Killing jobs by increasing wages
After the oil shocks of the 1970s drastically increased the price at the pumps, the left came up with a fairly simple solution: prevent gas stations from charging too much. The result was severe shortages and long lineups. At the same time, many cities tried to tackle the problem of high rental rates by limiting the amount landlords could charge their tenants. The result was that developers stopped building new rental properties and much of the existing stock fell into disrepair.
One would have thought policymakers would have learned a lesson from these real-world public-policy disasters. But it’s human nature to convince ourselves that past failures will succeed in the future. And so, the solution proposed by many on the left to the problem of people stuck working low-paying jobs is to force companies to pay them more by increasing the minimum wage.
City councils in Seattle, San Francisco and Los Angeles have all voted to increase the minimum wage to $15 an hour in the coming years. In this week’s Speech from the Throne, Alberta’s new NDP government committed to making “sure all Albertans are paid fairly at work — including those on the minimum wage” — likely by announcing a $15 minimum wage on July 1.
For many of the 383,900 Albertans currently making less than $15 an hour, it will seem like a pretty sweet deal. The problem is that many low-skilled workers, especially young people, will be priced out of the market. Indeed, it is a basic law of economics that, all things being equal, the higher the price of a good or service, the less of it people will buy. Conversely, when prices are set artificially low, more of that good or service will be demanded than the market is willing to provide, leading to shortages.
Some people, whose skills are valued at significantly less than the government-imposed price floor, or who work for employers that can no longer afford their salaries, could end up losing their jobs. But the effects may not be readily apparent: if, for example, a business has budgeted the funds to hire two workers at $7 an hour, it will only be able to hire one employee at $15 an hour.
To take another example, if a first-year university student would be paid $10 an hour in a free labour market, he may find that no one is willing to hire him at $15. That is why Canadian studies have found that a 10 per cent increase in the minimum wage leads to a three to six per cent decrease in youth employment.
I recently had this discussion with a socialist friend of mind — a man who likes the idea of raising the minimum wage, but thinks it’s a much better idea to institute a maximum wage. He argued that studies have found increasing the minimum wage does not have a negative effect, and that employment levels will not decrease because low-paid workers end up spending more.
It is true that some economists have argued that a $15 minimum wage would not have an adverse effect on employment, but many of their arguments are based on spurious logic and have been thoroughly refuted. There also have been studies showing that small increases in wages may have a relatively small effect on employment in some labour markets. Unfortunately, it will be years before we know the true effects of the wage hikes that are being instituted in a number of U.S. cities.
However, a study published last year by the National Bureau of Economic Research looked at the effect of the increase in the federal minimum wage in the United States from $5.15 to $7.25 per hour between 2007 and 2009. It found that the increase “reduced the employment-to-population ratio of working age adults by 0.7 percentage points,” meaning that there were 1.4 million fewer jobs than there otherwise would have been. Another paper published in the Journal of Labor Research in December found that increasing the federal minimum wage in the U.S. from $7.25 to $10.10 an hour, as supported by President Barack Obama, would re- sult in the loss of between 550,000 and 1.5-million jobs.
A comprehensive literature review of the effects of minimum wage increases around the world published in the journal Foundations and Trends in Microeconomics in 2007 concluded that, “the oft-stated assertion that recent research fails to support the conclusion that the minimum wage reduces employment of low-skilled workers is clearly incorrect.”
Claiming that increasing the minimum wage would result in increased employment because workers would spend more ignores the fact that no new money is being introduced into the economy. Thus, any increase in spending by lowskilled workers will be offset by a decrease in spending elsewhere in the economy.
Indeed, the entire argument for forcing companies to drastically increase salaries is based on the fallacy that greedy corporations are sitting on piles of cash that could be used to lift people out of poverty. In reality, corporate savings aren’t held in Scrooge McDuck’s vault for CEOs to roll around in — they’re invested. If more of that money goes to labour, less of it will be used to build new factories and create new jobs.
It is also the case that many businesses, especially in the food-service industry, are already operating on razor-thin margins. Even large chains are often run by local franchisees who struggle to get by. For businesses operating at the margin, increased wages will likely mean they will have to either hire fewer people, increase prices or close shop. This will drive many momand-pop operations out of business, as they will be unable compete with large companies that can afford to absorb the increased costs. And then there’s the problem non-profits, which are definitely not sitting on piles of cash, but will still have to raise salaries.
None of what I have said should come as a surprise to any student of public policy, even the inexperienced idealists currently running the Alberta government. When governments want to cut the demand for smoking, they increase the price of cigarettes. To think the price of labour can be increased without a similar reduction in demand is to defy both logic and the evidence.
A $15 minimum wage will price many low-skilled workers, especially young ones, right out of the market