Worker earnings, service quality, and firm profitability: Evidence from nursing homes and minimum wage reforms

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060420-WP-Worker earnings, service quality, and firm profitability-Ruffini

Krista Ruffini, University of California, Berkeley


This paper examines whether higher wages paid to low-income workers affects the quality of services they provide to consumers. To answer this question, I combine wage variation for direct care staff in long-term residential care settings, driven by minimum wage reforms, with objective measures of patient health. I find that a ten percent increase in the minimum wage raises low-skilled nursing home workers’ earnings one to two percent, reduces separations, and increases stable hires. These earnings gains and increases in firm-specific human capital translate into marked improvements in patient health and safety. A ten percent increase in the minimum wage would prevent at least 15,000 deaths, lower the number of inspection violations by one to two percent, and reduce the cost of preventable care. Firms are able to fully offset higher labor costs by attracting patients with a greater ability to pay and increasing prices for these residents, resulting in no significant change in profitability. Considering costs elsewhere in the health system, savings from pressure ulcer treatment alone offsets up to half of the increased wage bill, and if the social value of increased longevity for nursing home residents is at least $21,000—well below existing estimates—higher wages in this sector are fully offset by improvements in care.


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