[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

employee’s salary. Not only must the firm raise the wage offered to the new worker,
it must also raise the wage paid to all existing workers. This cost discourages the
firm from hiring additional employees. The imposition of a minimum wage limits
the expense of hiring an additional worker to just that employee’s wage. And because
their marginal cost of adding to their workforce is lower, firms that are required to
pay a minimum wage in fact will hire more workers.
These perspectives are consistent with several recent empirical studies that have
shown there to be negligible, or even positive, employment effects from a minimum wage.
Some economists have also pointed to broader positive consequences of minimum
wages: they induce firms to invest more in their workers in order to increase their
workers’ productivity. Gavin Wright, a distinguished economic historian at Stanford
University, has argued that minimum wages played a vital role in the transformation
of the South. It was a region that had been vastly poorer than the North from
the end of the Civil War to the Great Depression, and its economy had been largely
based on very low wages. The minimum wage catalyzed dramatic changes, shifting
the South away from low-wage industries to dynamic industries paying higher wages.
A further alleged advantage of raising the minimum wage is that it increases the
incentive to work by increasing the income gap between someone on welfare and
someone with a job.
OTHER INCENTIVES
Other important incentives to increase job performance are enhanced possibilities
of promotion, and thus higher salaries, for those who perform well. But, as already
noted, assessing achievement is often difficult. One way to figure out who is performing
well is to set up a contest among workers and promise the winner some
valuable prize, like a cash bonus. Consider a firm trying to figure out how much to
pay its sales force when it is promoting a new product. If a salesperson is successful,
does that success demonstrate good salesmanship, or is the new product able
to “sell itself”? All sales representatives are in roughly the same position. The
representative who sells the most gets a bonus—and wins the contest.
At the upper end of the corporate hierarchy, the top executives of America’s
largest firms are paid much more, on average, than their counterparts in many other
industrial economies; their salaries often run into the millions of dollars. Economists
continue to debate why this is. Some interpret these salaries as the payoffs of contests,
others as reflecting the large contributions of these managers or as wages of
trust. But some suspect that top managers have enough control over the firm to
divert a considerable amount (though still a small fraction) of its resources to their
own betterment in the form of higher compensation.
COMPENSATING WORKERS
We saw earlier that the wage a firm has to pay adjusts to take into account nonpecuniary
attributes. Some of these nonpecuniary attributes reflect decisions made
368 ∂ CHAPTER 16 IMPERFECTIONS IN THE LABOR MARKET