Minimum wages hurt the working poor

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Appeared in the Ottawa Sun, July 26, 2023
Minimum wages hurt the working poor

Raising the minimum wage is a popular policy among politicians and activists who say they want to help the working poor. But adding to the already voluminous literature showing the harmful effects of minimum wages—specifically, its negative effects on employment, concentrated among the least-skilled and least-advantaged workers—are a trio of recent studies.

One working paper, distributed by the National Bureau of Economic Research this spring, evaluated the claim that minimum wages reduce poverty. The researchers found “that a 10 percent increase in the minimum wage is associated with a (statistically insignificant) 0.17 percent increase in the probability of longer-run poverty among all persons.” Specifically examining minimum wage increases from 2010-2019, they “failed to uncover poverty-reducing effects of the minimum wage across a wide set of specifications.”

The overall conclusion that raising the minimum wage actually increased poverty was statistically insignificant, but the authors carefully noted that “our measures of poverty may understate the adverse effects of the minimum wage on family well-being” since other studies show minimum wages reduce workers’ fringe benefits—something not captured in their study. That the minimum wage is poverty-increasing might surprise some, but is consistent with Canadian evidence. As labour economist Morley Gunderson wrote in a 2014 paper, Canadian research tends to find “minimum wages have no effect on reducing poverty and may even exacerbate poverty slightly.”

A second recent study on minimum wages (another National Bureau of Economic Research working paper) examined the effects of minimum wage increases on the non-profit sector. Data both from the Bureau of Labor Statistics and the Internal Revenue Service, the researchers found, “show a negative impact on employment for states with large statutory minimum wage increases.” Unsurprisingly, as some non-profit organizations were unable to absorb the government-mandated labour cost inflation, the authors found “some evidence for a reduction in the number of nonprofit establishments.”

A third paper, written by a political science professor at the University of California San Diego, examined minimum wage increases in cities and states from 2006 to 2019 and found that raising the minimum wage increases homelessness, as the negative employment effects had the greatest effect on the lowest-skilled members of the labour force who were more likely to already face housing insecurity. The author notes that even if the negative effect of minimum wages on employment among the overall population is small, it may be significant for the most disadvantaged segments of the population.

That job losses resulting from minimum wages are concentrated among the most disadvantaged members of the labour force is a significant and well-known harm of the policy. Economists have warned for many decades that according to the data, those most affected by job losses caused by historical minimum wage increases in the United States are black teenagers. In fact, Milton and Rose Friedman wrote in their 1980 book Free to Choose that “we regard the minimum wage rate as one of the most, if not the most, antiblack laws on the statute books.”

The harms of the minimum wage are well-known and have been for decades. Recent studies only add to the evidence of such harms. Governments should take heed and implement some harm-reduction by freezing—or better yet, reducing—minimum wage rates.