A government-mandated increase in the price of low-skilled labour tends to lead employers to reduce their labour force
By Charles Lammam & Hugh MacIntyre
The Fraser Institute
It seems obvious: if you want to give low-wage workers a raise, increase the minimum wage. But raising minimum wage produces unintended consequences that hurt many of the people it’s supposed to help.
B.C.’s new government recently promised to raise the minimum wage to $15 per hour by 2021, starting with a 50¢ increase in September to $11.35.
However, minimum wage hikes reduce job opportunities for low-wage workers. A large body of Canadian academic research consistently finds that a 10 per cent increase in minimum wage leads to, on average, a three to six per cent decline in employment among youth, the largest demographic of minimum wage earners. The B.C. government is proposing a 38 per cent increase in three years.
When the price of something rises, people tend to buy less of it. This is true for business owners and their expenses, and for consumers of goods and services. So when the government mandates an increase in the price of low-skilled labour, without any concurrent improvement in labour productivity, employers tend to respond by reducing the amount of labour they employ. The result is fewer jobs created or fewer hours of work offered to low-wage employees.
And Canadian evidence continues to prove this effect. The latest academic paper, published this summer by University of Waterloo professors Kate Rybczynski and Anindya Sen, examined 185 changes to the minimum wage in Canadian provinces from 1981 to 2011. It found that raising the minimum wage reduced employment for young workers and recent immigrants.
This doesn’t necessarily mean low-wage workers will receive pink slips en masse when B.C. raises its minimum wage. Raising the minimum wage reduces employment opportunities in other, more subtle ways.
For example, a higher minimum wage encourages employers over time to automate tasks traditionally performed by low-wage workers. In response to Ontario’s proposed move towards a $15 minimum wage, major grocery chain Metro has plans to increase automation.
Jobs that generally involve routine or repetitive tasks such as working on an assembly line or checkout counter are particularly vulnerable to automation, and these are jobs generally held by low-wage workers. As a recent study by leading minimum wage expert David Neumark found, low-skilled workers in the U.S. (defined as having a high school diploma or less) who have jobs that can be readily automated are more likely to become unemployed after a minimum wage increase.
Jobs for low-wage workers can also be lost when employers go out of business because they’re unable to sustain the increased labour costs from minimum wage hikes.
A recent Harvard Business School study analyzed the impact of minimum wage increases in San Francisco on restaurant closures in that city. It found that a $1 increase in minimum wage leads to a four to 10 per cent increase in the likelihood of “firm exit.” In other words, a higher minimum wage increased the likelihood that San Francisco restaurants would close. And fewer restaurants means fewer jobs.
Even low-wage workers who keep their jobs may be hurt by the minimum wage hike if their hours are cut and the increase in the minimum hourly wage isn’t enough to offset the reduction in the number of hours worked. This is precisely what happened when Seattle hiked its minimum wage, according to an analysis by University of Washington researchers. The overall earnings (hours times wage) of low-wage workers declined.
Clearly, by raising the minimum wage, the B.C. government will hurt many low-wage workers – the very people the government wants to help.
Charles Lammam is director of fiscal studies and Hugh MacIntyre is a policy analyst at the Fraser Institute (www.fraserinstitute.org).