In several Canadian provinces, minimum wages have increased quickly in recent years, even as the economy has struggled and employers remained reluctant to hire. The reason given for boosting the minimum wage is to reduce poverty, but the evidence shows this is an inefficient strategy for achieving this goal; minimum wage hikes are blunt instruments when precision surgery is required.
First, on the trend. In April, Manitoba’s government announced that the minimum wage would be increased to $9.50 in October from the present $9 per hour. This was only the latest in a series of recent significant hikes and the rate of increase has picked up over the past few years. It was $8 per hour in 2008, representing a 19 per cent increase in just over two years.
Manitoba is not alone in aggressively raising minimum wages. In Ontario, a series of increases have raised the wage floor by 32 per cent over a four-year period. Similarly, New Brunswick has announced that it will increase its minimum wage by 18 per cent over the next year and a half.
The stated objective of all of these increases is to reduce poverty. And there is no doubt that some families will be able to more easily pay their bills as a result. But there is no such thing as a “free lunch,” appearances to the contrary. In order to fully understand the impact of minimum wage increases on poverty, it is necessary to look not only at who benefits from these policies but also at the people harmed by them.
The most important negative impact caused by higher minimum wages is the increase in unemployment that results among unskilled and inexperienced workers. This is straightforward: an iron-clad law of economics is that when the price of something goes up, people tend to buy less of it. This is true of coffee beans, movie tickets and yes, even unskilled labour. Proponents of high minimum wages try desperately to show that the market for labour is fundamentally different, but they have not been successful. A strong majority of research on the question shows that high minimum wages kill jobs.
That’s why using the minimum wage as a tool to fight poverty is the wrong strategy: because, obviously, more unemployment creates poverty. A well-designed U.S. study found the poverty rate among full time workers was only 2.6 percent. In Canada, the situation is fundamentally the same- poverty is overwhelmingly a problem of the unemployed and underemployed. Policies that increase unemployment or reduce available work hours for unskilled workers should therefore be viewed with suspicion by those whose objective is to reduce poverty.
This does not mean governments shouldn’t use public policy to boost the purchasing power of the working poor. It just means that it should look for smarter strategies for doing so.
For example, one particularly effective strategy is to create or enhance earned income tax credits- policies that use government funds to top-up the earnings of low-income families by giving them a certain number of cents for every dollar of income that they earned through work in a given year.
This approach provides an additional incentive to work without raising the price of labour, so it doesn’t create unemployment in the same manner as higher minimum wages. Also, it more efficiently targets the benefit to those who really need it. The money flows to poor households rather than simply to low-wage workers- not all of whom are poor. In fact, a recent Canadian study showed that about one-third of minimum wage workers belong to households that are in the top half of the income distribution. A minimum wage hike is therefore akin to a powerful missile that often misses the target and always causes collateral damage. Smart policy in this area requires more precise, sophisticated weapons that accurately target and destroy poverty .
Politicians love to raise the minimum wage because it makes it look like they’re helping the poor without incurring a direct expense to the treasury. But minimum wage hikes have real costs, even if they are sometimes hidden.
Fact is, minimum wage increases likely create more poverty than they alleviate as they make it more difficult for unskilled and inexperienced workers to find jobs. If provincial governments are serious about fighting poverty, they should abandon the flawed strategy of raising the minimum wage and instead embrace targeted anti-poverty policies that more effectively help poor families.