Min wage prices low-skilled workers out of a job

High unemployment in Atlantic Canada is a longstanding problem. For over four decades, unemployment rates have consistently exceeded the national rate. It is critical for the provinces to reduce barriers to work.

Yet governments do the opposite when they raise the legislated minimum wage, as all four Maritime provinces did last April. With each increase, more people become unemployable.

A person with only $10 in her pocket cannot exchange her money for something priced at $15. Intuitively, if a worker’s maximum productive output (of, say, $10) is exceeded by a legislated minimum wage of $15, she will struggle to find or keep a job. Labour markets, like markets for goods and services, are subject to the law of demand. When something becomes more expensive, the demanded quantity will fall. Supporters of higher minimum wages claim their policy helps low-wage workers. But how are low-wage employees helped by making low-wage employment illegal? Real incomes can sustainably rise only when economic output rises; legislated wage floors are counterproductive.

This isn’t just theory. Most empirical research confirms the negative consequences of minimum wages. Canadian meta studies find raising the minimum wage by 10 per cent reduces youth employment by about three to six per cent. For youth earning between the current minimum and the proposed higher one, employment falls by up to 20 per cent. The story gets worse for the Maritimes. Our policy analysis for the Atlantic Institute for Market Studies shows effects of minimum wage hikes are likely to be strongest in this region.

The Maritimes have the highest proportion of employees making close to minimum wage. These workers are at the highest risk of losing their jobs whenever the minimum is raised. Many of those priced out of work will be youth. When youth lose jobs because of a minimum wage increase, they lose not only income, but valuable experience. Even when they keep their jobs, employers often react to hikes by reducing training and other benefits. These lost opportunities damage career development.

Young people tend to have few skills and little experience. Exchanging their labour for low wages gives them the work experience they need for future, betterpaid employment. If government makes hiring young people prohibitive through a higher minimum wage, fewer may finish university or college having ever held a job.

These are damaging results considering how badly Atlantic Canada needs to retain its young people. Worse, minimum wages fail to accomplish the stated purpose of reducing poverty. Elected officials are simply removing the bottom rungs from the economic ladder. Minimum-wage supporters argue their policy helps the poor by “protecting” workers from being “exploited” by businesses. But it is competitive labour markets, not wage controls, that prevent workers from being underpaid. If workers produce far more than they are paid, competing businesses would hire them away from an “exploiting” employer. Economic growth requires greater production. By legislatively pricing low-skilled workers out of a job, the minimum wage serves the opposite purpose and reduces growth. Since workers will not find jobs if their skills fall below the legislated minimum, low-skilled workers will be worse off.

Governments should abolish the fruitless minimum wage if they want to do right by young and low-income persons. Keeping more young people in the region will achieve more for the economy than manufacturing greater unemployment.

Matthew Lau is an independent economics writer. Marco Navarro-Génie is president and CEO of the Atlantic Institute for Market Studies. They are co-authors of the recently published study, “Revisiting the Minimum Wage in Atlantic Canada” (AIMS.ca).