Does Minimum Wage Reduce Investment... | Marginal Babble Ep.41 with Professor Matthew Gustafson

Maxwell Dorey: Do minimum wage rates work or cause more harm than good? Minimum wage policies one of the most frequently discussed topics across economics and political landscapes. And to some degree, this is no surprise. According to the UK government, about 2 million workers were paid at or below the minimum wage rate in 2025, making up about 6.6% of the total UK workforce. It's a policy instrument that has a significant impact across the economic environment, and not just for workers, but for businesses, investors. And other stakeholders, either domestic and abroad, but it hasn't always been this way. The UK minimum wage was only introduced in 1999, and since then has grown to the third largest in the world, falling just behind Luxembourg and Ireland, respectfully. This has occurred at approximately the same time that UK productivity has stagnated, with output per worker flatlining since the global crisis of 2008. That's why, in this episode of the Marginal Babbel podcast, I've sat down with Professor Matthew Gustafsson. To discuss his research on the effects of minimum wage policy on capital and investment expenditure, in addition to wider effects on the economy. The answers might surprise you. We really want to support small businesses, and small businesses are critical to the growth in the economy. When minimum wages go up, there's more capital investment, consistent with our other channel where you invest in capital to replace labor. I hope you stick around, and if you do enjoy the episode, please do give us a like and comment down below. So without further ado, let's get into the episode. Enjoy. What made you interested in studying minimum wage economics and its effect on the wider economy? Yeah, I think that's a great question. ⁓ I mean, in my view, it's it's one of the biggest questions in labor economics, sort of the way that mandated wages impact ⁓ employment. And in the U US in particular, there's been a lot of academic research on the question. And the initial answer to the question. That focused mostly on short run employment impacts was done by some great economists, but essentially found nothing. Essentially, it just found that minimum wages did not affect current employment right after they were passed. And I don't think that's been refuted, but I think over the last few decades, there's been a lot of studies that have kind of built on that. And the one that we actually used to motivate our study, which we'll get to in a minute, is This idea that while it doesn't while minimum wage doesn't have a short run impact on employment, it does sort of have a growing impact over time, ⁓ as kind of the level of business growth or employment growth, I guess I should say. And what was interesting to me f as a finance professor was that all of the attention to minimum wage seemed to be on the labor side. There was almost nothing in in finance, academia. And, you know, That was ironic to me because one of the biggest outcomes we study in corporate finance is corporate investment. And that's arguably the main driver of of economic growth. And so, you know, even if you think about the employment effect as, you know, maybe being un ⁓ unexciting or minimal or something of that nature, the way that firms respond to this on an investment front is is an interesting question in and of itself. we kind of pit this tension whereby, you know, a lot of people we talk to jump to the fact that, well, if you raise a minimum wage, firms are just gonna invest less in labor, spend money on capital to replace the labor. ⁓ we actually also highlight that the opposite can happen, that when minimum wages go up, essentially you have less profitable cro profitable projects and it like scales down the industry. ⁓ so I think that was like the academic interest for me. And then it sort of sits in my wheelhouse of econometric tools, my my interest in policy experiments and other settings and and things like that. Right, certainly. And I guess the the area to start off would be is just to kind of outline, I guess, what minimum wage laws are and what their intent is, ⁓ at least in you know, in theory anyway, in purpose of what the impact they're meant to have on the economy that they used in. Yeah. I mean, I think policy makers are are very well intentioned when when they pass minimum wages. ⁓ they're basically aiming to set a floor under what a full-time worker should make. Usually the minimum wages are set on an hourly basis so that in the United States, every hour you work, you have to make at least seven dollars and twenty-five cents. And you know, that's designed to lift the incomes at the bottom and make sure that the people who are working, you know, aren't also living in poverty to the extent that ⁓ these rules can can prevent that. I think there's also kind of a economic rationale, which is that there might be a little bit of a fear that certain employers can take advantage of workers setting rates below like what what the market rate is, and that this floor in in that world can kind of raise pay without necessarily leading to, you know, employers having less hiring less people. And so I think that's sort of that's what the intention is on the policy side, to take care of the people who are working, make sure that they have some sort of living wage in many cases, and therefore make the the lower part of the income distribution better off. Sure. And I g we can I guess the the there's a couple of things I can go on there about, you know, does this really affect does it actually do they effectively work in in various pieces and how it affects sort of marginal utility and various other things? But I guess like the the the Basic first question to ask is do they actually effectively raise the minimum income levels for people at the lower