Of all the socio-economic policy issues discussed in the small business context, minimum wages are among the most emotive. It is not hard to see why. Standards of living are important benchmarks and the sense of ‘value’ is a deeply engrained economic concept.
When it comes to ‘value’, though, wages and how they progress are not as tied to the skills and characteristics of individuals, but to the value of the work they actually perform. The distinction is important when trying to understand and apply a minimum wage floor.
Principally, the higher the output of a worker, the higher their wage. A look at wage patterns in the economy bears this out—minimum wage earners only represent a fraction of employees (1 in 15 by Statistics Canada estimates), and most of those are new entrants
just beginning to pick up skills and experience— typically from middle-income households. Tracking studies also show that Canadians in low-wage categories at some point are highly likely to move up the income ladder over time—suggesting that the prospect of people being trapped in low wage occupations over the long term is not the norm.
There is some evidence from US studies that raising minimum wages can reduce poverty incidence by a ‘moderate’ degree, but even they suggest direct employment tax credit work incentives and active policies on skills are far more effective at achieving this policy goal. Moreover, there is little confidence that the relationship is positive forever—there likely exists a ‘sweet spot’ where higher minimum wages no longer have any net effects on poverty.
As for the common assertion that higher minimum wages are stimulative to the economy as a whole, there is no substantive evidence—especially in times of slack. The most likely effect is to redistribute activity from low-skill to higher-skill labour.
Just as minimum wage is a poor correlation to poverty, raising it significantly is a poor solution. Often left out of the debate is how minimum wage legislation cannot control for the number of hours of work offered by employers. Paraphrasing labour economist Morley Gunderson, he said poverty is caused by lack of hours of work, not by lack of dollars per hour. Again, strong evidence from Canadian studies shows that young workers bear the brunt of the offsetting impacts; for every 10 per cent increase in minimum wages, there is likely a decline of 3 to 6 per cent in employment.
A look back at 40 years of data in Ontario, for example, shows a pretty clear visual relationship between legislated minimum wage levels and employment rates among young workers (see Figure 1). It is hard to imagine that job prospects for new entrants would not start drying up if announced minimum wage rates sharply rise in 2018 and 2019.