Revisiting the minimum wage disemployment effects
Last Thursday the Vancouver Sun ran an opinion piece by yours truly entitled “BC’s minimum wage should not be a poverty wage.â€ I drew attention to the fact that between March 31 and May 1 this year, all other nine provinces increased their minimum wages and, as a result, BC now has one of the lowest minimum wages in the country. We are ahead of PEI and New Brunswick where the minimum wage is $7.75, and on par with Newfoundland at $8. I also called for an increase in BC’s embarrassingly low minimum wage to a level that lifts a single individual without dependents out of poverty and for indexing the minimum wage to inflation to preserve its value over time.
Today’s Vancouver Sun features the Fraser Institute’s response, “Minimum wage increase may cut jobs,” in which Keith Godin calls my argument “well-intentioned, but ultimately misguided and contradicted by the evidence.” What evidence, you ask? It’s the literature review authored by “two of the world’s most renowned minimum-wage experts, University of California Professor David Neumark and U.S. Federal Reserve Board economist Dr. William Wascher.” Sounds impressive until you realize that these two are the most vocal proponents of the adverse disemployment effect and that their opinion is in fact in the minority among the rest of (more renowned) economists who have studied the minimum wage (see Liana Fox for more information here).
The supposed negative employment effect of a minimum wage increase that Mr. Godin worries about is not as clearly established as he would like you to believe. Andrew Jackson has made this point on the blog before (see The Economics of the Minimum Wage) but it may be time to revisit the topic.
While the research findings are certainly not unanimous and individual studies can be endlessly cited on one side of the debate or the other, mainstream economistsâ€™ opinion has shifted towards the conclusion that â€œmodest increasesâ€ in minimum wages do not kill jobs. This is best illustrated by the joint statement issued in October 2006 by over 650 US economists, including 5 Nobel laureates, asserting that â€œa modest increase in the minimum wage would improve the well-being of low-wage workers and would not have the adverse effects that critics have claimed.â€
The key here is the size of the increase. When studies showing negative employment effects are reviewed carefully, one notes that modest employment declines are found in response to fairly large increases in minimum wages. But sharp one-time hikes are only necessary if the government leaves minimum wages unchanged for long periods. They can be easily avoided by indexing minimum wages to inflation. Employers would benefit from the increased certainty: with scheduled annual adjustments they would know what to expect and could plan for the upcoming increases in their wage bill.