This commentary was written by Matthew Lau, an independent economics writer and contributor to the Financial Post, and Marco Navarro-Génie, President & CEO of the Atlantic Institute for Market Studies. They are co-authors of the recently published study, Revisiting the Minimum Wage in Atlantic Canada.
High unemployment in Atlantic Canada is a long-standing problem. For over four decades, unemployment rates in the Atlantic Provinces have consistently exceeded the national rate. It is therefore critical for the provinces to reduce barriers to work.
Yet, governments do the opposite when they raise the legislated minimum wage, as all four provinces did last April. With each increase, more people become unemployable.
Everyone knows that a person with only $10 in her pocket cannot exchange her money for something priced at $15. Intuitively, then, if a worker’s maximum productive output (of, say, $10) is exceeded by the legislated minimum wage of $15, she will struggle to find or keep a job.
Labour markets, just like markets for goods and services, are subject to the law of demand – the central concept in modern economics. When something becomes more expensive, the demanded quantity will fall.
Supporters of higher minimum wages claim their policy helps low-wage workers. But how are low-wage employees are helped when the government makes low-wage employment illegal? Real incomes can sustainably rise only when economic output rises; legislated wage floors are unhelpful and indeed counterproductive.
This isn’t just theory at work: most empirical research confirms the negative consequences of minimum wages. Canadian meta-studies find that raising the minimum wage by 10 percent reduces youth employment by about three to six percent. For youth earning between the current minimum wage and the proposed higher minimum wage, employment falls by up to 20 percent.
The story gets worse for the Maritime Provinces. Our policy analysis for the Atlantic Institute for Market Studies shows that the effects of minimum wage hikes are likely to be strongest in this region.
The Maritimes have the highest proportion of employees making close to the minimum wage. These workers are at the highest risk of losing their jobs whenever the minimum wage is raised. Many of those priced out of jobs will be youth.
When youth lose their jobs because of a minimum wage increase, they lose not only income, but also valuable job experience. Even when they keep their jobs, employers often react to wage hikes by reducing training and other benefits. These lost opportunities damage career development.
Consider that young people tend to have few skills and little experience. Exchanging their labour for low wages gives them the work experience they need for future, better-paid employment. If government makes hiring young people prohibitive through a higher minimum wage, fewer may finish university or college having ever held a job.
These are particularly damaging results, considering how badly Atlantic Canada needs to retain its young people.
Worse still, minimum wages fail to accomplish their stated purpose of reducing poverty. Far from helping the poor, elected officials are simply removing the bottom rungs from the economic ladder.
Minimum wage supporters argue that their policy helps the poor by “protecting” workers from being “exploited” by businesses. But it is competitive labour markets, not wage controls, that prevent workers from being underpaid. If workers produce far more than they are paid, competing businesses would hire them away from their current “exploiting” employer.
Economic growth requires greater production. But by legislatively pricing low-skilled workers out of a job, the minimum wage serves the opposite purpose and reduces growth. And since workers will be unable to find employment if their skills fall below the legislated minimum, these low skilled workers will be worse off.
Governments should abolish the fruitless minimum wage if they want to do right by young and low-income persons. Keeping more young people in the region will achieve more for the economy than manufacturing greater unemployment.