end of the of the distribution, which I I presume would be the core intent behind the policies? Yeah, so I I think that that they do kind of mechanically do that on some level. I mean, certainly the impact of them is gonna be very context dependent. ⁓ it's gonna depend on how many people are actually being paid the minimum wage in a given country or a given industry. ⁓ which later on we'll get to, which is why in the United States we end up focusing on on restaurants in our study. But in the United States at least, this minimum wage is somewhat binding for, you know, restaurant and retail industries. And so it does mechanically kind of impact certain certain states and certain industries ⁓ who who don't have kind of, you know, don't have all employees making over over that threshold. You know, when when you kind of look more generally at the academic literature, you know, what what happens? It it ends up being a lot more complicated than just, ⁓ look, a few a few people, ten percent of your employees make more money. You know, it you also see a lot of other ⁓ dials being turned by firms in response to this. You know, th there's a large literature that discusses kind of well how prices are gonna respond. So, you know, the The best view I one of the best views for minimum wage ⁓ supporters would be, you know, if if we raise minimum wages, you're just gonna be able to raise prices and you're gonna not gonna fire anybody and we're just gonna pass on these added costs to the consumers instead of having the lower income employees bear it. So certainly prices are something that that can adjust in response to this. ⁓ there's also growing evidence over time that it's really like the mix of employees that shift around. And so, you know, you get less temporary Or maybe more temporary workers, you know, and and and there's a lot of different dials that the that the companies can adjust. Maybe more zero hours contracts, I think things of that nature. Yeah, I actually c in preparation for this podcast, ⁓ there was a twenty nineteen paper from looking at Ireland's increase. I guess they increased the minimum wage in twenty sixteen. And, you know, there I think their findings roughly fit with the evolution of the literature in the United States where, you know, there was a little bit of a a short run impact. More so on the hours worked than on anything to do with the number of employees. But then there was also kind of the biggest brunt was borne by these temporary workers and sort of the conditions that they ended up ended up facing there. Sure. As with anything, it's it depends how you de ⁓ do you ⁓ define the policy and the context and the culture in which you're sort of implementing or all sort of big factors, I guess. ⁓ in the context of your research in particular. Obviously you were looking at the relationship between minimum wage rates and sort of capital expenditure by businesses. And I think what kind of interested me about this was that I mean so often, particularly at the moment, and I'm I'm I in the UK there's certainly a thing, and perhaps it's the same thing in the States, we just had this ⁓ employer's NI sort of increase and it was meant to be kind of ⁓ a way to not tax workers, but a way to tack businesses. It even though that many people will argue that actually by putting that up, you're just reducing the you're increasing the cost of the business, and that affects how much you can be paid. And I think just within that kind of context of the environment, there's been a lot of discussion in regards to minimum wage laws or just wage cost more generally on how it and how it affects entrepreneurship or how a business can either invest, grow, and do all the things that that an economy needs to do to kind of thrive. And particularly in the context of the UK, ⁓ we've had this kind of stagnating period of growth, which is not necessarily intrinsic to the UK, but ⁓ and some other Western powers. ⁓ but well, particularly when you consider The minimum wage law was only in introduced in the UK in in 1999. It's actually quite a recent thing. We have one of the more generous minimum wage packages in the world. Not the generous, but certainly one of the more generous of it. Obviously, correlation does not does not mean causality and that. business activity for an ability to grow. So I think if you could just go into into like your research a little bit and maybe ex explain kind of what you were trying to look at and what the results were when looking at these capital of expenditure components. Yeah, yeah. No, I think the the angle that you're coming at this from is is really, really interesting. And I think it comes from the same foundation as our study, which is basically, you know, that firms are going to take projects where the present value of what they can make is Greater than zero essentially when you factor in all the costs and things like that. And so this investment decision is really the same for kind of the large public companies that we're going to study and the entrepreneur kind of considering starting a business. And what we looked at in our paper was kind of the capital investment decisions of the restaurant industry in particular. In earlier drafts, we had some retail stuff and found qualitatively similar results, but These are the two industries in the United States that are most bound by the the minimum wage laws. And and so what we find is that when minimum wage goes up, in our case, we focus on kind of three different federal minimum wage increases, and we compare the states that are forced to change their minimum wage w wages with the ones that aren't. And we find like, you know, a 12% increase in the minimum wage in our study leads to about 12% reduction in capital spending among these ⁓ restaurant industries. So we kind of, you know, back of the enveloped what that actually means for kind of the typical