Last week, a Healthy Debate column written by Dr. Ritika Goel used a patient narrative to help support her argument that the minimum wage should be increased, from $10.25 to $14 an hour. The patient, Raj, drifted between low-wage jobs as many aspects of his life and health became more difficult.
Unfortunately, a higher minimum wage policy would probably exacerbate Raj’s employment situation, and possibly ensure that he becomes, tragically, artificially unemployable. My central criticism of the minimum wage increase is that it does not reduce poverty, and in fact makes things worse by increasing unemployment among the most vulnerable.
I wish to start by highlighting where I agree with Dr. Goel. I agree with her that living in poverty has a strong connection with worse health status. I also agree that it is critical that physicians appreciate the social determinants of health, of which income is a large contributor. However, it follows from none of these that an increased minimum wage is sensible public policy, or will increase population health.
First, minimum wage increases do not actually decrease the number of people living below the Low-Income Cut-off in Canada. It is important not to confuse minimum wage earners, as a group, with those living in poverty. In fact, in Ontario, over 80% of low wage earners (that is, those workers who could potentially benefit from a minimum wage increase) do not live in poor households, and 75% of poor households do not contain a low wage earner. Most of those working for minimum wage are teenagers seeking job skills and living with parents, or retired persons trying to keep busy or supplement pension income. Most minimum wage earners work part-time, work only for a short period, and live with parents or other family members.
However, there are people like Raj who do indeed struggle to support themselves and others with minimum wage. How would increasing minimum wage affect them? Evidence demonstrates that minimum wage legislation increases unemployment, making life even harder for people like him. Surely, many who remain employed enjoy a higher wage. But for others, instead of receiving a wage of $14, they end up with a wage of $0, and nowhere to learn new job skills.
The National Bureau of Economic Research conducted a systematic review in 2006 of 100 studies and found that over 85 of them identified negative employment effects, which were more severe among low-skilled groups. Newer research agrees with this.
When labour becomes more expensive, employers respond to incentives. Employers cut fringe benefits from current employees, or they pass costs onto consumers, which is a regressive tactic. Low-income people suffer the most from consumer price inflation. Most commonly, though, more expensive labour means that less of it will be used. This results in layoffs, or makes mechanization such as ATMs, self-checkouts, or fast-food robots more appealing to corporations.
Current estimates are that for a 10% increase in the minimum wage, employment declines about 2.5% among affected workers. In Canada, the estimate is slightly higher at 3-6%. There are presumably others who are moved from full-time to part-time work. This invokes the possibility that if the minimum wage was lower, more people might find jobs, subject to job-seekers deciding if such a wage is worth their while.
Internationally, the trend of decreased employment holds as well.
Finally, even among low-skilled workers, the minimum wage most drastically affects historically disadvantaged groups. The last time that the African-American unemployment rate was lower than that of Caucasians in the USA was 1930 – coincidentally, the last year without a minimum wage law. Since then, unemployment among African-Americans has steadily climbed and remained about double of that of other groups. Closer to home, a 1927 report from the B.C. Department of Labour explicitly stated that the goal of the minimum wage was to price Asian immigrants out of the market. Other examples abound.
Canadians display broad support for some form of a safety net. To help those who have no options, several policies are popular across the political spectrum. One option is a negative income tax. In essence, a negative income tax is a flat tax rate, followed by a tax-free cash transfer (of, say, $10 to 15 thousand dollars) to every Canadian. While tax is paid on all income, the result is that there is a guaranteed minimum income for everyone. In addition, no one pays any net taxes (because of the transfer) until a certain, higher income level – perhaps $40,000, depending on tax rate and transfer size – is reached. This policy has far fewer distortionary effects on employment, and enjoys a stronger theoretical backing.
I am hopeful that this discussion can continue in the spirit of constructing public policy that is both safe and effective. As Dr. Goel conveyed, there are many Canadians in dire need of better jobs and a steady income. An awareness of sound public policy can go a long way to assist these individuals. In this case, my heart goes out to those people who are seeking minimum wage work, and remain unemployed through no fault of their own.