"Youth unemployment is still unacceptably high," noted the Ontario government as it identified priorities in its 2013 budget. Oddly, however, the government is now contemplating a policy that would make it harder for young Ontarians to find jobs. With its newly minted advisory panel, the government is considering ways to automatically increase the minimum wage by tying its future value to changes in inflation or perhaps economic growth.
The panel's lofty goal is to "come up with a system that will ensure both job creation and income security for all Ontarians." Achieving it, however, is wishful thinking. Scores of economic studies have found that minimum wage increases result in fewer job opportunities, particularly for the young and low-skilled.
Before the panel gives its recommendations, it should ponder a new study published earlier this month by the National Bureau of Economic Research. Instead of the traditional approach of looking at employment levels, the authors looked at how minimum wage increases impact net job creation (jobs created minus jobs destroyed). After examining data in U.S. states from 1977 to 2011, they found that a 10 per cent increase in the minimum wage led to about a one-quarter reduction in the rate of net job growth. Put another way: increasing the minimum wage reduced the rate of jobs being created, resulting in fewer employment opportunities than would have otherwise occurred.
Of course, one study alone is not convincing evidence of the destructive effect of minimum wage hikes. So consider a comprehensive review of the academic literature conducted in 2006 on minimum wages and employment. Led by Professor David Neumark, an expert in the area, the review looked at more than 100 studies covering 20 countries and found an overwhelming majority of studies reached the conclusion that minimum wage hikes negatively impact employment.
In Canada, more than a dozen studies have examined the impact of provincial minimum wage increases. Based on those findings, a 10 per cent minimum wage hike decreases employment for young workers (ages 15-24) by an average of three to six per cent. For young workers most affected -- those earning between the current minimum wage and the proposed higher wage -- the impact is more acute, with job losses of up to 20 per cent.
To understand why increasing the minimum wage has such negative effects, it is important to recognize how compensation is determined in competitive markets. Compensation is based on the amount employees produce--their labour productivity. For example, if a fast-food employee can produce a maximum $8 worth of output each hour, then her employer would be willing to pay up to $8 per hour in total compensation. In other words, the employer aims to match per unit labour costs with the value of what their employees produce.
If the government imposes a minimum wage rate that results in compensation exceeding an employee's maximum ability to produce, employers adjust their affairs accordingly. Employers not only respond by decreasing the number of jobs but also by reducing the hours employees work, cutting non-wage benefits like on-the-job training, giving priority to the most productive employees, and/or finding ways to operate with fewer workers and more automation.
While the negative impact on employment is one thing, there is a growing body of evidence that shows minimum wage increases actually do little to help households in need.
A 2012 study by prominent Canadian minimum wage experts analyzed provincial data from 1997 to 2007 and found that raising the minimum wage had no statistically discernible impact on measures of relative poverty (including Statistics Canada's Low Income Cut-Off).
One important reason is the bulk of minimum wage workers do not actually belong to low-income households. In a 2009 study, researchers used Statistics Canada data to profile minimum wage earners in Ontario. They found that "over 80 per cent of low wage earners are not members of poor households" (they define poverty as earning income that is half the median wage). The researchers also found that "over 75 per cent of poor households do not have a member who is a low wage earner."
If the government is serious about tackling Ontario's youth unemployment and fostering job creation, then it should steer clear of future minimum wage increases regardless of what formula the advisory panel recommends. The reality is that increasing the minimum wage will actually reduce job opportunities and not alleviate poverty.
This piece was co-written by Hugh MacIntyre, Fraser Institute analyst.