restaurant chain. ⁓ and that's gonna basically mean that you're opening two less establishments per year. And so, you know, what we're saying is not that minimum wage kind of immediately necessarily leads you to fire people, but consistent with this employment literature that there's this longer run stagnation of employment growth, we kind of find that, you know, ⁓ the most sensitive industries just really stop growing as much. And and it kind of leads to less ⁓ you know, l less employment in the economy over over a longer horizon. ⁓ what's kind of interesting is, you know, I I actually, as I was publishing this paper, finding that, you know, minimum wage increases reduce capital investment, I was asked to review a paper at at another comparable journal, which they actually revealed me as the reviewer. So I'm allowed to say this normally you're not supposed to. But But their paper found actually almost the exact opposite result in ⁓ manufacturing firms in China. So there they found that when minimum wages go up, there's more capital investment, consistent with our other channel where you invest in capital to replace labor. And so I I think that kind of the putting these two studies together really highlights just how, you know, minimum wages certainly matter, but the way specifically that they matter is fairly context dependent. ⁓ that's interesting. So In this other paper, the context is or the the I guess perceived context of the of their results, because they do find sort of opposite findings to you, obviously, because there's a different context in which it's being applied. But increasing the minimum wage actually changes the cost-benefit analysis for a company in terms of whether they want to invest in things like machinery and automation and productivity. And that actually increases capital expenditure and that actually potentially because of that increase in capital expenditure increases the pro the productivity of the worker because obviously a lot of labor productivity is tied to how much capital investment you do. It's it's it's you know, it's not just how you know how many hours and how you how how good the individual is a lot of the time people kind of get that confused. But I actually found that it actually increased it, which I find quite i interesting. I guess that's completely context driven because again, manufacturing ⁓ I would imagine, although I don't know, is an incredibly capital intensive industry when I think of like car manufacturing or ⁓ biomedical engineering or th whatever that you're is your manufacturing as opposed to something like tourism or ⁓ the the the restaurant sector where obviously there's capital expenditures but a lot of the h overhead ⁓ is probably linked to to labor, I would say. So it's th so that's interesting you're gonna bring up that connotation. So I guess ⁓ could you elaborate a little bit more on potentially what the nuances are between the relationship you find and the different contexts in which you find Yeah. Well I think you actually described it quite well. I mean in so in China Again, I I'm basing it more on their study than any deep knowledge that I have of of China. But my understanding is that a lot of the minimum wage workers are working in manufacturing plants and the minimum wage level is is just really, really low ⁓ relative to kind of where it where it stands in the United States at least. And so I think those two things together, ⁓ al along with the time period over which the studies were conducted. Just led to a situation where it it seems like it was optimal for the employers to dedicate in capital investment to substitute for the labor. In the U.S. restaurant industry, over the period that we studied, which I also think is an important caveat that I'll get to in a second, but over the period we studied, it seemed like, you know, when you forced restaurants to pay more for their workers, ⁓ they didn't really have well, it wasn't their best option to substitute away with. With capital investment. Instead, they just found less projects to be profitable and grew less. I wonder, I I suspect that if you were able to reconstruct our study today with the automation and the kiosks and things like that in restaurants, you might actually find something that's more in between because all of these results are just highlighting the fact that like the the economic impacts, at least on businesses of minimum wages, are are very context dependent. And I think that is an important takeaway from From all of this, which maybe goes back to, you know, why I'm on here, because there's a lot of conflicting evidence in the in the literature that kind of cuts both ways and it's not necessarily one singular answer to these questions. No, no, certainly. I'd actually even be interested to see whether you found similar results if you did the s to the research again in 10, 20, 30 years' time. Because although I I I just mentioned about how potentially the ⁓ the s the s the ⁓ the restaurant sector or the service sector or the tourist sector are a little less automated than potentially like manufacturing, for example. We are starting to see autonomous robotics coming in to that can serve food, that can take sort of ⁓ food up to big people's hotel rooms. There's different automations like I think kiosks have been a massive thing, self-service on on those kind of components. So I would be interesting to see what the the research would give. If you did it again in sort of ten, twenty years' time when you when we expect a lot of those things to become more introduced. My intuition would tell me that potentially it would pot change for the f like the fast food industry, for example, where you probably expect more of those those kiosks, those automations to occur, but maybe not at the ⁓ kind of high end restaurant culture where you probably don't want as much sort of automation. personal