THE BLOG

Why A Higher Minimum Wage Won't Help the Poor

01/31/2014 12:45 EST | Updated 04/02/2014 05:59 EDT

After several months of labour activists putting pressure on the Ontario government to increase the provincial minimum wage, Premier Kathleen Wynne finally succumbed and announced that she will increase it to $11 per hour from the current $10.25 rate.

This is yet another clear case of politics trumping evidence in the setting of government policy. Minimum wage legislation has been studied ad nauseam so there's plenty of evidence to draw upon. And the vast majority of that evidence shows increasing the minimum wage does little to help impoverished families and often hurts the most vulnerable workers.

When governments impose a wage floor higher than what would prevail in a competitive market, 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 usually end up as collateral damage in the process since they are the ones with less job qualifications and experience.

Don't take our word for it. Consider a comprehensive review of independent, academic research on minimum wages and employment by University of California Professor David Neumark, the foremost expert in the area. The review looked at more than 100 studies covering 20 countries and found the overwhelming majority of studies concluded that minimum wage hikes negatively affect employment.

Despite mountains of evidence, Premier Wynne last summer felt it necessary to establish a panel to provide advice on Ontario's minimum wage. The panel reported back late January and could not deny the impressive weight of the evidence against minimum wage hikes.

A quote straight from the panel's final report: "In the Canadian context, researchers have generally found an adverse employment effect of raising minimum wages especially for young workers." The report goes on to cite a series of Canadian studies and notes that recent research finds "teen employment would drop by three per cent to six per cent if the minimum wage is raised by 10 per cent."

The panel correctly points out that focusing solely on employment numbers misses other negative and unintended effects of minimum wage hikes. When faced with such wage floors, employers also respond by cutting back on hours, providing less on-the-job training, and giving employment priority to the most productive workers.

That last response is a key reason why workers with less experience, education and job-related skills tend to be hurt by the policy. And these workers are presumably the very people the government and activists want to help.

As for the link between minimum wages and poverty, the panel also reviewed the growing body of evidence that shows minimum wage increases actually do little to reduce household poverty. The panel even acknowledged "some studies even find that a higher minimum wage leads to an increase in poverty." This is a counterintuitive result no doubt but it is partly explained by the fact that the bulk of those working for the minimum wage do not belong to poor households.

According to the panel's own analysis, 81.5 per cent of minimum wage workers in Ontario do not belong to a poor household (here poor is defined in a relative sense). In addition, the majority of minimum wage earners (56.3 per cent) are dependents living at home with their parents while a considerable proportion has a working spouse (17.4 per cent).

These statistics may come in stark contrast to the images pushed by activists of a single parent struggling to support their family. In reality only 2.6 per cent of minimum wage workers are single parents.

Finally, the panel makes an all-important point that is often forgotten: "minimum wage jobs are often taken as temporary stepping-stones to higher paying jobs." In other words, workers who earn minimum wage don't typically stay at that pay rate for long.

Premier Wynne's disregard for her own panel's evidence is validation that politics superseded evidence in the decision to raise Ontario's minimum wage. Unfortunately, Ontario's youth and most vulnerable workers will pay the price of this political decision.

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