How do labor standards affect employment?

After the Bureau of Labor Statistics announced earlier this month that employers added 321,000 jobs in November—the most in nearly three years—journalists and pundits alike reacted with a flurry of excitement.  The news was indeed good. As Ben Casselman of FiveThirtyEight proclaimed, the BLS report “crushed it.”

Employment numbers alone, however, do not give us a full picture of what is really going on in the labor market. That is why the Washington Center for Equitable Growth has awarded one of its 2014 inaugural grants to T. William Lester, an Assistant Professor at the University of North Carolina’s Department of City and Regional Planning. Lester seeks to use differences in local labor laws to understand how labor standards affect employment practices and outcomes in terms of wages, benefits, turnover, on-the-job training, and productivity.

The jobs that have been created since the end of the Great Recession in 2009 have beenconcentrated within services industries, such as restaurants, retail stores, and entertainment establishments. Many of these jobs are characterized by low wages, unpredictable schedules, the absence of benefits, and little to no opportunity for advancement. State and local governments are taking notice, and campaigns to improve job quality by improving labor standards – in the form of minimum wage increases or paid sick day legislation – are gaining significant momentum. These new policies are well-studied—and controversial—but tend to focus only on their effects on overall employment rates.

But how these mandates affect the employment relationship within the firms themselves—in terms of turnover, productivity, training, tenure, and industry-specific norms—is what Lester calls the “black box” of understanding among researchers interested in these questions. The classic supply and demand model of the labor market assumes that if an employer cuts wages, even by a minimal amount, then employees will quit and begin their search for another job. Lester’s project begins with the research-backed premise that workers understand finding a job is costly, even in the best of circumstances. As a result, he argues, the classic supply-and-demand model may be flawed.

For starters, employees aren’t the only ones who conduct job “searches.” In a tight labor market, with a shortage of qualified workers, the employer may have to raise wages in order to attract the right people.  If, however, workers incur any kind of monetary or non-monetary cost to change jobs, a situation that economists see as far more prevalent than previously thought, then the employer has the advantage, and can therefore pay lower salaries.

Lester focuses on the full-service restaurant industry, generally a lower-wage sector of the economy, in two regions with vastly different labor laws: San Francisco, which has the nation’s highest minimum wage, paid sick leave requirements, and a citywide pay-to-play healthcare mandate; and the Research Triangle region in North Carolina, which has no locally mandated labor standards.

Lester preliminary results show that that North Carolina restaurants have a much wider divergence in terms of wage distribution. While the majority of employers will use a low-wage, high-turnover model to maximize profits—with employers willing to hire anyone with a “good attitude” and a “good smile—some restaurants pay much higher wages in order to attract and retain top talent. In San Francisco, where the minimum wage is much higher, there is less variation and a higher average wage compared to the Research Triangle area. Employers, therefore, seek new strategies —such as offering better than required health benefits and incorporating continuous learning techniques—to retain their best workers.

As a result, there is a greater “professionalization” of the restaurant labor market in San Francisco, and employers pay more attention to searching for and retaining “career” servers and line cooks who can ultimately increase the restaurant’s productivity. Lester’s work suggests that labor standards reshape the employment relationship by leading to stronger matches, higher productivity, lower turnover and the development of professional norms within low-wage labor markets.

This research is consistent with other work that indicates that high-quality human resource practices are linked to lower turnover. And studies have looked at the regional variation in human resource practices across different restaurant markets. But Lester’s work is the first to analyze how labor standard mandates and legislation specifically affect the employment relationship within firms in traditionally low-wage industries. As a result, it’s a critical piece of the puzzle for understanding the way in which new labor laws, such as raising the minimum wage or paid sick days, will affect individual businesses and their employees.

This article is published in collaboration with The Washington Center for Equitable Growth. Publication does not imply endorsement of views by the World Economic Forum.

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Author:  Bridget Ansel is Equitable Growth’s Assistant Editor for Publications and Development.

Image: An instructor (L) teaches trainees at a maritime transport training centre, which offers classes as part of a government-sponsored programme to train unemployed people in industrial professions, in Alexandria April 30, 2014. REUTERS/Stringer.