touch, all these kind things. You want a high-end chef to be able to cook your food and not have it be automated would be my intuition. But again, it's an interesting area to kind of consider. Yeah, yeah, no, for sure. I mean, and and kind of layered on top of that, I agree with everything everything that you said there. I mean, layered on top of that is just the fact that minimum wage may be more or less binding in in certain instances. ⁓ so like in the US we have, you know, kind of odd laws about, you know, tip based pay. And so like minimum wage may not apply the same way. in that setting. And also it's I was I've been shocked the last few years just that we we haven't updated our federal minimum wage since 2009. So it still sits at seven dollars and twenty five cents. The CPI's gone up by about fifty percent. Inflation's gone up by raised prices by fifty percent since then. And ⁓ you know, so it all if if minimum wage isn't binding, for example, then raising it may not have much of an impact either. So so You know, in addition to all the complexities you just outlined, you also have to have a a critical mass of ⁓ employees making at or near the the minimum wage level for it to have a big impact. And I guess the ⁓ the states is an interesting context for this as well, because it is such a self-sufficient economy. I think like only d in terms of its GDP, and about twenty percent of it is in terms of like international trade and stuff. So much of the stuff comes from domestic, which is very unique to global developed economies in particular. And particularly with the s the the shift we maybe seeing, I don't know, whether it's going to persist or not, in regards to the attempts by ⁓ the Trump administration to try onshoring through things like tariffs and things like that, whether those kind of if manufacturing is going to start coming back to the states, or if you aren't allowed able to just import certain things from abroad as easy. whether those things would also have an effect on minimum wage and p potential productivity rates as well. I mean, ⁓ th because the the initial thing would be if you can't import as much stuff and you're manufacturing more on site, you're having to the minimum the the the wage rates will probably go up with it without even having to set minimum wage rates probably because they're just increased demand and you can't able to cause like from a cost competitive standpoint, particularly if you're gonna increase manufacturing and things like that where things can be a little bit And then to that point, you kind of mentioned with the the manufacturing component. maybe setting a higher minimum wage, like a really high minimum wage, even affects productivity because you can use more capital expenditure. So I'm I'm curious to how you s how you think some of these minimum wage laws and potentially how it affects capital expenditure by businesses might differ between countries and maybe regions, depending on what their economy mix is like and the general mix of policy instruments that the cut the economies and the governments are implementing. Yeah, I mean I I I think it's a it's a great question that I I don't know if I have the perfect answer to. I think I would kind of most immediately lean back on on what I said before, where I the most intuitive thing to me is more, you know, the distribution of of labor and wages across different industries, which may have more or less ability to substitute capital for labor. ⁓ in the United States, I doubt that a rise of an onshoring of manufacturing is gonna matter because the vast majority of jobs in manufacturing in the US are are a decent amount above minimum wage. ⁓ so like our minimum wage floors just doesn't happen to be binding for for that industry, ⁓ whereas it does for restaurant and retail. ⁓ and and so I don't think that's gonna matter in the in the US. I I think your international context is something I hadn't thought about either, but quite interesting in the sense of You know, I I guess kind of embedded in all of these theories of minimum wage is which is probably mostly true, that these minimum wage workers don't have too much mobility to other regimes. I mean, I suppose if if you had a lot of ⁓ migration ability, ⁓ which should actually be possible in the United States actually because each state has their own minimum wage. That's actually something that's interesting in the United States that we exploited in our study, which I won't get into too much, but Every state has its own minimum wage, whereas like twenty states just adopt the federal minimum wage of seven dollars and twenty-five cents. So, you know, across state borders in the United States you can get different minimum wage ⁓ thresholds. And I I can't remember a study kind of looking at, you know, whether employees move to a more favorable regime or not. ⁓ but I think that that's certainly a possible mechanism that would complicate a lot of the discussion here. Where if you raise your minimum wage, you might actually draw in better employees who would kind of fit those profiles. Yeah, potentially. And when you were doing the research, what kind of data were you pulling on? Was there like a data set from the government that you were able to pull on? Was it were you looking at actual businesses and the the the wage rates that they were providing? Like what what were you analyzing when you were doing the research? Yeah, so I mean that's that's actually probably one of the main reasons why the the study that we did hadn't been done because The data aren't perfect for what we were doing. ⁓ but we really wanted to look at ⁓ large public companies that, you know, we could observe their capital spending for. And then what we did for the most, you know, focused results is we focused on relatively small public companies who are likely operate mostly in the state at which they're