Incentivizing Low Productivity

· January 27, 2019

Timothy Taylor has a great summary of Santiago Levy’s Under-Rewarded Efforts, a book about the lack of productivity growth in Mexico. One of the core points is that the social welfare system drew a big distinction between salaried and non-salaried workers, which failed to account for the incentives that would create:

The combination of tax, social insurance, and labor regulations deployed to increase social welfare taxed the high-productivity segment of the economy and subsidized the low-productivity segment, impeding productivity growth and thwarting rapid GDP growth. It also failed to provide workers with satisfactory levels of protection and efficient coverage against risks, while limiting their opportunities to get better paid jobs congruent with their increased schooling. Thus, over a quarter of a century later, it is not possible to assert that this program delivered the prosperity expected from it.

This reminds me a little of the implicit government subsidy to employers of lower paid retail worker (famously, Walmart) due to wage levels being so low that employees were supported with food stamps and other government benefits, benefits which are effectively paid for by taxes on higher-paid workers. I wonder whether there have been any similar effects in areas of the US, where the (relatively mild) disincentive has encouraged companies at the margin to avoid investing in workers (at the lower end of the wage scale) in the hopes of higher levels of productivity. These negative spillovers (if happening) feel like they could offer support for a higher minimum wage.