Economist says minimum wages ineffective

Research shows they are not alleviating poverty
By Gordon Sova
||Last Updated: 02/12/2009

Though very few unionized wage rates are affected by the provincial minimum wages (some are pegged at a fixed number of cents above it), unions are strong supporters of increases in the minimum wage. Some of the support is based on social policy, some is probably based on economics (a rising tide floats all boats). The purpose underlying the minimum wage is improving the lives of the poor and the aim in increasing it is to further advance their welfare.


However, a study entitled “Minimum Wages: Operating with a blunt instrument,” authored by Morley Gunderson and published recently by the Atlantic Institute for Market Studies, suggests that “minimum wage legislation perpetuates poverty and eliminates job opportunities.” 


The minimum wages currently in force in Canada leave a single individual working full time at approximately three-quarters of the poverty line; an increase to about $11 would be necessary to bring minimum salaries above it.


However, there are three characteristics about minimum-wage employees that make the argument for an increase cloudy: the majority of minimum-wage employees are students and young people, they remain in minimum-wage jobs for a short period, and they often work fewer than full-time hours. Gunderson suggests that an increase in the minimum wage has little effect on poverty because the number of workers in long-term, full-time, minimum-wage jobs is small.


He then argues that other policies, such as tax credits, are more effective in raising incomes and alleviating poverty.


Gunderson provides research that suggests that an increase in the minimum wage results in a reduction in employment opportunities for youth. They are presumably replaced with labour-saving technology or by extra effort from existing employees. But, the proverbial Tim Horton’s in Fort McMurray has raised its wages (albeit voluntarily) and wants to hire more employees. A labour shortage has a funny way of making the impossible possible when it comes to wages.


He also suggests that a higher minimum wage might disadvantage young people by enticing them to remain in poorly paying jobs rather than aspiring to better-paid ones. It does seem odd to hear an economist argue that individuals will act in a way that is clearly inimical to their interests (by staying in a job with low pay, little training and few prospects for improvement) when it is only heavily against their economic interests and that they will move out of that position only when it is massively against their interests (when minimum wages are abolished and wages fall).


Unfortunately for Gunderson’s solution, there is a political constituency for raising the minimum wage and another one for holding it down. However, there isn’t currently one for instituting expanded tax credits for the poor. It may be good economics, but it’s bad politics.


And, despite these arguments, there will continue to be a need to protect the most vulnerable, who are victims of the unscrupulous even with minimum wages and employment standards.