headquartered. And so we sort of looked at basically the minimum wage environment that That they faced and how that was impacted by a federal minimum wage change. So, like I was saying, the federal government sets a minimum wage of right now it's $7.25. But about 30 states have minimum wages that are like higher than that, say $10. So when the federal government raises their rate to nine dollars, it's only impacting, you know, maybe half of the states in our country. And so we basically compared the evolution of capital investment of restaurants that were more or less exposed. to federal minimum wage increases. And and we saw that ⁓ the ones that were exposed to the increase reduced their investment on a relative basis. So then at the end of the paper, we have this a supplemental test that does leverage some government data on restaurant establishments. And for that, we kind of look at ⁓ restaurant establishment growth on two counties that are on either side of the border of a state. And we sort of exploit the same the same method there to at least corroborate ⁓ our main takeaway at the establishment level. ⁓ and and we find that, you know, if you're in a state that raises your minimum wage relative to the county right across the border, then growth in restaurant establishments drops on a relative basis in those in those counties. ⁓ so those were the two methods. Like we we came at it from a corporate finance perspective. ⁓ my co author Jason Cotter was a colleague of mine here in our finance group. And so You know, part of the reason we did the study was because we were surprised nobody in our field had really looked at this. And really the main data set that people use for these corporate questions is ⁓ the the reporting, the CompuStat data set where they report public firms report their investment and financial situations. And so we wanted to kind of show that this mattered in that context, but while acknowledging that, you know, it's hard to get perfect data, ⁓ when you're talking about these big public firms in that way. No sure, seldomly do you get a nice big complete data set that you can sort of move to your will and s and so yeah, I suppose it's not quite difficult. ⁓ I think maybe something I'd like you to elaborate on a little bit, and I because it's important for the context of the paper as well, is how important investment is. I g I well, I guess specific to this paper it would be in the in the case of ⁓ firm investment or private investment. maybe there's obviously components of government investment as well. However, in the context of this paper, obviously that's the more probably not as much of a relevant. But how important is investment by businesses or the private sector in how it impacts the economy and an economy's ability to grow and develop and produce? Because I think this is something that I've seen quite a bit where Particularly like in the UK or something, there's been a real stagnation across since particularly since 2008, in regards to ⁓ investment and UK productivity seems to be slowing down quite, quite considerably. And so could you just talk to me a little bit about The relationship between private investment or business investment and the health and the ability of a an economy to grow and develop? Yeah, I mean in in the United States, ⁓ you know, it's commonly talked about and shown that like small business growth is is one of the most fundamental drivers of employment growth and the vibrancy of the economy. But I th I think that kind of comes down to Just the more general idea that, you know, small businesses are the ones that, you know, when they grow, they tend to more directly impact, I would say, the labor market and such compared to huge firms when they grow. They I mean, certainly huge firms have great value for society, but a lot of the residual value that's generated kind of is going to go to the shareholders and and things like that when when a huge firm grows. But but I think what To bring this back to what we're studying in our paper, ⁓ you know, I this is just a gut feeling of mine, but my feeling is that by looking at these labor-intensive businesses that actually have a lot of lower income employees, we're kind of looking at the subset of the bigger firms where, you know, on an establishment by establishment basis, they are actually touching kind of the real economy and, you know, the real workers of the areas and things where they, you know, sprawl out to their establishments, right? So you look at a a big restaurant chain like McDonald's, you know, they have establishments all across the country. You look at a company like ⁓ Google that's probably got a market cap that's 20 times McDonald's now in terms of value, but, you know, they probably have a sliver of the business establishments and like the geographic reach across kind of the the broader landscape of of the world. So so yeah, so I I do think that the literature would say that small business Growth is a key driver of economic growth. I would, you know, ⁓ cautiously extrapolate that to kind of the establishment-driven businesses that we study in our paper and say that it probably also is a big driver of sort of the growth in these areas or at least the stability of the labor market. That's really interesting. Because I was thinking about this the other day. ⁓ I was thinking about it in the context. I was talking to someone ⁓ that I know about this. Because we were also talking about it in the context of ⁓ things like maternity pay and other benefits that employers have to provide to employees, right? And we were talking about the difference between, you know, having minimum wage rates, but also things like maternity leave, sick pay and stuff for small businesses versus like large mega corporations. And I was kind of making the argument to the individual that I was talking to that Yeah, I think for the mega