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June 10, 2010

The positive effect of minimum wage increases

Do increases in the minimum wage really lead to unemployment? That is an important question for Ontario. The Provincial Government has raised the minimum wage each of the past seven years. It now stands at $10.25 an hour. Prior to that, it had been stuck at $6.85 an hour for ten years.

“Some of the new evidence points toward a positive effect of the minimum wage on employment; most shows no effect at all.” That is the conclusion drawn by economists David Card and Alan B. Kreuger in their book Myth and Measurement: The New Economics of the Minimum Wage (published by Princeton University Press). They studied increases to minimum wage rates in the United States during the 1990s. They also reexamined existing research.

The Waterloo Region Record published an opinion piece recently (June 8) under the title "Minimum wage increases merely add to unemployment." The author, Ben Eisen, from the Frontier Centre for Public Policy, argued that minimum wages are ineffective because they cause unemployment. Eisen claimed this is “an iron-clad law of economics” and that a “strong majority of research on the question shows that high minimum wages kill jobs.” Unfortunately, Eisen’s article did not provide links to any of the research supporting the view the minimum wage destroys jobs.

Card and Kreuger acknowledge that the assumption that minimum wages lead to unemployment is one of the very few areas of broad agreement among economists. “Such a high degree of consensus,” they write, “is remarkable in a profession renowned for its bitter disagreements. But there is one problem: the evidence is not singularly agreed that increases to the minimum wage reduce employment.”

The two economists explain what led them to reexamine minimum wage research. “Our initial work on the 1988 increase in California’s minimum wage and on the 1990 and 1991 increases in the federal minimum wage, showed the anticipated positive effect of the minimum wage on the pay rates of teenagers and other low-wage workers. But in each case, the anticipated negative effect of a minimum-wage hike on employment failed to materialize.”

Card and Kreuger’s findings are reinforced by the UK’s experience with its minimum wage. When the British Government first introduced a national minimum wage in 1999, it created a Low Pay Commission to assess the impact of the minimum wage and recommend adjustments to it. The Commission has produced ten annual reports.

The Commission reported that in the first year after the minimum wage was introduced, there was “no measurable impact on overall employment,” while “employment continued to grow in low-paying sectors in the quarter following the introduction of the minimum wage.” The 2008 report observed: “One of the notable achievements of the National Minimum Wage has been that, for the best part of the last decade, it has ensured, probably for the first time, that the wages of the lowest paid in the UK have shown a modest but meaningful uplift when compared to increases in the average wage and with no consequent loss of jobs.”

Public policy must be guided by solid evidence. The evidence from the UK’s Low Pay Commission and research by Card and Kreuger demonstrates that minimum wage increases over that past decade have raised the incomes of low wage workers without creating unemployment.

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