April 1 wage hikes no boon to workers
Economics 101 doesn’t teach everything, just as experience of gravity does not make a person a physicist. But ignoring Economics 101, like ignoring gravity, is not smart. So, when a Canadian Centre for Policy Alternatives economist made the reality-defying claim in a recent op-ed that rent controls “don’t reduce housing supply,” it was good that Murtaza Haider and Stephen Moranis brought him back down to earth with their Economics 101-grounded FP column last week: The Evidence Leaves No Doubt — Rent Controls Hurt Rental Supply.
Another idea frequently promoted by those lost in economic space is raising the minimum wage. Economics 101 helps here, too.
The minimum wage for federally regulated employers rises from $16.65 to $17.30 per hour on April 1st, the same day the four Atlantic provinces are also raising their minimum wages. Some increases (including the federal one) are because of indexation but in Prince Edward Island there is a real increase from $15 to $16 per hour, while in Newfoundland and Labrador the minimum wage is increasing four per cent to $15.60 even though the last increase was just six months ago. Of course, the usual suspect — the Canadian Centre for Policy Alternatives, again — is pushing for even higher increases.
Yet, as many low-wage workers in places with high minimum wages have recently learned, economic reality is no more avoidable than gravity. California is imposing a new $20 minimum wage for fast food workers on April 1st, up from $16. In anticipation, Pizza Hut has laid off over 1,200 delivery drivers. Other establishments have not yet made such large layoffs, but it’s estimated the minimum-wage increase will cost the 1,224 Mcdonald’s locations in California about $250,000 per location per year, most of which is bound to be passed on to consumers. Even if stores don’t immediately shut down in large numbers, the higher costs mean fewer hamburgers and fries will be sold than otherwise — which means fewer jobs for people who flip the burgers and make the fries.
Proving economic reality is unbounded by geography, Reason magazine reports that so far the main result of Seattle City Council’s minimum earnings mandate for app-based food delivery drivers, which went into effect this January, has been “customers deleting their delivery apps en masse, food orders plummeting, and driver pay cratering.” Uber Eats orders declined by 30 per cent, while Doordash reported 30,000 fewer orders in the first two weeks of the new mandate.
According to the Seattle Times, many drivers are incensed by the earnings mandate, with a survey finding a significant increase in waiting times between orders, over 70 per cent of drivers reporting they are receiving “significantly fewer” orders, and most saying they are receiving lower tips. The backlash from both drivers and businesses is already causing Seattle City Council to consider partially rolling back the mandate.
These examples of the harms done by minimum wages are not exceptions. Comprehensive literature reviews firmly establish what Economics 101 teaches: raising the minimum wage reduces employment. With job losses concentrated among the lowest skilled and most vulnerable workers, recent studies find the minimum wage can actually increase poverty. For example, a National Bureau of Economics working paper last year estimated a 10 per cent minimum wage increase is associated with a 0.17 per cent increase in the probability of longer-run poverty among the population. The result was statistically insignificant, but the authors say they may have underestimated the negative effect of minimum wages by not capturing their role in reducing workers’ fringe benefits, which has been established in other studies.
Although the negative effects of minimum wages are most clearly seen with large and sudden increases, even raising them in line with inflation has negative consequences.
Thomas Sowell tells how, as he was leaving home as a teenager in 1948 to become self-supporting, inflation had made the minimum wage, introduced a decade earlier and not indexed, meaningless. Unemployment among Black teenage males was relatively low in 1948, about the same as for white teenage males, “but it was only a matter of time before liberal compassion led to repeated increases in the minimum wage, to keep up with inflation.” What happened as a result? “The annual unemployment rate for black teenagers has never been less than 20 per cent in the past 50 years and has ranged as high as over 50 per cent.”
Compassion is good but ignoring Economics 101 is calamitous. Canada’s April 1st escalations in the minimum wage are foolish policy.