corporations and the people that require really highly skilled labor, it makes a lot of sense actually. And you're s you're seeing this a lot with, for example, ⁓ la law firms in London, right? Where they just have this massive exodus of ⁓ female partners around the age of thirty because they have to go and sort of they're to rich because they've w if they want to have kids, they have to choose to do it at at some point. And it's actually causing a real problem for them. And so it meant there's an incentive for them to actually provide ⁓ maternity benefits, paternity be benefits to help sort of balance out some of the that the the workload, but also provide other support for those kind of things. However, that's because they have the resources and ⁓ and the ability to do it and because they have such an existential problem of retention that it makes it cost effective for them, or cost effective in in brackets, for them to do so. If you then compare like someone having to do that, like a a s a a startup, a small to medium sized company where you're employing three people, And s you know, someone joins the company and then has to go on maternity leave, or you have to provide them a certain level of minimum wage or on this kind of thing, that's a massive impact on that ability's ⁓ that company's ability to grow, develop, and create more sort of small local businesses that to your point are really, really important to the economy. And so what we were kind of talking about is potentially like, should things like minimum wage be separated depending on the size of the organization that you're talking about? You know, sh should there instead of having minimum wage laws for ⁓ sort of ⁓ you good in the UK we have different minimum wages for sort of under sixteen apprentices, ⁓ and then different age rates up to sort of like twenty-five or so under the national living wage. But sure but perhaps there's more scope for doing such things for larger companies versus smaller companies, where we can actually still encourage economic growth. through small to medium sized business, which is really important for local economies. A lot of the small local businesses also spend a lot of money in the local economy as well. So there's a kind of a multiplier effect in that regard. In comparison to let's say medium to to larger companies. I don't know whether you ever thought about that, some of those those things and whether it's appropriate or whether it's it's one of those things, maybe pr i in theory it sounds good, but pragmatically it would just be a nightmare to administer and and in in actuality large companies would just find a way around it anyway. Yeah, no, I I think it's a really fascinating question. I I think where you kind of started with ⁓ the maternity benefits and such, my mind was going at that point to kind of the the difference between, you know, having specialized labor where you've developed skills that, you know, are perhaps unique or at least somewhat unique to the firm that you work at. And so there's kind of this like surplus between the employer and the employee. That they kind of bargain over and so they get these extra perks because breaking that match would be very costly because you've dedicated this time at the farm and such. And that doesn't necessarily apply to the typical minimum wage worker, the way a lot of people think about it. The w the fact that you're minimum wage would suggest you're not even kind of a manager and therefore like you're you're sort of ⁓ somewhat replaceable in a way. So I'm not sure that aside from the general idea that like We really want to support small businesses. ⁓ and small businesses are critical to the growth in the economy. That argument could justify kind of having this lower minimum wage for for that subset. I the thing that Jason and I grappled with a lot, but could never find surprisingly, we could never find great results is kind of on the employment side of things, one thing that you could I believe you should do. is cater the minimum wage to the area's cost of living. And so like if you think about what minimum wage is doing in the US, if you were to raise minimum wage from let's say seven dollars and twenty five cents to eight fifty, it's probably gonna have no effect on San Francisco. I mean, maybe a few people make minimum wage, but what it's gonna crush is like the small establishments in rural United States who really can't afford to pay people more than this because, you know, the The cost of living there is so low that the minimum wage is actually quite reasonable, perhaps. I'm not making a statement about whether it is, but it's more reasonable there than in like San Francisco or New York. ⁓ and so I do think, you know, that would correlate with the idea that you're kind of laying out that, you know, the small local businesses, ⁓ to the extent especially that they're in lower cost of living areas, maybe should be able to, you know, sort of have a different minimum wage than what they are in San Francisco. And then You know, then the question is, you know, should they be higher in the cities or should we reduce it even further in the rural areas? So the debate would go on. But I do think that having some variability there and it would also encourage businesses to locate, you know, in lower cost of living areas, which might be, you know, a policy benefit ⁓ that could come along with it. Yeah, maybe affect some of the the income distribution. 