Benefits of a strong minimum wage outweigh any costs

US raised the minimum wage without killing jobs and so can Canadian provinces

By: Todd Scarth

  WINNIPEG: When presentations to the Manitoba Minimum Wage Board begin next week we can expect to hear a number of compelling arguments in favour of raising the minimum wage ‹ doing so reduces poverty and income inequality, for example ‹ and one big argument against.
  The argument against is the claim that a strong minimum wage is a powerful "job killer" that hurts the very people it is supposed to help by pricing their labour out of the market.
  This argument is the stick with which business groups and others often try to beat back minimum wage increases. But is it true that a strong minimum does more harm than good? In a word, no. Any negative effect it may have on employment is dwarfed by the positive effect it has on social equality.
  If we imagine the full output of the economy as a pie, the minimum wage can do two things. It can change the size of the overall pie, and it can change the size of the individual slice that different groups receive.
 

In 1999 Manitoba increased the minimum wage and since then, unemployment has fallen to the lowest level in a generation

  Opponents of a strong minimum wage argue that it reduces both the overall size of the pie and the slice low-wage workers receive. Let¹s call this the "job-killer theory." It holds that each worker is "worth" a certain amount to her employer. If the minimum wage exceeds that figure, employing that worker will no longer be affordable, and low-wage workers will end up as the big losers out of the deal.
  Sounds simple enough, even elegant.
  But elegance is for tailors, and this argument is not so much simple as simplistic. It assumes that employers can hire workers in the same way they might buy shares on the stock market‹that they can hire as many workers as they need at the "market price," they have no reason to pay more than this price, and that people working the same job receive the same wage everywhere.
  In reality, the labour market is much more complex than that. Employers avoid some of the costs of a wage increase through higher productivity, lower recruiting and training costs, decreased absenteeism, and improved worker morale.
  Economic models that look specifically at low-wage labour markets take these things into account, and help explain why there is little evidence of job loss associated with minimum wage increases.
  In 1995 Princeton economists David Card and Alan Krueger published the results of five years of in-depth empirical research. Their main findings were that minimum wage increases in the United States in the early 1990s did not have the negative employment effects that the job-killer model would predict.
  In Canada, a study published by the Canadian Centre for Policy Alternatives in 1999 compared Statistics Canada data from Canada's four largest provinces. The authors found that the immediate impact of a change in the minimum wage on employment levels is statistically insignificant for all groups except for young men, for whom there is a small negative effect. In 1999, the Manitoba Filmon government increased the minimum wage as part of their pre-election strategy. Since then, unemployment has fallen to below 5% - the lowest level in a generation. The case for the "job killer" argument gets weaker all the time.

A minimum wage worker is statistically much more likely to be an adult woman than a suburban teenager

Distinction without a difference
  There are plenty of other examples. Suffice it to say that in recent scholarship the debate over the purported job-loss effect is a debate over whether this effect is very small, or nothing at all (some studies have even found a small increase in employment). While this debate may be an interesting one for economists, from the perspective of a government looking to help the working poor, it is a distinction without a difference. Even if you were to accept the most negative findings from the research, you simply could not avoid the conclusion that the benefits of the increase far outweigh the costs.
  The prime beneficiaries of a minimum wage increase are low-wage workers. Rather than ending up out of work, as the "job-killer" model would have predicted, they in fact receive a bigger slice of the total wage bill.
  And they deserve it. It is important that we not forget the historical reason for introducing a minimum wage: to ensure fairer treatment of the most vulnerable workers. If a person is doing work that is of value to an employer and to society, she should earn enough to live in dignity. In Manitoba, this is not the case. The real value of the minimum wage in Manitoba has been steadily eroded by inflation, and increases have been typically tied to the election cycle.
  It should be increased immediately to at least $7.00 per hour, and indexed to one of a number of indicators - a percentage of the average industrial wage, the Consumer Price Index, or the poverty line. There are good cases to be made for each of these, but the point is to protect low-wage workers from the vicissitudes of provincial politics.
  There is a popular stereotype that the typical minimum wage worker is a teenager who lives with his parents and spends his earnings at the mall. Statistics Canada¹s Survey of Labour and Income Dynamics provides evidence that destroys this stereotype.
  In Canada, nearly two-thirds of minimum wage workers are adults, approximately the same percentage are women, and about half have some post-secondary education. Fewer than one in five are young adults living at home.
  So a minimum wage worker is statistically much more likely to be an adult woman than a suburban teenager.
  Which is not to say that teenage minimum wage workers do not also deserve a raise. The numbers show that the vast majority of them are also full-time students at some point during the year. Minimum wage work helps many students finance their university education ­ something that should be supported.
  Most importantly, increasing the minimum wage will provide the most benefit to low-income families. Because the minimum wage only helps the poor who have jobs, it is far from a magic bullet against poverty. But unemployment as low as it is now in Manitoba means that a high number of poor people are working ­ so the government would get a big bang for its anti-poverty buck. The time for a serious minimum wage increase is now.

Todd Scarth is director of the Canadian Centre for Policy Alternatives-Manitoba.

Related Reading
Raising the Floor: The Social and Economic Benefits of Minimum Wages in Canada, by Michael Goldberg and David Green. CCPA, 1999.

The Case for a Strong Minimum Wage Policy, by Errol Black with Lisa Shaw. CCPA-MB, 1998.

Myth and Measurement: The New Economics of the Minimum Wage, by David Card and Alan Krueger. Princeton University Press, 1995.

Making Work Pay: The Impact of the 1996-1997 Minimum Wage Increase, by Jared Bernstein and John Schmitt. Economic Policy Institute, 1998.

Posted: May 14, 2001

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