McGuinty puts thousands of jobs at risk with planned increase in minimum wage
When it comes to minimum wages, Premier Dalton McGuinty recently acknowledged that increasing the minimum wage in challenging economic times like these might not be a good idea. He then suggested his government may not go ahead with the planned increase in the minimum wage to $10.25 per hour in 2010.
So why then, does he plan to increase the minimum wage to $9.50 from $8.75, effective March 31, a move that will likely kill thousands of jobs and hurt those it is intended to help?
The most damaging impact of minimum wage increases is that employers respond by reducing the number of workers they employ and/or the number of hours their employees work. In other words, minimum wage increases result in higher unemployment for low-skilled workers and young people.
This unpleasant reality is well-documented in the research. A review of academic studies from Canada and around the world demonstrates convincingly that high minimum wages lead to lower employment levels. For example, a recent, comprehensive study by renowned minimum wage experts Professor David Neumark, of the University of California, and Dr. William Wascher, U.S. Federal Reserve Board economist, reviewed over 100 studies covering 20 countries over the past 15 years and found that the overwhelming majority of studies, especially the most credible, consistently show that minimum wage increases result in decreases in employment.
Closer to home, 14 studies have specifically examined the impact of minimum wage increases in Canadian provinces. The Canadian research indicates that a 10 per cent increase in the minimum wage is likely to decrease employment by three to six per cent among all young workers (aged 15 to 24). For those young workers most directly affected earning between the current $8.75 to new $9.50 the impact is more acute, experiencing employment losses of 4.5 to 20 per cent.
Using the evidence from past experiences with minimum wage increases across Canada, we estimate that increasing Ontarios minimum wage by 8.6 per cent to $9.50 per hour will lead to a job loss of up to 48,000 jobs for workers aged 15 to 24.
Workers lucky enough to retain their jobs when the minimum wage is increased to $9.50 are likely see reductions in their hours, fringe benefits, and/or training. Again, these effects have been widely studied. For example, a recent study in the Journal of Labor Economics found that a 10 per cent increase in the minimum wage reduced the proportion of minimum wage workers (aged 20 to 24) who received on-the-job training by two percentage points. This means that even if low skill workers retain their jobs, they may actually not be better off, depending on changes to their benefits and training.
Of course some minimum wage earners will benefit, but the typical minimum wage earner is not the person depicted by the advocates of higher minimum wages. The reality is, the majority of typical minimum wage workers are young people, often students living at home.
Data from Statistics Canada reveals that only 6.3 per cent of workers in Ontario earned the minimum wage in 2007. Of these, 65 per cent were between 15 and 24 years old, most of whom (89 per cent) were living at home with family. Many of the remaining individuals earning minimum wages were adults supplementing their family income with part-time work during child-rearing years or after retirement.
Finally, it is important to note that minimum wage work is largely a temporary experience. The vast majority of minimum wage earners experience upward income mobility rather quickly. Research shows that after one year, more than 60 per cent of minimum wage workers earn more than the minimum wage, with a typical wage gain of about 20 per cent. The percentage of workers earning more than the minimum wage increases to over 80 per cent after two years. With experience and growing skills, minimum wage workers increase their productivity and thus garner higher wages.
Despite the best of intentions, minimum wages are incapable of alleviating poverty and actually make matters worse for those people it is intended to help. Given the current economic situation, Premier Dalton McGuinty should be focused on improving the economy, not killing thousands of jobs through an increase in the minimum wage.
Subscribe to the Fraser Institute
Get the latest news from the Fraser Institute on the latest research studies, news and events.