'Cause that's another component actually, like that at least affects the UK, but I I know also affects the US, is the wealth inequality has massively ⁓ sort of grown over the sort of the last like however many decades or so. I think ⁓ you know, pot particularly as wage rate ⁓ economic growth rates have slowed, wealth inequality has certainly increased. ⁓ and so potentially having a little bit more discrepancy for those things that might encourage people out into certain areas. And in the UK it's like a north south divide, but you know, behemoth potentially that helps grow the economy of the north and actually gives the people more opportunities in more rural locations potentially. So that's like an interesting context that would be interesting. ⁓ I think the obvious well, I guess not maybe not the obvious, but the I guess the headline thing that I guess someone would might take away from reading your paper is that ⁓ minimum wage is negatively affecting ⁓ capital investment rates as such, we probably shouldn't have as high or any minimum wage in order to encourage businesses to spend on capital expenditure, grow and grow ⁓ hopefully grow the economy as a result. I guess the the counterpoints to that Which I guess I'll just sort of like rattle off to you and you can tell me whether they're kind of you think that they're relevant or they're not relevant, is that minimum wage essentially provides, I guess in some context, as as you mentioned, ⁓ increased productivity. ⁓ and there have been other papers that have shown that, that actually by, you know, by providing people ⁓ a minimum set of wage ⁓ for various reasons, it could be to making sure that they can eat properly, they can House themselves appropriately, that makes them more productive workers. And that ultimately that increases productivity. And ultimately, that's like a win-win scenario. And that also, by increasing the minimum wage, you are effectively helping some of that wealth inequality component that we have seen massively increase over ⁓ however many decades. and helps address that issue as kind of like a policy benefit. But also by increasing the minimum wage, you are typically ⁓ affecting people that work in specific localities, probably people that have a higher marginal propensity to consume in comparison to sort of higher wage earners. And so if they have a ⁓ higher marginal propensity to consume, you're probably by increasing the minimum wage actually going to get some of that money back in tax revenues because ⁓ the likelihood is that, or at least the the theory would be that people would spend more of that money in the local economy. And because of the multiplier effect, you would get some of that back in VAT and income tax from other businesses and such. And so do any of those things like ring true to you or do Do they are they potentially oversimplifications of what is essentially a very multivariated and complex system? Well, I I th I do think it's certainly very complex. I think that's that's kind of the the starting point for for me. And I think the if I'm thinking about the trade-offs I of these minimum wage policies, I'm kind of thinking that there is and there must be some sort of long run impact on employment growth. ⁓ but that doesn't necessarily mean that these laws aren't kind of a net positive in in certain ways. I'm not saying that they are or that they aren't. It just it doesn't necessarily imply that. Because what you would then need to understand is first of all that the people who are working at the minimum wage level, the ones who retain their jobs, they're all kind of they are better off. They're making more money for the same work that they were doing before. Perhaps they enhance their their productivity. that could definitely happen. ⁓ you could think about a situation where let's say ninety percent of people keep their jobs, ten percent of people lose them, but now like if you don't work hard, you could be replaced by somebody. There's clearly other people who would want to work at this higher minimum wage. And so you might end up with, you know, better productivity ⁓ in that sense. Also like competitiveness almost being right. Because now the job is more desirable, right? Now you're paid eleven dollars, you used to be paid ten and you have to make sure that you're providing value and stuff so you can hopefully retain the job actually. Right. I mean, that was like the old story that I remember people talking about Henry Ford and how he paid way above, you know, market wages. And I think Costco He gave people the weekends so that they had time to use their cars and that increased demand and kind of stuff, yeah. Right, exactly. And they wanted to keep their job so they worked harder, et cetera. So I think there's definitely a a component to to kind of what you're what you're saying there. I mean you you you start off at the start of this conversation by outlining the part of the reason or the reason that you wanted to do this research desp despite it being a little bit of like an isolated one in your kind of ⁓ repertoire of the research that you've conducted is that there was a kind of just a hole and you were quite surprised that you hadn't seen some of this research conducted before. I guess what I would ask you then that now that this research is published, what research do you think would be really value adding to be conducted in the future that could help build upon the findings of this research? Or maybe even not that, but just fill in some of the gray areas and gaps that you we you think that there are in the literature? Yeah, I mean, I I think that the I think the gap are mostly at this I I don't know. I I think the the framework of the literature right now is fairly intuitive. You know, it's not obvious. Minimum wages could have had a huge negative employment effect right when they're passed. That that I think is pretty safely not the case. ⁓ but I do think that there's kind of mounting evidence, at least in the United States, over the call it nineteen ninety to twenty twelve period, that, you know, minimum wages did have some long run negative effects on on employment, et cetera. ⁓ but I think that the and and it's hard because like, you know, academia is all about novelty, right? So like I don't think there'll be an AER