National Post Debate on Minimum Wages

Ben Eisen, Blog, Uncategorized

The National Post has two op-eds today arguing for and against higher minimum wages in Canada. They’re both worth reading.

Unsurprisingly, the debate hinges on the complicated question of whether and to what extent higher minimum wages increase unemployment.

Jim Stanford, arguing for a higher wage floor, argues that “the effect of minimum wages on employment is probably a wash.” This just doesn’t match up with my sense of what the bulk of the Canadian evidence suggests is the case.  Experts can survey the evidence better than I can in this blog post, so anybody who is interested can check out this labour economics textbook which provides references to recent studies on the impact of minimum wages on employment in Canada.

Though Stanford is right that the evidence from the States is a bit more mixed, with high quality studies on both sides (though a majority suggest an adverse employment effect),  everything I’ve read suggests the Canadian evidence is reasonably strong that minimum wage hikes increase unemployment. Of course, this doesn’t neccessarily mean raising the minimum wage is a bad idea -somewhat higher unemployment could conceivably be worth trading off in exchange for higher hourly wages for unskilled workers. However, I don’t think the Canadian evidence supports Stanford’s claim that the employment effect is likely “a wash.”

In any event, given the current state of evidence, I think it is fair to say that raising the minimum wage in a given province, at the very least, generates a risk of creating adverse employment effects. There are more efficient ways to fight poverty than raising the minimum wage that don’t generate this type of risk, and which more effectively target low-income families.

A big problem with the minimum wage as an anti-poverty tool is that most minimum wage workers aren’t poor – they are secondary earners in non-poor families.

Enhancing instruments like the Earned Income Tax Credit, which use government funds to “top up” the labour income of poor households represents a smarter strategy for fighting poverty. This approach doesn’t generate a risk of adverse employment effects and makes sure that money flows to people who need it the most. Giving money to poor people is a better way to fight poverty than tinkering with the market for unskilled labour.