Monday 31 March 2008

Minimum Wage: Friend or Foe?

Tomorrow, April 1, the minimum wage in Manitoba jumps 50 cents ("fiddy cent", to those of you with your ball caps on sideways) to $8.50, good for a tie for second place behind Ontario, which increased its minimum wage from $8.00 to $8.75 today. The nurses must be jealous. They're only third highest in the country. Anyhoo ...

Is this minimum wage increase a good thing? Lefties say it will help hardworking single moms get by on their earnings from pumping gas. Righties and restaurant owners say it will hurt small businesses and increase unemployment. I say: let's see what the studies have to say. Hold on to your pocket protectors, boys and girls, here we go ...

The theory

The theory, when dumbed down to my level, is very simple. Without wage controls, the labour market will adjust such that the wage employers will pay will match the wage that people are willing to accept for a given job. This will result in your equilibrium wage (Pe) and equilibrium number of jobs (Qe). If there is a minimum wage (Pm) set higher than the equilibrium wage then the quantity of labour demanded will decrease correspondlingly (Qm) and there will be a gap between the number of people who want to work and the number who are lucky enough to get jobs. Either unemployement will increase or people will drop out of the work force. Either way, there are fewer people working.

The reality

Fortunately for me, Morely Gunderson did all of my homework for me with this study: Minimum Wages in canada : theory, evidence and policy in which he analyzes basically every peer-reviewed paper that has been written on the subject.

Some of Morely's conclusions from Canadian studies:

  • recent studies "find larger adverse employment effects at the higher end and beyond the consensus range, especially in the longer run." They imply "that at 10 percent increase in the minimum wage would lead to a 3 to 6 percent reduction in the employment of teens. The fact that they use different data sets and methodologies suggest that these results are robust."
  • "Minimum wage increases also tend to reduce the labour force participation rate inducing some to leave the labour force"
  • "As an anti-poverty device... they are an exceedingly blunt instrument and not well targeted towards the poor"


Do you suppose Gary Doer, Greg Selinger and Nancy Allen read any of this? They wouldn't make a policy decision based purely on ideology, would they?


Anonymous said...

Either way it gets passed on to won't be taking any hit.

cherenkov said...

That's what some people might say, but it depends on a number of things. In the 90s, adverse minimum wage effects were low. More Recent studies tend to show that, yes, jobs are lost. Some of those lost jobs are probably due to businesses cutting back or closing.

Unapologetic Ex-Winnipegger said...

I wonder what the Albertans making $15.00 an hour at Tim Horton's think of minimum wage legislation. Maybe putting a province on a solid economic footing is a better idea for our provincial leaders....

Anonymous said...

One of the practical problems with minimum wage is that it discriminates against the private sector creation of appropriately paid jobs for people that are not worth minimum wage. This problem forces the government to support those folks in a higher manner by other less productive means. Those other means also have the undesirable side effect of inducing an unhealthy long term entitlement life style.

cherenkov said...

u e-w: it must be sweet to be a student living with the parents in Alberta right now. One night of work at the donut shop will give you cash for the weekend.

u b: increasing it on the eve of an economic slow-down doesn't help either.

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