality and can enable a fast response to unexpected situations. As Helper and Martins show, this strategy is especially effective when firms also consistently perform preventive maintenance (so machines are ready when needed) have employees participate in quality circles (to debug new products and processes quickly) and have a higher percentage of sales from products designed by the firm (to generate a steady stream of products that need such debugging). Because the product mix changes constantly, a fixed division of labor is not practical. In manufacturing, one successful high-road strategy is “agile production,” in which firms design, set up, and produce a variety of products quickly. The key to their success is a mix of complementary practices in marketing (reducing the number of products and promotion so that stores can manage inventory efficiently), human resources (cross-training workers so they can respond to a variety of demands), and operations (avoiding unneeded steps, in part by soliciting feedback from employees). In retail, for example, firms such as Costco and Trader Joe’s pay far above minimum wage, yet remain profitable, as MIT’s Zeynep Ton has shown. Much research documents the ways that firms can utilize high-road policies or good-jobs strategies to tap the knowledge of all their workers to create innovative products and processes. In this blog post, I argue that insufficient attention has been paid to this third channel, and that government efforts to help firms “take the high road” could ease firms’ transition to higher wages in a way that also benefits workers and consumers. Employers can adjust to paying higher wages in three ways: (1) increasing prices, (2) accepting reduced profits, or (3) offsetting higher-wage costs with increased ability by adopting “high-road” practices. A great deal of research shows that higher minimum wages benefit workers by adding to their income while causing little unemployment, as this report and this report show.
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