Higher minimum wages kill jobs

From Economist John Clinkard.

"As an economist for more years than I care to count, it has always perplexed me how often politicians and other commentators believe that if you arbitrarily raise the price of a good or a service, the users of the good or service will continue to buy as much as they did previously and will not reduce, cut back and/or search for cheaper alternatives.

This is the essence of the argument used by those who support introducing and/or raising minimum wages of low skilled workers in order to help them escape poverty.

Before assessing the impact on the demand for labour of higher minimum wages, it is worth noting some of the key characteristics of the 817,000 individuals (approx 5.8% of total employment) earning the minimum wage in Canada.

First, according to Statistics Canada, over half (59.2%) of these workers are relatively young, i.e. between 15 and 24 years of age.

Second, approximately 60% are living at home with their family and of those, just over half are attending school.

Based on the age distribution of minimum wage earners noted above, it is clear that raising the minimum wage would not significantly benefit adults and particularly those with dependent children.

In the United States, following the passage of the Fair Labor Standards Act in 1938 and the setting of the minimum wage at 25 cents, it was possible for economists to determine the impact of minimum wages on the demand for labour.

Indeed, after raising the minimum wage during the 1960s and in the 1980s, the US congress created the Minimum Wage Study Commission to analyse the impact of minimum wages on employment.

After extensive study, the commission reported that statistical studies "typically found that a 10 percent increase in the minimum wage reduced employment by one to three percent".

In Canada, the results of research on the effects of high minimum wages are completely consistent with those of the United States as noted above.

A recent paper by the Fraser Institute titled The Economic Effects of Increasing B.C'.s Minimum Wage, examined 14 studies undertaken over 30 years that revealed a 10% increase in the minimum wage reduces employment among those at the bottom of the wage scale by 3% to a jaw dropping 20%.

Further, the research found that higher minimum wages frequently caused firms to scale back benefits and training,  and by raising starting pay for unskilled work, created an incentive for high school students to leave high school before they graduate.

From our perspective, we would not object to higher minimum wages if there was evidence that they raised the standard of living of a significant portion of adults at the bottom of the income scale, especially those with dependents.

However, the research noted above clearly indicates that this is not the case and raising minimum wage rates contributes to a material decline in job opportunities for the young people who need them the most. In addition, higher minimum wages can make some low income households less well off by reducing the job opportunities of their younger family members.

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