Minimum Wages Nudge Firms to Train Workers
Contrary to long-held assumptions, new research by Prof. Katarina Zigova shows that minimum wages in Switzerland can actually encourage firms to invest more in employee training. Text: Katarina Zigova
In an era of skill shortages, few would object to firms investing more in training their employees. Policymakers, too, seek measures to encourage such efforts. Yet many firms remain reluctant, as training brings additional direct and indirect costs, and the risk of losing newly trained employees to competitors dampens motivation.
Turning a cost into an opportunity
At first glance, introducing minimum wages seems an unlikely way to boost training investment. Why would firms spend more when regulations already raise labor costs? But what if low-wage workers are in fact valuable – and replacing them proves even more expensive than retaining and training them?
When the canton of Neuchâtel introduced Switzerland’s first regional minimum wage in 2018 – followed by four more cantons between 2020 and 2022 – the intervention created an ideal setting to study how minimum wages affect training. Drawing on three extensive Swiss surveys covering a period over eight-years, Prof. Katarina Zigova from the University of Zurich and Prof. Thomas Zwick from the University of Würzburg examined firms’ training activities before and after these policy changes.
Switzerland’s federal structure provides a natural comparison between cantons with and without minimum wages, strengthening the study’s findings. The results are striking: minimum wages led to about 10% more training – mostly employer-financed, often during working hours, and covering topics beyond core business areas.
Further analysis shows that the training increase is not limited to workers directly affected by the minimum wage. Smaller, yet significant training increases also occur among higher-paid employees – a phenomenon known in the literature as the ripple effect. Moreover, the training effect remains stable over several years.
Beyond the minimum wage
A common concern might be that this favorable outcome simply reflects a change in the workforce composition following the introduction of minimum wages. However, Zigova and Zwick provide strong evidence against this claim. Firms in the affected cantons did not hire higher qualified employees or alter their workforce composition in other ways. Working conditions such as overtime and contractual arrangements also remained unchanged.
Cantonal minimum wages are a relatively new phenomenon in the Swiss labor market, and many observers initially feared negative side-effects. However, the research by Zigova and Zwick shows that firms hardly laid off employees. Instead, they responded by increasing training efforts and offsetting higher labor costs through productivity gains. As a result, the policy brought not only a direct effect – raising low wages – but also an indirect one, by stimulating investment in human capital.
Katarina Zigova is a professor of personnel economics, vocational education and lifelong learning at the Department of Business Administration UZH.
Text: Katarina Zigova, Source: Oec. Mag. #24