The Minimum Wage: Forbidding People To Work

Commentary, Poverty, Frontier Centre

Where should we set the minimum wage? Even when the answer to that question reeks of good intentions and we jack up the rate, in practice it creates very real problems. The argument about it can provoke the strangest of behaviours.

Recently Cy Gonick, a retired economics professor and local old-left icon, took NDP Premier Gary Doer to task for raising the minimum wage only 25 cents an hour, to $7.00 (“Manitoba’s minimum wage should be increased to $10 by 2007,” Winnipeg Free Press, January 17, 2005). He accused Doer of cozying up to the Chamber of Commerce. Go figure.

Last fall Todd Hirsch, chief economist at Calgary’s venerable Canada West Foundation, chastised Alberta’s Premier Ralph Klein for the same reason (“Alberta should bump the minimum wage,” National Post, October 4, 2004). Hirsch’s complaint? That his province’s low minimum wage is “embarrassing,” given its abundance of wealth.

This agreement suggests a rare ideological consensus. But both chaps are wrong. The minimum wage’s harmful effects penalize the poorest of people, no matter how affluent their surroundings. In fact the latest studies suggest that higher minimum wages have even more destructive social effects than those previously documented.

Professor Gonick plays fast and loose with numbers to make his case that everybody be guaranteed a “living wage.” He claims that 7.4 percent of Manitoba’s workforce is paid the minimum wage, and that most of them are adults. To the contrary, the Caledon Institute of Social Policy, not exactly a pro-capitalist outfit, pegs the total here at just over five percent, three-fifths of whom live with their parents. Gonick adds that 20 percent of those at minimum wage are “family heads,” but neglects to mention that most of them live in households with more than one wage-earner.

Economists on Gonick’s wavelength have never liked the inarguable fact that legislated floors on wage rates mean trouble for the poor. In 1995, two of his intellectual bedfellows from Princeton University set the chattering classes on fire with alleged proof that minimum wage rates went up in New Jersey without any rise in joblessness among poor and minorities. Paul Phillips of the University of Manitoba and Errol Black of Brandon University went public with this data which, it turned out, were erroneously gathered and analyzed. No corrective retractions ever reached the media.

Canada West’s Hirsch admits that minimum wages do increase unemployment but says that’s “acceptable.” His advocacy is based on moral perceptions about poverty and homelessness among the working poor. Even though he knows that a hike would only be “symbolic” and do little to alleviate those problems, he thinks Alberta’s low rate makes it look bad. Others have already taken him to task for a “vivid heart-versus-brain conflict,” a problem that infects many of Manitoba’s aging policy orthodoxies.

Perhaps he wasn’t aware of the new research on the subject. An exhaustive study of the effects of minimum wages by David Neumark and William Wascher, published in 2004 by the Industrial and Labor Relations Review, calculated consistent employment losses among 19 to 24-year-olds in 17 industrialized countries. Many studies peg the losses at between one and three percent for every ten-percent increase in the minimum wage.

Alan Reynolds of the Cato Institute points out that three times as many people as those salaried at the minimum wage earn less than that, and that each hike swells their ranks. Forbidden to work in the official economy, people whose skill levels command fewer rewards turn instead to unrecorded, cash income. They forgo all pension benefits and the protection of laws governing overtime, sick pay or other working conditions. Neumark and Wascher also showed that increases in minimum wages cause employers to offer fewer fringe benefits and to reduce on-the-job training.

According to the Employment Policies Institute, the average income of minimum-wage workers increases by 30% within one year of employment, on the basis of learned skills. Cutting people out of the labour market with legislated wages stops them from getting in at the bottom and acquiring valuable experience. Afro-American economists Walter Williams and Thomas Sowell have written reams about increases in discrimination against minorities because minimum wage laws tighten competition for low-paid jobs. In Winnipeg, that translates into fewer working aboriginals.

But it gets worse. In 2003, in the journal Economics of Education Review, a group of researchers showed that minimum wage increases tend to reduce school enrolment among teenagers. In the same year, others found that 41 percent of minimum-wage workers were high school drop-outs. Do we really want to encourage people to reduce their chances for lifetime earnings by enticing them to be burger-flippers?

Poverty and its eradication should be the business of all righteous men and women. But minimum wage laws are not the way to reach that goal. Why don’t we simply exempt families whose incomes fall below a certain level from paying any income taxes at all? That will help the poor in a real way, unlike the chimerical lure of legislated wages.