Manufacturing businesses respond to wage hikes by reducing hours, investing more in automation or exiting the market altogether, according to a recent study from the U.S. Census Bureau, which examined how manufacturing plants with low-skilled laborers responded to exogenous wage increases.
The study found that when the hourly wages of production workers rose by 10 percent – or $0.90 – plants reduced hours by 7.2 percent. As a result, annual wages only rise 2.8 percent, which saves plants $165,000 on average.
Not only are hours reduced, but the number of production workers is slashed by 2.7 percent, too.
Another negative consequence is that firms replace workers with capital. Plants tend to significantly increase capital expenditures on machines – by about 25 percent. Researcher Yuci Chen, from the University of Illinois at Urbana-Champaign, noted it is equivalent to the amount the plant saves by reducing worker hours.
The estimated elasticity of substitution between capital and labor is 0.85.
Because the plants studied were in low-skilled industries like textile, apparel and food processing, they are likely more apt to substitute machines for workers.
Meanwhile, some establishments end up exiting the market entirely – a 10 percent increase in wages increases the probability of exiting by 3.2 percentage points.
The study notes that not all industries will respond to changes in wages in a similar manner.
The current federal minimum wage is $7.25 per hour, where it has been since 2009.
In January, Democrats unveiled the Raise the Wage Act, which would increase the national minimum pay rate to $15 by 2024 through scheduled annual increases. It has more than 180 co-sponsors, including support from House Speaker Nancy Pelosi, D-Calif., and Senate Minority Leader Chuck Schumer, D-N.Y.
The House passed the legislation, which is unlikely to make any headway in the Republican-controlled Senate.
According to research released by the Congressional Budget Office (CBO), gradually raising the federal minimum wage to $15 per hour would put about 1.3 million people out of work in 2025. The CBO says there is a "two-thirds chance" that the change in employment could range from zero to a loss of 3.7 million workers.