Can higher wages reduce labor costs?

Host Mary Walden asks about the low level of wages paid by many companies.  Some argue that such companies are hurting themselves. These folks say companies could actually pay their workers more and at the same time reduce their costs and increase their profits. Her husband, N.C. State University economist Mike Walden describes how this could happen?

Mike Walden: “Well, this could happen in a couple of ways, Mary. One, by offering a higher wage, the view is that the company could actually attract better workers who can actually do the job better. Another thought is that by offering a higher wage the company is going to attract a more motivated worker who feels rewarded by the higher wage.

“And then finally there’s the thought that by offering the higher wage and getting better workers — more motivated workers — that’s going to reduce worker turnover. And that’s very costly to a business. So, if you put all these three things together, the notion is that by offering a higher wage. the company actually gets a more productive worker, a worker that is producing more per hour, and that extra productivity, the view is, could compensate and perhaps maybe even more than compensate for the higher pay.

“So, why don’t we see all businesses do this? Well, I think whether this works or not is really going to depend on the particular business. We already see some businesses engaged in doing this. But I think the important thing here is for a business to think about this. And if they’re not happy with their current employee staff and they think turnover is too high and motivation is too low, they may actually want to consider what might be counter intuitive and offer a higher wage.”

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