$15 and What? The effects of raising minimum wage
Most people want everyone to be as well off as possible. The question, then, is how to achieve this. An idea that has gained prominence for fighting low living standards is raising minimum wage to $15. It should be remembered that while economists can make predictions, it is very difficult to speak to situations that have not been observed with much accuracy.
Such a high minimum wage vis-a-vis median income is unprecedented on a nationwide scale. The average ratio of minimum wage earnings to median income in OECD (The Organisation for Economic Co-operation and Development) countries is 50% (Maximin, 2016); the higher the ratio, the closer minimum wage earnings are to median income. In 2014, median individual income in Canada was $32,790 (Median and Average Income, n.d.), while those earning $15 an hour would earn about $26,000 yearly, a 79% ratio. This is much higher than even the highest ratios previously observed (the highest being 68%, in Turkey). As such, exact effects can only be guessed at. The following analysis examines whether higher minimum wages improve lifestyles.
The jury is out when it comes to whether or not unemployment rises due to higher minimum wages; camps of Nobel Prize recipients agree and disagree about whether minimum wage affects unemployment (Woellert, 2014). One study shows that a 10% raise in minimum wage causes a 2% drop in employment for those affected (Buttonwood, 2016). A minimum wage of $15 in Canada would be a 30%-50% raise.
Others argue that the effects vary by sector. For example, jobs that cannot be automated or moved overseas, such as service jobs, stand a higher chance of surviving so long as the firm can tolerate lower profit and higher prices. This is especially true in fast-growing, high-income areas where rising prices will not incentivize consumers to choose cheaper substitutes. For instance, a chain restaurant in Seattle may be able to absorb higher labour costs, but other industries may experience hiring freezes or even cuts (Maximin, 2016).
Some say that you cannot increase the value of labour by enforcing higher compensation. If a business cannot get the value of the wages it pays, it must let employees go and redistribute the workload amongst those remaining. This raises the output of the work done by remaining employees, so that their employer can afford to pay the new wage. Although certain workers will benefit, it will either be because they were previously under-compensated (note that this is rare in a competitive market…typically an undervalued employee would negotiate or find other work) or because their output has increased (Hazlitt, 1979). This is all to say that while some may benefit from the introduction of a higher minimum wage, we expect that others would suffer in order to allow this to happen.
Some argue that higher wages will reduce welfare payouts (Maximin, 2016). Others argue that the effects of raising minimum wage and thereby forcing companies to downsize are two-sided. For one, employees lose the opportunity to earn even their previous wage. On top of that, members of their community can no longer benefit from their services, and must pay for their welfare assistance on top of it (Hazlitt, 1979). The effect that higher wages will have on relief programs will follow the unemployment patterns described above; if the impact of higher wages can be absorbed, strain will be taken off welfare programs. Otherwise, the opposite is true. However, it is unlikely that the situation will fit into one box or the other- the need for welfare assistance would lighten up in certain sectors or cities and increase in others, but the net effect is difficult to predict.
Is raising minimum wage targeting the right people?
Another important question to ask is who, really, is affected? Neumark did a study showing that only 13% of U.S. minimum wage earners are from poor households, while 45% had household incomes three times the poverty line or higher (likely teenagers or other dependants). There is a clearer connection between unemployment and poverty than minimum wage work and poverty, as evidenced by the fact that 52% of families below the poverty line have no income at all (Neumark, 2008). In Canada, minimum wage earnings and the Market Basket Measure (a standard for basic needs) in 49 regions were examined. Of the observed regions, less than half have minimum wage earnings lower than this living standard, with the greatest differences being in small Newfoundland towns where earnings fall $1,310 short (Young, 2015). It is problematic that some minimum wage workers do not earn enough to meet the standard, but if we assume that Neumark’s findings can also describe Canada, many of these minimum wage earners likely enjoy wealth from outside sources (such as other family members).
Are there better solutions?
Raising minimum wage has uncertain benefits and may not target the right people, but alternative solutions are available. Unionization can protect workers by ensuring they receive an income that reflects the value of their work. To raise wages stably, the labour’s output value can be raised by using machines, more training, etc (Hazlitt, 1979). This was seen in history when the U.S. saw a leap in wages between 1928 and 1950 due to a significant increase in productivity (Buttonwood, 2016). While it is important that poverty be addressed, it is also important to find a solution that effectively targets the issue. Raising minimum wage significantly does not appear to be this solution, but we should take full advantage of alternatives already suggested while continuing to research new ideas.
Buttonwood. (2016, April 1). Employment Down, Productivity Up? Retrieved from http://www.economist.com/blogs/buttonwood/2016/04/minimum-wages?zid=309&ah=80dcf288b8561b012f603b9fd9577f0e
Hazlitt, H. (1979). Economics in One Lesson. New York: Arlington House.
Maximin. (2016, June 25). Some cities have raised minimum wage dramatically. They may regret it. Retrieved from http://www.economist.com/news/united-states/21701126-some-cities-have-raised-minimum-wages-dramatically-they-may-regret-it-maximin
Median and Average Income. (2015). Retrieved from http://www.freedomthirtyfiveblog.com/resources/median-and-average-income
Neumark, D. (n.d.). IZA World of Labor. Retrieved November 09, 2016, from http://wol.iza.org/articles/employment-effects-of-minimum-wages/long
Woellert, L (2014, January 14), Seven Nobel Laureates Endorse Higher U.S. Minimum Wage. . Retrieved from http://www.bloomberg.com/news/articles/2014-01-14/seven-noble-laureates-urge-increase-in-u-s-worker-minimum-wage
Young, L. (2015). Could you live on the minimum wage? Retrieved from http://globalnews.ca/news/2011969/could-you-live-on-the-minimum-wage/