Raising the Wage Will Hurt Our Youth

There is perhaps no other area of public policy in which the tug-of-war between the heart and the mind is so fierce as the debate over minimum wages.

Unfortunately, too many well-intentioned people take an overly simple and often emotional view of minimum wages. From their viewpoint, governments can simply increase the minimum wage and eradicate poverty with no negative side-effects.

Todd Hirsch, the chief economist for the Canada West Foundation, presented readers with a vivid heart-versus-brain conflict. In a recent column, Hirsch skimmed some of the evidence showing why minimum wages should not be increased. He briefly discussed, for example, how increasing the minimum wage reduces employment, particularly for those who are young and/or low-skilled.

Unfortunately, the soft side of Hirsch overcame his years of training, leading him to conclude that at the very least, the provincial government (Alberta) should consider an increase in the minimum wage of 10 per cent.

Such a recommendation would be disastrous for those who earn that wage -- and for those who are unemployed and aspire to climb the first rung of the job market -- because there are large negative consequences.

First, as Hirsch admitted, there is a large research consensus that increasing the minimum wage leads to less employment. For example, David Neumark and William Wascher, writing in Industrial and Labor Relations Review in 2004, concluded increases in the minimum wage caused employment losses among youth across 17 industrialized countries.

A 1999 study by Michael Baker, Dwayne Benjamin, and Shuchita Stanger estimated a 10 per cent increase in the minimum wage results in a one-to-three per cent reduction in the employment rate among youth aged 15 to 25.

In addition, Neumark and Wascher showed that increases in minimum wages result in employers offering fewer fringe benefits and reduced on-the-job training.

And increases in the minimum wage tend to drive up high school dropout rates. Duncan Chaplin and his colleagues published an important study into this effect in 2003 in the academic journal Economics of Education Review. They found that higher minimum wages were related to reduced school enrolment among teenagers. These findings were recently supported by 2003 findings that 41 per cent of minimum-wage workers in were high school dropouts.

Perhaps most importantly, the facts show those who earn such wages are not typically the working poor, but are rather young people living at home. A paper by Statistics Canada’s Deborah Sussman and Martin Tabi, like many before it, found that 69 per cent of men and 60 per cent of women working at the minimum wage were between the ages of 15 and 24 and, of these, 56 per cent lived at home with their parents.

This review of minimum wage research indicates there are negative consequences to such policies and that the benefits of increased minimum wages largely accrue to young people, mostly living at home.

A more successful policy, which would actually help low income workers through their entire work life, would create robust job markets characterized by high rates of job creation, low unemployment and improving worker productivity. Flexible job markets, without arbitrary minimum wage levels, are one important part of that strategy.