In many work environments, it’s common to see workers especially across the lower hierarchy of any organization complain and demand for higher wages. Sometimes it doesn’t even matter what the organization pays in relative terms to the industry standards. I think it is inherent in humans to ask for more, besides there is this thing called inflation. Wages vary across location and industry, and acknowledging that these parameters also affect turnover or profit also implies that a wage differential is likely going to be present.
What this means is that, an industry built in a locality where labour is cheap is likely going to pay lower wages. Infact, this is the reason many firms that have operational bases in the United States prefer to locate their factories in China where the labour cost is lower. So this tends to explain why industries may want to pay lower wages. But it doesn’t say what higher wages does to productivity. The results on that are clear.
First, paying higher wages would allow companies to keep better employees. This is also hinged on the idea that other firms within the industry do not raise their wages as well as a result of competition. Also paying a wage that is higher than the industry average can make existing employees become more motivated to stay. This also means that more people from the outside will be open to come to fill up openings when they come, making the job more competitive. As a result, workers who are not effective will be easily replaced with perhaps better workers, who will be willing to step into the vacant positions for a wage higher than what they are used to. Also consider than a higher wage would mean that workers will have more income to spend on vital areas such as health care. Every organization or country needs a healthy workforce. And recent insights have shown a direct relationship between increased health care spending and the GDP growth.
So if higher wages bring labour competition, then it is desirable because competition leads to efficiency and improvement. This is likely to happen in a competitive market. Apart from that, workers tend to sabotage the efforts of the organization they are working for when they realize that their wages are far below what the industry standards are. This happens in so many ways. Having worked in the construction industry for a while, I think this is very common. It is usual to see workers slow down the tempo of work when unsupervised. Sometimes they stop working completely in the absence of any supervision. This is expected, though I am not in any way encouraging it. Why should someone who has no stake in a company work as hard you who own or have a stake in it, or as hard as you want him to unless (A).there is an incentive to do so or (B) a penalty for not doing so.
In these scenarios, it is common to hear phrases like this “Is it my father’s company? ” a testament to the fact that they’ve got no stake in the firm or a reason to give in their best, leading to productivity sabotage. Why then should a firm decide not to pay competitive wages if an increase in productivity is in their agenda? It’s hard to say.
This extract from Science daily puts it in perspective:
“Employees work harder and more cohesively if they feel they and their colleagues are paid a wage which reflects their skill and effort, new research has found. Data from more than 360,000 UK firms following the introduction of the National Minimum Wage showed ‘statistically significant’ increase in productivity in Britain’s low-paying employment sectors
The study was conducted by academics from the University of Lincoln and Middlesex University in the UK, and Australian Catholic University. It is published in the British Journal of Management.”
Of Course if the rate of increase of nominal wages is faster than the increase in labour productivity, this leads to inflation in the economy. And this inflation is equal to the resulting differential in the increments. Inflation isn’t a desirable thing in an economy, so care must be taken to know exactly where the line must be drawn. But for individual organizations or firms whose economic policies do not affect the overall turnout of the wider economy, who desire increased productivity, an increase in wages will be more than able to solve the problem.