Does the minimum wage need to be raised? No: An increase hurts those it is meant to help

Calls for minimum wage hikes are increasingly being heard across the country.

With the best of intentions, minimum wage advocates argue that increases are needed to reduce poverty for the working poor and that it can be done without negatively affecting employment. The unpleasant reality however, is that increases in minimum wages are accompanied by a host of negative side-effects and, more often than not, end up hurting those they are intended to help.

The single largest problem with increases to the minimum wage is that they result in higher unemployment for low-skilled workers and young people. Put simply, increases in the minimum wage increase labour costs to employers who respond by reducing the number of employees and/or the number of hours worked.

A recent study by two of the world's most renowned minimum-wage experts, University of California Prof. David Neumark and U.S. Federal Reserve Board economist Dr. William Wascher, comprehensively reviewed all of the academic studies of minimum wages over the past 15 years. They reviewed more than 90 studies covering 15 countries and found that the overwhelming majority of studies consistently show that minimum wage increases have negative employment effects.

Of the 90 studies reviewed, five specifically examined minimum wage changes in Canada. All five studies concluded that there were negative consequences for employment from increases to minimum wages. For example, a 2006 study by economists Michele Campolieti, Morley Gunderson and Chris Riddell found that a 10-per-cent increase in the minimum wage resulted in a 1.4- to 4.4-per-cent reduction in the youth (aged 16 to 24) employment rate.

Research also indicates that employers often respond to increased minimum wages by reducing other benefits and on-the-job training. Even if workers earning the minimum wage are lucky enough to keep their job and the number of hours worked, they may still not be better off due to reduced benefits and/or training. A recent study in the Journal of Labor Economics found that the proportion of young workers receiving formal training fell by one to two percentage points for every 10-per-cent increase in the minimum wage.

Another unfortunate reality of increased minimum wages is that they increase high school drop-out rates. Duncan Chaplin and his colleagues published an important study in 2003 in the academic journal Economics of Education Review which found that higher minimum wages were related to reduced school enrolment among teenagers.

One of the most common misconceptions is that the majority of minimum wage earners are adults struggling to make ends meet while supporting families. In fact, the typical minimum-wage worker is young and lives at home.

According to Statistics Canada, 63 per cent of minimum wage workers in Canada are between the ages of 15 and 24, and of these, 84 per cent live at home with their parents. There is little difference in British Columbia, where 58 per cent of minimum wage workers are between the ages of 15 and 24, and of these, 80 per cent live at home with parents.

In addition, many of the adults earning minimum wage are supplementing their family income with part-time work during child-bearing years and retirement.

Because the benefits of increased minimum wages largely accrue to young people still living at home and adults supplementing their family incomes, minimum wages are best considered a blunt tool for increasing the incomes of the working poor.

A better way to help low-income Canadians is through direct cash subsidies via the tax system such as the Working Income Tax Benefit announced in the recent federal budget. Other superior options include reducing personal income tax rates for low-income individuals as was done in the 2007 B.C. budget, and increasing the amount of income that can be earned before individuals must pay income tax.

Independent academic research repeatedly finds that minimum wage increases reduce employment and on-the job training and benefits, while increasing school dropout rates.

The drive to increase B.C.'s minimum wage may well be paved with good intentions; impartial review suggests it is simply bad policy.