February 02, 2016

Minimum wage advocates make minimum sense

In a recent blog post, the Broadbent Institute presents five arguments in favour of increasing the minimum wage. Unsurprisingly, their case doesn't stand up to much scrutiny.

The first two claims made by the Broadbent Institute are that minimum wage increases won't cause jobs to leave and won't increase unemployment. The second of these is easier to debunk: it is impossible to deny, and the empirical evidence strongly suggests, that minimum wages are job-killers.

The first claim, then, that minimum wage increases won't cause jobs to flee to lower minimum wage jurisdictions, is irrelevant. It is only relevant that minimum wages kill jobs. Further, even if jobs are unlikely to relocate to other jurisdictions since minimum wage employers tend to be immobile, high minimum wages may kill jobs by driving them out of business. And even if minimum wages don't kill existing jobs, it surely worsens the investment climate, which capitalists will take into account when deciding where to invest.

The third claim made by the Broadbent Institute is that minimum wages don't have much impact on prices. But the evidence suggests that this is not necessarily the case. A publication from the Cato Institute summarizes some of the research on the effects of minimum wage hikes on prices:
In 2004 a comprehensive review of more than 20 minimum wage studies looking at price effects found that a 10 percent increase in the U.S. minimum wage raises food prices by up to 4 percent and overall prices by up to 0.4 percent. A 2007 study from the Federal Reserve Bank of Chicago found that restaurant prices unambiguously increase in response to minimum wage increases. And a 2011 study of quick-service restaurants found that two-thirds of the minimum wage cost increases were offset by higher menu prices, and that higher prices rather than cuts in employment and hours was the most important channel of adjustment for this type of firm.
A $15 minimum wage, as proposed by the Broadbent Institute, would represent a 33.3 percent increase in Ontario; according to the evidence even a 10 percent increase could result in food prices going up by as much as 4 percent.

Finally, the Broadbent Institute argues that low-wage jobs are taken on increasingly by older Canadians, and that the minimum wage is below the living wage. The implication is that by increasing the minimum wage we can pull Canadians out of poverty.

This is nonsense. Not only does it ignore the severe disemployment effects of minimum wages, but it also ignores the fact that the vast majority of minimum wage earners are not from poor households.

For example, in Ontario, only 12.5% of minimum wage earners are from poor households, and in British Columbia the number is only 11%.

That minimum wages don't reduce employment is widely agreed upon. According to the Fraser Institute, "academic studies consistently find that minimum wage increases do not reduce poverty. At best, Canadian researchers find no statistically significant effect. At worse, they find minimum wage increases can actually increase relative poverty."

Even left-wing union economist Jim Stanford, who formerly worked for Unifor, has said that minimum wages are "not solely, or even mostly, an anti-poverty" measure.

No matter how many times the Broadbent Institute makes the case for minimum wage hikes, it is still an idea that makes minimum sense.

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