Raising the minimum wage: Good intentions, bad policy

Minimum wage advocates argue that increases are needed to reduce poverty for the "working poor," and that these increases can be implemented without negatively impacting employment. The reality, however, is that increases in the minimum wage come with serious negative costs, particularly for those workers whom the increases are intended to help, says Canada’s Fraser Institute.

The most damaging consequence of a minimum wage increase is that employers respond by reducing the numbers of workers they employ and/or the numbers of hours their employees work. In other words, minimum wage increases result in higher unemployment for low-skilled workers and young people, says Fraser.

In Canada, 14 studies have reviewed the effects of minimum wage increases in the Canadian provinces, specifically British Columbia. According to Fraser:

A 10 per cent increase in the minimum wage is likely to decrease employment by 3 per cent to 6 per cent among all young workers.

Those individuals earning between $8 and $10 an hour will see the greatest effect and 4.5 per cent to 20 per cent will lose their employment.

Increasing British Columbia's wage by 25 per cent (to $10 an hour) would lead to a loss of 11,000 to 52,000 jobs for workers aged 15 to 24.

Even for those workers who retain their employment after the minimum wage increase, they are likely to see a drastic decrease in the amount of hours worked.

Additionally, the Journal of Labor Economics found that a 10 per cent increase in the minimum wage would decrease on-the-job training for unskilled workers by two percentage points. This will entrench them in the unskilled workforce, decreasing chances for vertical mobility.

Source: Neils Veldhuis, Raising BC's minimum wage: Good intentions, bad policy, Fraser Forum, February 2009.

For text: http://www.fraserinstitute.org/Commerce.Web/product_files/RaisingBCsMinimumWage.pdf

For more on Economic Issues: http://www.ncpa.org/sub/dpd/index.php?Article_Category=17

FMF Policy Bulletin/ 24 March 2009