Busting the minimum wage myth

Minimum wage myth busted

What does the evidence about the impact of raising minimum wages actually say?

It’s one of the most contentious public policy debates of recent years. Opponents of raising the minimum wage say it will result in job losses – making it more expensive to hire workers means businesses will hire fewer workers. Supporters point to studies purporting to show no negative employment effects.

The most comprehensive review of minimum wage studies, by David Neumark and William Wascher over a decade ago, surveyed 102 studies.

They concluded that almost two-thirds of studies indicated negative employment effects, while only eight suggested positive employment effects. So while some studies don’t conclude that minimum wages reduce jobs, those studies are the minority.

Furthermore, of the 33 most credible studies in the Neumark and Wascher review, 85 per cent indicated negative employment effects. “Moreover, when researchers focus on the least-skilled groups most likely to be adversely affected by minimum wages,” they wrote, “the evidence for disemployment effects seems especially strong.”

The evidence that minimum wages kill jobs is stronger among Canadian studies. In a report for a government-sponsored think-tank in 2014, University of Toronto economist Morley Gunderson found that “the Canadian evidence is more in agreement … that a 10 per cent increase in the minimum wage reduces employment by about three to six per cent for teens and slightly less for young adults.”

The report also concluded that according to the Canadian evidence, “minimum wages have no effect on reducing poverty and may even exacerbate poverty slightly.” A study published last year by the C.D. Howe Institute similarly concluded that “the existing Canadian evidence points to a larger employment loss from a minimum wage increase than in the U.S. … it is not likely to reduce poverty and may even increase it.”

So consistent is the Canadian evidence that when researchers from the Fraser Institute produced a list of all 20 Canadian minimum wage studies published in academic journals since 1979, they found that the “consensus of these studies is that minimum wage hikes reduce employment opportunities for young workers. Not a single one of these studies contradicts this conclusion.”

Importantly, while some disagreement exists among empirical studies (as the Neumark and Washer review indicated), economic theory is unambiguous: minimum wage increases cause unemployment. The law of demand states that if something is made more expensive, purchasers will buy less of it. The labour market is no exception.

Why then do some people insist that making it more expensive to employ workers will not reduce the number of workers employed?

Don Boudreaux, an economics professor at George Mason University, once suggested that “were there to exist powerful political and ideological forces” that relied upon a public belief that dropping rocks into pools of water does not raise the water level, “there would be no shortage of physicists who conduct and publish studies allegedly offering evidence” to substantiate these claims.

Just as some empirical studies fail to detect the job losses suffered as a result of raising the minimum wage, some researchers might measure the water level of a swimming pool before and after dropping rocks into it and – after controlling for factors like evaporation and swimmers’ activities – fail to detect the effect of the rocks on the water level.

But the law of demand can’t be overturned by a handful of minimum wage studies purporting to show no negative employment effects, just as the failure of physicists to detect a rise in the water level wouldn’t be sufficient to conclude that dropping rocks into pools of water has no effect.

There’s no way around the fact that raising the minimum wage puts some workers out of a job.

Matthew Lau is a research associate with the Frontier Centre for Public Policy. He’s a columnist with Troy Media.

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