Wednesday, November 24, 2010


"For many years it has been a matter of conventional wisdom among economists that the minimum wage causes fewer jobs to exist than would be the case without it... were this not the case, there would be no logical reason why the minimum wage could not be set at $10, $100, or $1 million per hour."

Living Wage Fallacy
The general drawbacks of minimum wage increases have been well charted and explained by conservatives for decades, so there's no need to go into all that here, but I did want to touch on one aspect.

In March of 2010, Ontario Canada's minimum wage moved up 75 cents to $10.25 an hour (Canadian dollar). In 1976, the average minimum wage in Canada was $2.65 an hour. At today's consumer prices, that's the equivalent of almost $10. At present the Canadian Dollar is just about equal to the US dollar (a few pennies less), so the numbers are pretty equivalent for American economics.

Here's the aspect I wanted to write about, and it probably has some special name or law in economics which I'm unaware of. Minimum wages tend to stagnate for a while, the go up in big jumps rather than follow a steady even pattern. Over the last six years, the Ontario minimum wage has gone up almost 4 dollars, from $6.85 in 2004, and many were saying it was long past time for an increase, since the economy has grown over those years.

You see, the reason that the minimum wage stays pretty stable for a while is that it tends to outstrip the economy's ability to sustain those wages. When you force employers to pay unskilled and entry workers a greater and greater sum, that tends to damage hiring and encourage employers to not hire younger workers. A study done in the 1990s showed that every 10% increase in minimum wage increases unemployment among youth by 1-3%.

Canada's unemployment rate for younger workers is double the national unemployment rate, which is around 7.6%. Raising the minimum wage won't help those workers, because frankly why hire a questionable untrained teen when you can get some out of work older person with a work history and more stability and maturity? Its hard enough to get

That's why minimum wages tend to stagnate. Not because lawmakers and employers are money-gouging, flinty-hearted jerks, but because if the wage is shoved up too high by an eager government it needs to stay that way and let the economy catch up. Eventually, unless an economy totally collapses, inflation will inevitably move prices and wages up to the point that this artificially inflated minimum wage will become reasonable for businesses instead of damaging.

By that time, or even before it, leftists start complaining that the minimum wage hasn't gone up for so long that its cruel to workers and harmful to minorities and families, so it has to be raised. And since its been so long, it has to be raised by a lot! So the cycle begins again, and people, seeing sob stories on TV news and thinking "gosh, it has been a long time, its only fair" vote for it and support the increase. Canada's minimum wage increase is a perfect example of how the cycle works and why it is so bad for businesses.

This cycle is very damaging to economies, and as we can see it actually hurts the people its meant to help the most. So if there's any need for the minimum wage to go up at all it seems like it has to follow several basic rules, none of which are "lets help people in need" or "its been too long since the last raise:"
  1. Never during an economic downturn
  2. Slightly lower than or equal to the rate of inflation
  3. Steady rather than big jumps
The big problem is that voters look at the history and think "well its been so long since the last raise, its unfair to not have it go up with how the economy is growing" without taking into account the fact that it probably was too high to begin with.

1 comment:

Philip said...

Left out is that, in union contracts, wages tend to be based on a multiple of what the minimum wage is.