Lowering Employee Turnover
A variety of quantitative and qualitative evidence exists to support the assertion that a $1 increase in hourly wages will meaningfully improve employee turnover. Perhaps most notably, a working paper out of Harvard University specifically concludes that a $1 increase in pay has the potential to reduce turnover among hourly workers by as much as 19%. However, an extensive review of top-tier media (e.g., The Wall Street Journal), research journals (e.g., Harvard Business Review), employee survey data (e.g., Glassdoor) and other credible resources did not reveal evidence to support the stance that small wage increases improve the stickiness of other retention practices. As such, below please find a curated list of studies, reports and the like that highlight the positive correlation between small wage increases and improved employee retention.
The Payoffs of Higher Pay
- This past January 2021, The Wall Street Journal highlighted a working paper by Harvard University doctoral students Natalia Emanuel and Emma Harrington that examined the impact of wages on productivity and retention among hourly employees at a Fortune 500 online retailer.
- The paper, entitled "The Payoffs of Higher Pay: Elasticities of Productivity and Labor Supply with Respect to Wages," concluded that a $1 pay increase in 2019 reduced the "quit rate" among hourly warehouse workers at the company by 19%.
- Similarly, incremental pay increases among the organizations' customer service representatives led to meaningful turnover improvements among this cohort.
Why Do Employees Stay?
- A March 2017 analysis published in the Harvard Business Review also found that incremental pay increases had a substantial, quantifiable impact on employee retention.
- Specifically, Glassdoor Chief Economist Dr. Andrew Chamberlain revealed his finding that a "10% higher base pay is associated with a 1.5-percentage-point increase in the likelihood that workers will stay at their current company the next time they move to a new role, a statistically significant link."
How Amazon’s Higher Wages Could Increase Productivity
- A separate October 2018 discussion piece published in the Harvard Business Review pointed more qualitatively to the relationship between increasing wages and increasing employee retention.
- The paper asserted that the "intuition is straightforward" on the relationship between these two factors; specifically "higher wages makes a job more desirable."
- Particularly in cases where small wage increases are above the market rate, they result in "workings having more to lose" by leaving or risking termination.
Analyzing the Aftermath of a Compensation Reduction
- Meanwhile, The Wall Street Journal referenced a forthcoming paper in Management Science that considers the negative impacts of employee pay reductions on turnover.
- Entitled "Analyzing the Aftermath of a Compensation Reduction," a group of researchers out of Harvard University, Michigan State University and the University of Utah found that "employees who received pay cuts were more likely to leave the company."
- Moreover, the increase in turnover due to pay reductions was particularly acute among the most productive employees.
More Dated Research/Studies
- A December 2004 paper published in the Journal of Industrial Relations (link here) found that implementing slightly higher, living wages at San Francisco's airport reduced employee turnover by 33%. Specifically, "turnover fell by an average of 34% among all surveyed firms and 60% among firms that experienced average wage increases of 10% or more. The greatest reduction in turnover occurred among airport-security screeners, from 94.7% a year in April 2000 to 18.7% fifteen months later, an 80% decrease. Cabin-cleaning firms reported a 44% reduction in turnover, and ramp workers a 25% reduction. "
- A separate 2005 analysis (link here) of low-wage workers in Lost Angeles who similarly received living-wage increases found that their employers enjoyed turnover rates of 32%, compared with 49% for companies that did not implement living-wage pay adjustments.
- Meanwhile, current Federal Reserve chairwoman Janet Yellen is cited by The Wall Street Journal, among others, for her body of research that indicates that increasing wages leads to lower employee turnover.