paper, which is the top economics journal paper, written on what I'm gonna say. But I do think it's really important to understand, you know, with the rapid rise of technology and and things like that over the last 15 years, you know, what pockets of the economy would still be impacted in what ways from from minimum wage changes at at this point. ⁓ and so I I think, you know, I think conceptually the story is pretty good and pretty well fleshed out in the literature. But I think it's very unclear how it would apply to, you know, shifts today. Like we look at a margin marginal changes from seven dollar or from like six dollars to seven dollars in two thousand nine and ten. Right. But there's cities talking about they want a fifteen or twenty dollar minimum wage now. Like I I just don't think that the literature is well suited to project out what's gonna happen to those type of new and important ⁓ policy decisions. Yeah, partly because it's literature's very context driven and that's probably why you get some of the contradictions or like the confusion that people like myself that have when we're kind of trying to look into the area as like ⁓ novices. But also is that the as you point out the the landscape training changing. And so things like the types of capital and the types of businesses ⁓ that we have are probably changing constantly as well. So it's yeah it's not giving me a lot of hope in terms of getting a conclusive answer. But but it's ⁓ but it's it's certainly a fair point. And it's Well yeah so so you don't have a fair answer, but I do think the literature has given you like a menu of things to think about. Right. And and so then it's a question of like, okay, so I want to raise minimum wage in this city. Well, here are the types of things that that I should think about might happen. And then you kind of need to be a little bit ad hoc or maybe do your own sort of consultant type study on how these different things might map out, you know, to your specific setting. ⁓ one of the challenges with economics research is that everybody wants, you know, broad aggregate conclusions in order to publish well. And so there isn't that much drive for like an academic economist to study, you know, a specific city and how minimum wage might affect something in a specific city. Especially not beforehand, right? ⁓ academic research also happens after the fact. So it provides even less guidance to what you might expect is gonna happen up front in in a sense. Yeah, no, certainly. And is there Given the the literature we kind of c talked about, is there anything that you think that the general public or even potentially ⁓ researchers at large maybe misunderstand about minimum wage economics and how minimum wage policies affect the economy? Well, I mean, I think the first big one, which maybe is a little bit obvious given our conversation, is just that I think if you were to take a snapshot of, you know, the public discussion of these issues and even the academic literature, I think it's a little it's overly focused on the employment on the immediate employment impacts. I think that that's certainly the first thing that we should look at and it's been looked at a lot. But I I would just encourage ⁓ people to understand that the the types of things that are moving are much, much different and much more nuanced than just are there more or less employees in the year after after the change. The second thing that I would say is that. You know, at least in the United and again, this is context dependent as we've been saying. But in the United States, you know, a lot of the minimum wage workers are not the the sob story of the sole moneymaker in the household. Right. So a lot of these are, you know, teenage folks like trying to get jobs over the summer, ⁓ and things like that. And, you know, that that I think shifts the calculus a lot. ⁓ because for them what they're really gaining is the experience as much as the money. And so by having this minimum wage stop a a restaurant from hiring a worker over the summer might make it so that that generation of workers has takes longer to become a manager or whatever it might be, or whatever they want to do. And so I think that those are kind of the two things that I would say that that it's more than just employment and that it's not always about you know, the person trying to make a living wage for themselves or a family off of the minimum wage. Although that is important, there's also other angles to it that that can have consequences that we should consider. Certainly. ⁓ Matthew, this has been a really interesting conversation. I r I really appreciate you taking the time. I guess what I'll just like leave you as like a sort of like a final question is how not necessarily how you see minimum wage policy changing in the future. But how do you see discussions around minimum wage policy and minimum wage effects changing into the future, particularly as we see technology progressing ⁓ in various industries and in various capital ⁓ manifestations? Well, I don't know what's gonna happen, but I think my hope is that. minimum wage becomes less of an issue and is subsumed by kind of more general progressive policy to redistribute wealth that's being generated from the capital that we have. ⁓ I mean, I think minimum wage is good in isolation to set a floor and give people some minimum standard of living. But I but I do think that economists and myself included, while we might not have the perfect policy answer, would say that, you know, some sort of progressive tax structure that that redistributes money would might be a better tool in many cases to kind of bring those same people up to maybe even a higher level of of utility. All right, certainly. Matthew, thank you very much for taking the time. It's been a great conversation. I really appreciate it. Thank you, Max. It was great. Thanks for having me.