Want to help the poor? Don't waste your time with the minimum wage

Stephen Gordon reviews the evidence on the minimum wage

Barack Obama has proposed increasing the U.S. minimum wage, and the discussion is spilling over to Canada. There are two things one needs to know about the minimum wage, employment and poverty in Canada:

1. In Canada the link between minimum wage increases and lower employment levels is stronger than in the U.S. 

The famous Card-Krueger study of events along the Pennsylvania-New Jersey border in 1992 found that an increase in the minimum wage actually led to an increase in employment. Subsequent work has challenged that conclusion, but as far as I can tell, U.S. studies generally find that the link between (small) changes in the minimum wage and changes in employment has been fairly weak.

The Canadian literature on the link between minimum wages and employment looks very different. For one thing, empirical studies that use Canadian data are able to exploit variations in the minimum wage both across time and across provinces (in the U.S., on the other hand, the minimum wage is largely driven by changes at the federal level). Estimates for the effect of minimum wage are generally stronger than those in the U.S., and as Morley Gunderson notes in his 2005 survey of the literature:

While there are substantial differences across the different Canadian studies, the following generalizations emerge:

The earlier Canadian studies (based on data prior to the 1980s) tended to find adverse employment effects that were in the range of US consensus estimates, and sometimes higher, where a 10% increase in the minimum wage would give rise to a 1-3% reduction in employment.

Studies based on data to include the 1980s tended to find smaller effects that were at the lower end of the consensus range, and possibly zero, as was often also the case in the US.

However, some more recent studies using different and more sophisticated methodologies as well as more recent data (e.g., Baker, Benjamin and Stanger 1999, Yeun 2003, Baker 2005, Campolieti, Fang and Gunderson 2005a, b, Campolieti, Gunderson and Riddell, forthcoming) find larger adverse employment effects at the higher end and beyond the consensus range, especially in the longer run. The elasticities typically range from -0.3 to -0.6 for teens (slightly lower for young adults), implying 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.

Overall it appears that the Canadian studies tend to find adverse employment effects that are at least as large and likely larger than US studies; certainly none find positive employment effects as occasionally occurs in the US.

Using Card-Krueger to support calls for a minimum wage increase in Canada isn’t just cherry-picking: it’s cherry-picking from an entirely different orchard.

2. Minimum wage increases do not help the poor.

You often hear the phrase “blunt instrument” when people describe the connection between increasing the minimum wage and reducing poverty and/or income inequality. The problem is that the statistical link between “earning minimum wage” and “being in a low-income household” is almost nil. Most of the people in low income households fall into two categories: those who don’t work, and those who earn above minimum wage but are constrained in the number of hours they can work. Minimum wage increases don’t help them. On the other hand, the majority of the people who do earn minimum wage live in households where there are other earners and are not in poverty. (There is some concentration of minimum wage workers in households with below-median incomes, even if they aren’t in poverty.)

Most of the literature reviewed by Morley Gunderson in 2005 was focused on the disemployment effects of the minimum wage. Since then, research efforts have become more focused on the link between minimum wage and poverty. Here are a few of the findings:

Minimum wage increases as an anti-poverty policy in Ontario: “Even without any negative employment effects, planned increases in Ontario’s minimum wage will lead to virtually no reduction in the level of poverty.” See here for a summary.

Les travailleurs au salaire minimum vivant sous le seuil de faible revenu au Québec: “Ces augmentations du salaire minimum auraient eu toutefois peu d’effets sur les inégalités de revenus.” (“These increases in the minimum wage would have had little effect on income inequality”). This study is summarised (in English) here.

Teen employment, poverty and the minimum wage: Evidence from Canada: “[A] 10% rise in the minimum wage is also significantly associated with a 4%-6% increase in the percentage of families living under Low Income Cut Offs (LICOs) …  [A] higher minimum wage may paradoxically result in a significant negative shock to household income among low-income families.” (Emphasis added)

The (non) impact of minimum wages on poverty: Regression and simulation evidence for Canada: “We … find that minimum wages do not have a statistically significant effect on poverty and this finding is robust across a number of specifications. Our simulation results … find that only about 30% of the net earnings gain from minimum wage increases goes to the poor while about 70% “spill over” into the hands of the non-poor. Furthermore, we find that job losses are disproportionately concentrated on the poor. Our results highlight that, political rhetoric not-withstanding, minimum wages are poorly targeted as an anti-poverty device and are at best an exceedingly blunt instrument for dealing with poverty.”

As anti-poverty strategies go, increasing the minimum wage is at best pointless. A far more effective strategy for helping low-income workers would be to campaign for strengthening the Working Income Tax Benefit.


Looking for more?

Get the Best of Maclean's sent straight to your inbox. Sign up for news, commentary and analysis.