When Can Employers Pay Poverty Wages? The Relationship Between Living Wages, Monopsony, and Employee Turnover

Employees have been quitting at higher rates over the past years, leading to what has been deemed “the great resignation.” This has happened alongside wages stagnating for those in the bottom quintile of the wage distribution, leading to a significant number of US workers earning below a living wage. This paper asks: when does paying below a living wage increase a firm’s turnover rate? While prior studies provide evidence of a relationship between wages and turnover in specific contexts, we employ a large panel dataset across geography, firms, industry and job type, identifying wages and turnover at a level of granularity and breadth previously unexamined. We explore nuance in the relationship between wages and turnover as well as focus on low wage job categories specifically since lower wages impact workers in low wage jobs most and generate the greatest societal cost. Further, our descriptive evidence shows that the relationship between wages and turnover differs between low and high wage workers, suggesting that underlying mechanisms differ by wage levels. With an instrumental variables approach, we find causal evidence that paying below a living wage leads to greater turnover but show important variance in this relationship depending upon several firm and location specific factors including monopsony power. Firms that exert control over the local labor supply face less of a penalty for paying low wages. These results are robust to location, industry, firm, and time effects. The costs of paying below living wages appear to be high; a one standard deviation increase in paying below living wages more than doubles employee turnover among workers in low wage job categories, relative to other firms in the same MSA. These results bear implications not only for the cost of paying below living wages for firms, but also wage policies in locations where there are few employers