In 2010, seven provinces increased the minimum wage. An eighth province, British Columbia, is likely to do so later this year. While poverty activists, politicians and policy- makers who push for higher minimum wages might have good intentions, the unpleasant reality is that minimum wage increases don't help the poor.
Let's start with one of the most common misconceptions, 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, nearly 65 per cent of minimum wage workers in Canada are between the ages of 15 and 24, and of these, about 85 per cent live at home with their 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.
Since the benefits of higher minimum wages largely accrue to young people still living at home and adults supplementing their family incomes, it's hard to see how these increases represent a solution to poverty. But it gets worse.
The single largest problem with minimum wage increases is that they result in job losses, because they increase labour costs for employers who respond by reducing the number of employees and/or the number of hours they work.
At least 14 academic studies have examined the impact of minimum wage increases in Canadian provinces. Based on these studies, a 10-per-cent increase in the minimum wage is likely to decrease employment by an average of three to six per cent for young workers (aged 15 to 24). For young workers most directly affected - those earning between the current minimum wage and the proposed higher wage - the impact is more acute, with employment losses of up to 20 per cent.
Lost job opportunities for young people are especially unfortunate given that entry-level jobs, which generally pay the minimum wage, can be a stepping stone to better paid employment. These jobs enable workers to develop skills and gain experience that ultimately lead to higher productivity and wages. In fact, research shows that after one year, more than 60 per cent of minimum wage workers earn more, with a typical wage gain of about 20 per cent. After two years, the percentage of workers earning more than the minimum wage increases to more than 80 per cent.
Of course, some workers will be lucky enough to keep their jobs and maintain their hours worked after a minimum wage hike. But even they will likely not be better off. Research shows that employers often respond to a minimum wage hike by reducing other benefits and on-the-job training. A recent study found that the proportion of young workers receiving formal training fell by up to two percentage points for every 10 per cent increase in the minimum wage.
Given that higher minimum wages decrease employment opportunities, benefits and on-the-job training, it's not surprising that recent evidence from Canada shows that hiking the minimum wage leads to more poverty, not less.
A study published in Labour Economics this year examined minimum wage increases in nine Canadian provinces over two decades, from 1981 to 2004. The authors found that a 10 per cent increase in the minimum wage increases poverty rates by four to six per cent.
While it might feel good to jump on the "raise the minimum wage" bandwagon, a look at the facts indicates that such policies have very negative consequences. Minimum wage hikes hurt the poor.
Niels Veldhuis and Amela Karabegovic are economists with the Fraser Institute.
