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Minimum Wage Increases Won't Solve Our Poverty Problem

12/03/2014 06:08 EST | Updated 02/02/2015 05:59 EST

The B.C. Federation of Labour is out in full force with its latest campaign to increase the provincial minimum wage to $15 from the current $10.25 per hour. Last week on these pages the Federation's outgoing president Jim Sinclair argued in favour of the hike, framing the increase as a way to help British Columbians escape poverty.

While the aim of helping poor families is something we all want, the reality is that a minimum wage increase is the wrong policy.

It sounds straightforward: get the government to legislate a higher wage so low-wage workers earn more. Unfortunately, this oversimplification fails to account for a number of facts including who earns the minimum wage and the unintended consequences that result from minimum wage hikes.

First consider that the vast majority of minimum wage earners are not part of poor households. (Poor in this sense is defined by Statistics Canada's low income measure which is not a measure of absolute poverty but rather relative low-income.) According to a major report for the Ontario government earlier this year, 81.5 per cent of minimum wage earners in Ontario in 2012 did not live in poverty. This presents a conundrum for those advocating minimum wage increases as a way to fight poverty.

There are several reasons for the counter-intuitive reality about minimum wage earners. First, most people who earn minimum wages are not the sole income earner in their household. Most are in fact young people starting out in the labour force working their first job while in school. The same Ontario government report indicates that 61.8 per cent of minimum wage earners are between the ages of 15 and 24 and that 56.3 per cent of minimum wage earners are living at home with their parents.

A large share of the remaining minimum wage earners (17.4 per cent) have working spouses, meaning their household income is higher than what a single minimum wage would provide. Thankfully, the image of a single parent struggling on minimum wage to make ends meet is a rarity as single parents make up only 2.6 per cent of minimum wage workers.

This basic data on minimum wage earners helps to explain why academic studies consistently find that minimum wage increases do not reduce poverty. At best, Canadian researchers find no statistically significant effect. At worse, they find minimum wage increases can actually increase relative poverty. Poverty can increase because minimum wage hikes make some low income households worse off by reducing employment opportunities for young workers in the family.

Hundreds of academic studies from around the world have examined minimum wages. A comprehensive review led by Professor David Neumark, the foremost expert on minimum wages, concludes that the balance of evidence is that minimum wage hikes negatively affect employment among young and low-skilled workers.

The over dozen Canadian studies that have examined provincial minimum wage hikes are more conclusive and show larger negative effects than in the United States. On average, the Canadian evidence finds that a 10 per cent increase in the minimum wage decreases youth employment by between three and six per cent.

The economics of these findings is relatively straightforward. When governments impose a minimum wage higher than what would otherwise prevail and without corresponding productivity increases, employers find ways to operate with fewer workers. While the more productive workers gain through a higher wage, their gain comes at the expense of others who lose as a result of fewer employment opportunities. Young and low skilled workers are most adversely affected since they possess less job qualifications and experience.

In the end, minimum wage hikes rob young people of the opportunity to gain work experience that helps them develop basic skills and earn higher levels of income. Indeed, research finds that earning the minimum wage is often a stepping stone to higher paid work.

But focusing solely on the employment numbers misses other negative effects from minimum wage hikes. Employers also respond by cutting back on hours, providing less on-the-job training, and giving employment priority to the most productive workers.

Minimum wage proponents also ignore the policies currently in place that help augment the income of low-wage workers. For instance, the Working Income Tax Benefit (WITB) provides a subsidy to workers, depending on their family circumstances and where they live. Unlike the blunt minimum wage instrument, WITB actually targets benefits and imposes almost none of the negative side-effects noted above.

If we are genuinely interested in helping the poor, we first need to know who they are and what makes them poor to begin with. Hiking the minimum wage will impose enormous costs and do nothing to reduce poverty in a meaningful way.

This piece was co-written by Hugh MacIntyre, Fraser Institute analyst.

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